Volume 88: Just Johnson, bankruptcy grifters.

1. Just Johnson, bankruptcy grifters.

tl;dr: Johnson & Johnson to split.

I wrote last week about how GE is splitting into three separately listed public companies. One focused on healthcare, one on power and energy, and one on aviation. In the case of GE, the bet is that these three companies represent hidden shareholder value that will be better realized through independence rather than interdependence.

Hot on the heels of that announcement, we hear that Johnson & Johnson is splitting into two companies (Oh, how badly I want one of them to be called “Just Johnson,” haha). Anyway, while these splits may at first glance appear similar, they are, in fact, very different. Where GE is splitting to try and realize greater shareholder value, Johnson & Johnson is splitting in an attempt to contain exposure to legal risk.

To understand this, we need to know two things. First, J&J today comprises a large and highly profitable pharmaceutical medical company and a smaller and less profitable consumer healthcare company. The former produces prescription medications and medical devices, and the latter things like toothpaste and…baby powder. Second, the baby powder I mentioned is critically important to this story because J&J is currently being sued for billions because this product was (allegedly) laced with ovarian cancer-causing asbestos for decades. Now, that isn’t a particularly good look for them because the risk of paying billions in lawsuits is depressing the stock price, and the reputational risk of losing in court threatens to push it down further. So, what to do to get the stock price back up? Take the hit and say sorry and accept responsibility for the deaths and illness caused? Oh, hell no. Split the company in multiple ways and contain the damage.

Specifically, J&J is engaging in two separate splits. The first is to use a quirk of Texan state law to form a new and immediately bankrupt entity, called LTL, that’s intended to hold all of its liabilities, including some 38,000 lawsuits related to its ovarian cancer-causing baby powder. The second is to split the smaller and less profitable consumer healthcare business from its much larger and more profitable pharma sibling as an extra layer of liability insurance.

It’s a spectacularly cynical act yet has become depressingly familiar in our post-Friedmanist economic system. Let me quickly explain.

Limited liability is a foundational idea upon which hundreds of years of capitalism rests. In essence, it’s a legal construct that says liability lies with the company, thus protecting shareholders. Since its introduction, this separation of liability has been a central facet of capitalism's economic dynamism and everything we’ve reaped from it. However, in recent years, the barons of private equity figured out how to weaponize limited liability to line their own pockets by stripping companies of assets, loading them with liabilities, declaring them bankrupt, and then…walking away. This approach led directly to the path pursued most recently by Purdue Pharma to escape their exposure to the opioid crisis. (The bankruptcy settlement was so pathetic that the Sackler family and their enablers walked away scot-free, as the fine levied over ten years will be more than paid for by dividends on the financial assets they stripped from the company prior to its bankruptcy. Look up the term “evil” in the dictionary, and you’ll see a Sackler grinning back at you).

Anyway, even within the context of these highly cynical legal maneuvers used to pit a foundational idea of capitalism against itself, the approach taken by Johnson & Johnson is noteworthy for its bravado, which might lend further ammunition to attempts to change the law.

Anyway, look for a lot more on the subject of bankruptcy grifters, and let’s see if this sparks any changes in the way bankruptcy law operates. Because if the Sacklers can use bankruptcy maneuvers to get away with the opioid crisis and J&J to get away with cancer-causing baby powder, then we really need to take a long hard look at what’s allowed and to close the loopholes that allow it.

Oh, and don’t believe the PR-media hype. The GE split and the J&J split has almost zero in common.

3. A loot-box approach to retail and other assorted odds and ends.

tl;dr: Stuff I found interesting this week.

Sorry, this week is a little busy as we wind up toward the end of the year. However, here are a few things I stumbled across that might be worth your time:

Ford ran out of electric crate motors for the aftermarket. I love the idea of tricking out old trucks and hot rods with electric motors almost as much as I love the idea of Ford selling electric crate motors in the first place.

Marketers, don’t fear pricing. (Assuming you have any say over it in the first place.) Just don’t, whatever you do, let engineers do it, or you’ll end up with nonsense like $3 Twitter Blue.

DTC darling Casper is being taken private at a fraction of its IPO price. A poorly run company with terrible economics that should never have gone public in the first place. Apparently, it’s the wholesale business rather than the DTC part the buyer is interested in. However, as it’s a private equity deal, there might be a future roll-up plan to combine several struggling mattress and sleep-focused companies under the Casper brand.

Like a bad smell, Fred Reichheld is back with “Net Promotor 3.0” because he has a new book to sell. I have to say it’s hard to trust someone who writes a self-referential article where he constantly talks about himself in the third person. Oh, the ego. Anyway, this one is causing people fits because it hits right at the heart of the grow your customer base/increase the loyalty of existing customers battle-lines. All I’m going to say is the whole concept of “earned growth” versus “bought growth” is almost as brilliant a hook for a book as it will be excruciating to try and deal with in practice. As an aside, publishing this dross in the HBR magazine shows that standards haven’t just dropped through the floor at dumb internet cousin HBR.org, but over at the elitist main event too. Oh, and I love dogs, but WTF is up with that dog pic in the article?

Finally, on the subject of the critical importance of customer-centricity, retailers have decided to fix bot purchasing of hard-to-get items like PS5s and the new Xbox by making human customers join a paywalled service just to have a chance at buying one. This is a real-life loot box approach to retail folks, making you pay just for the chance at buying a product. As far as solutions to a problem go, I’m going to go out on a limb and suggest this is probably the most cynical and least-customer-friendly approach they could’ve chosen. Somebody better send Fred over for a word.

3. Welcome to the Icelandverse.

tl;dr: A timely and much-needed parody.

OK, this is a quick one. In case you live in a cave and missed it, the Icelandic tourist board just released a rather brilliant ad.

Aside from being timely, funny, having a beautiful backdrop, and a scarily Zuckerbergian Icelander, this is part of a trend toward novel advertising that works because of what it’s reacting to, rather than what it has to say.

Actor, entrepreneur, Twitter influencer, and now advertising-savant Ryan Reynolds is perhaps the best known for this approach, especially with the ad for Aviation Gin that immediately followed that Peloton ad.

On the subject of Peloton, what on earth is going on over there? So far this year, the stock price has dropped almost 3x (From $148 on Jan 1 to just $51 as I write this). I guess it must be their many travails, from bad ads to supply chain woes, to killing children, to regulatory spats, and then the piece de resistance: missing its earnings forecast, which it tried, and failed, to fix through discounting. Clearly a lockdown phenomenon, it’s hard to call Peloton a well-run company, which means it’s hard to see it magically righting itself in a much more challenging environment without some major changes at the top…which seem unlikely with a founder CEO who continues to control the company.

Look for the troubles to continue and for it eventually to be bought, probably by Apple or maybe…Disney?