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Johnson & Johnson Vs. Goldman & Goldman: Street Whispers

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On Tuesday, Rubin underscored the argument, downgrading J&J to a 'Sell' rating, citing the company's M&A strategy and competitive threats to its drugs unit. "[JNJ's] focus on M&A versus cash returns to shareholders or a break-up strategy (like Pfizer, Abbot Laboratories, Covidien, and Baxter International) puts it at a disadvantage as other companies get more aggressive," writes Rubin in the report, which argues J&J's stock is worth just $72, far below other estimates. In early afternoon trading, J&J's shares were off nearly 2% to $68.26.

Rubin goes on to argue that a focus on drug R&D pipelines and shareholder friendly management of corporate purse strings are the biggest catalysts to the pharma sector as a whole, and recommends companies like Pfizer, Abbott Labs, Covidien and Baxter International over J&J.

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In March, Rubin floated the idea that Pfizer should consider breaking up to a bigger degree than management's plan to divest non-drugs assets like its animal health and baby nutrition units, signaling conviction behind the benefits of a pure play pharma businesses over a conglomerate structure.

The differing perspectives on J&J offered by Goldman by way of its investment bankers as an advisor to the company and its research analysts as an independent monitor on the company's share performance appear to add a new twist to the perception Wall Street research is compromised by the drive for lucrative M&A and IPO-related fees.

In April 2003, ten of the largest Wall Street firms, including Goldman Sachs, paid a total of $875 million in penalties and disgorgements to the Securities and Exchange Commission as a result of alleged conflicts between research reports for investors and fee-seeking investment banking activities.

The SEC enforcement action alleged that Wall Street research was inappropriately influenced by investment bankers within firms seeking M&A and IPO related fees, thereby creating conflicted instead of objective analysis.

As part of the settlement, big name analysts like Henry Blodgett and Jack Grubman were barred from the industry and banks were forced to build so-called "Chinese walls" to minimize conflict-inducing communication between research analysts and bankers, among a host of reforms. (In the settlement, the banks did not admit wrongdoing.)

The fact that Goldman's research analyst's appear to be stealing defeat from the jaws of victory on the company's advisory work on J&J's acquisition of Synthes seems to indicate that a "Chinese Wall" does in fact exist within the ranks of its lush headquarters on 200 West Street. "Our research is completely independent from our investment banking operations," said Leslie Shribman, a spokesperson for Goldman's research unit, in a statement to TheStreet responding to questions on the bank's M&A advisory work and its newly issued 'sell' rating on J&J shares. "Our analysts set their ratings based on their objective projections and models," adds Shribman.

For those who think Wall Street cannot be reformed in spite of legislation or SEC enforcement actions, there's reason to be skeptical of Goldman's work on J&J, even if the firm's advisory and research efforts indicate objectivity and independence.

Just as M&A efforts generate investment banking fees, so to spinoffs and asset sales. A cynic might say that after advising on efforts at conglomeration, Goldman may stand to now benefit were J&J to begin trimming down, as Rubin advises.J&J has shown no inclination to do so. Meanwhile, many Wall Street insiders like Carl Icahn and Barry Rosenstein of Jana Partners continue to question the objectivity of Wall Street research and M&A advice.

Earlier in October, Rosenstein of Jana Partners lambasted Morgan Stanley's M&A advisory work and its published research on agricultural giant Agrium (NYSE:AGU), a company the activist hedge fund says should be split up.

In the case of Pfizer, Rubin's bold breakup calls presaged greater clarity on the company's spinoff and asset sale efforts. In April, Pfizer sold its baby nutrition unit to Nestle for $11.85 billion and in August, the company filed an IPO of its animal health unit, to be called Zoetis. Still, Goldman's bankers weren't hired on either fee-generating divestiture, losing out to Morgan Stanley, JPMorgan and Bank of America for investment banking work, among others.

For those keeping score of whether Wall Street has changed, watch to see whether J&J heeds Goldman's research advice and decides to streamline its sprawling operations. Were the New Brunswick, N.J.-based health care conglomerate to decide on divesting non-drugs assets an hire Goldman, skeptics may yet have reason to be cynical of Wall Street research.

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