Johnson & Johnson announced Friday it will split itself into two publicly traded companies, separating its lucrative pharmaceutical and medical devices divisions from the consumer products business known for Band-Aid, Tylenol and its namesake baby shampoo.
Johnson & Johnson will headline the larger pharmaceutical and medical device business — which includes its coronavirus vaccine manufacturing. The divisions brought in nearly $13 billion in the most recent quarter.
The other company will be built around such well-known household brands as Tylenol, Listerine and Band-Aid, assets that brought in about $3.7 billion in the most recent quarter. It is referred to in the company’s announcement as “The New Consumer Health Company.”
Investors appeared warm to the idea, sending the stock to $165.01, up 1.2 percent, on Friday. The company has a market value of $434.4 billion.
Analysts say this week’s carve-outs mark a retreat from the empire building that arose in the 1960s and accelerated in the 1980s under such corporate titans as Jack Welch of GE — which put its stamp on everything from jet engines and refrigerators to lightbulbs. Separation allows the parts to support one another, they say, and investors increasingly believe they can unlock better returns over time.
“We went through a period where all sorts of companies and CEOs decided they were just going to buy everything, in the old Jack Welch days, and you ended up with these hodgepodge mishmash things,” said Michael Farr of the investment firm Farr, Miller & Washington. “More effective CEOs said, ‘Wait a minute, I need to make sure this is strategically and logically integrated with everything our core business is doing.’ ”
Corporate splits usually occur under one of two situations, he said. In the first, investors feel there isn’t enough symbiosis among the disparate divisions. In the second, which Farr says applies in the Johnson & Johnson scenario, investors feel that a company’s value isn’t being properly recognized by the market.
Johnson & Johnson has seen faster growth in its pharmaceutical business, home to its single-shot coronavirus vaccine, compared with other parts of the company. In the year ended Sept. 30, the unit recorded a 13.2 percent increase in sales.
By comparison its consumer products unit, which includes beauty and skin care brand Neutrogena alongside its array of medicine cabinet staples, reported a 4.1 percent increase in revenue.
In a call with investors Friday, chief executive Alex Gorsky said the company’s board and executive team had been reevaluating whether Johnson & Johnson’s “broad-based approach” was in its best interests.
“While this approach has historically served us well, addressing the complexity of today’s global health care and consumer environments now demanded unprecedented focus, innovation, and agility,” he said.
Peter Choi, senior research analyst at the asset management firm Vontobel, said the split-up “could increase the market’s appreciation of a business that was often overlooked as part of a much larger conglomerate.” But it also helps, he said, that the pharmaceutical business can be freed from legal liabilities related to the company’s baby powder.
Though Johnson & Johnson has long rejected allegations that baby powder causes cancer, it discontinued talc sales in the United States and Canada after lawsuits alleging asbestos contamination led to a decline in sales. In June, the U.S. Supreme Court declined to take up the company’s request to review a $2.1 billion award to women who claimed the baby powder contained asbestos.
On Friday, the company also said that Gorsky will become executive chairman in January and that Joaquin Duato, the current vice chairman, would replace him as CEO. The split is expected to take 18 to 24 months and is subject to board approval.
Johnson & Johnson’s announcement came the same day as Toshiba, which is splitting into three publicly traded companies under pressure from activist investors. The Japanese conglomerate, which dates back to 1875, has been reeling since a 2015 accounting scandal.
Toshiba said one business will focus on energy and infrastructure and another on electronics, including is its lineup of laptops, televisions and other consumer gadgets. The third, which retains the Toshiba name, will hold onto the company’s memory chip business. Further sell-offs could be forthcoming.
CEO Satoshi Tsunakawa said the new structure “will unlock immense value” by removing complexity, according to the Associated Press. It will lead to more focused management, facilitate agile decision-making and enhance choices for shareholders, he added.
The names for the spinoffs and other details will be announced later, the company said, and the plan still requires shareholder approval.
General Electric announced Tuesday that it would break into three companies, starting with GE Healthcare in early 2023. The renewables and power units will become a new energy business in early 2024 while the remaining business, GE, will focus on aviation.
GE, which has struggled to slim its business operations and pay down massive debt, also concluded that it can unlock the most value by breaking itself apart.
“By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees,” GE chairman and CEO Larry Culp said in a statement. He will lead the aviation business.