J&J and Synthes agree on $21.3 billion merger

Health-care giant Johnson & Johnson and medical-device maker Synthes Inc. - both of which have large operations in the Philadelphia area - agreed to a $21.3 billion merger deal announced Wednesday.

Johnson & Johnson Inc. hopes to fill a hole in its 250-company portfolio by adding a stronger device component and dominating that market. Synthes is a leader in the manufacture of devices that help treat bones with compounds, screws, nails, plates, and power tools.

The deal is J&J's largest acquisition ever. Synthes has its North American headquarters in West Chester, along with five other facilities in Chester County, but the company was founded in Switzerland and is traded on that country's stock exchange.

In the days since the talks were first reported, financial analysts predicted that the deal would work for J&J in part by allowing it to cut costs where there is overlap, which often means eliminating jobs.

The spine division of Synthes would seem to have the most overlap with J&J's DePuy orthopedic division, but Alex Gorsky, vice chairman of J&J's executive committee, said J&J liked the deal because of the complementary nature of the companies and the growth potential, not the cost-cutting opportunity.

If that pans out, that would be a relief to workers and families locally.

"We don't foresee significant head-count reductions," Gorsky said.

Before this deal, J&J had about $28 billion in cash on its books, much of it parked overseas. Analysts predicted that overseas cash could be used to buy Synthes to lessen the U.S. tax hit. In a Wednesday morning conference call with analysts, J&J chief financial officer Dominic Caruso did not say how much foreign cash would be used in the Synthes offer or what J&J's remaining cash would be, in part because the deal hasn't closed. Indeed, about 65 percent of the per-share offer is in the form of J&J stock and there is a range for what J&J will pay when the final price is set. Caruso said the deal probably would close in 2012.

J&J and Synthes said in a joint statement that each share of Synthes common stock would be exchanged for 55.65 Swiss francs ($63.63) in cash and 103.35 Swiss francs ($118.18) in J&J common stock.

Moody's Investors Service affirmed Johnson & Johnson's Aaa long-term and Prime-1 short-term bond ratings, but it also revised J&J's rating outlook to negative from stable.

J&J stock closed up 62 cents at $65.57. Synthes rose slightly to close at 146.6 Swiss francs, which equates to $167.48.

The joint statement said that the boards of directors of J&J and Synthes had approved the transaction.

J&J hopes to dominate the orthopedic field, which has profit potential because of aging and obese populations, especially in developed countries.

"Orthopedics is a large and growing $37 billion global market and represents an important growth driver for Johnson & Johnson," Bill Weldon, J&J chairman and chief executive officer, said in a statement.

Concerns about health-care costs might hurt sales of devices used in elective surgery, but traumatic injuries are less affected by cost.

"If somebody needs to be treated for trauma, they are going to be treated," Weldon said in the conference call with analysts.

According to the statement, Hansjoerg Wyss, Synthes chairman, and related parties have agreed to vote shares representing not less than 33 percent of Synthes common stock in support of the transaction.

"The combination of Synthes and Johnson & Johnson, two organizations focused on the best patient care and improving health care throughout the globe, is a very exciting and promising one," Wyss said in the statement.

Both DePuy and Synthes have had problems in recent months:

DePuy had to recall artificial-hip components.

Synthes, its subsidiary Norian Corp., and four company executives have pleaded guilty to charges related to promoting the use of a bone cement for uses that were not approved by the U.S. Food and Drug Administration. The executives are awaiting sentencing and the company agreed to a deal with the Justice Department in the case, which was prosecuted by the U.S. Attorney's Office in Philadelphia.

As part of that deal, Synthes has to divest itself of Norian by May 24. No mention was made of the Norian situation during the Wednesday morning conference call. Synthes could be prevented from getting funds from federal programs such as Medicare and Medicaid if it doesn't meet terms of the divestiture agreement and a "corporate integrity agreement."

Health and Human Services' Office of Inspector General is monitoring that part of the government's case.

"The corporate integrity agreement with Synthes requires a divestiture," OIG spokesman Donald White said Wednesday. "If Synthes does not comply with the [corporate integrity agreement], the OIG can take further legal steps against Synthes, but we have not done that."

Synthes' legal counsel in the criminal case could not be reached for comment Wednesday. A call to the Synthes official in West Chester who is listed in court documents as the point of contact for the divestiture was not returned.

Aside from daily penalties, the Norian problem would transfer to J&J if it was not resolved before the merger.

"We are confident they are handling this matter with the government," J&J spokesman Bill Price said Wednesday evening.