Tyco, Johnson Controls Bet Bigger Is Better
January 26 2016 - 3:02AM
Dow Jones News
(FROM THE WALL STREET JOURNAL 1/26/16)
By Bob Tita and Dana Mattioli
Johnson Controls Inc. and Tyco International PLC agreed to merge
in a $14 billion deal that creates a new giant provider of
commercial-building systems and reflects a growing push by some
executives and shareholders toward companies that are bigger but
more focused.
The deal, announced Monday, would combine Johnson Controls'
business selling heating and air-conditioning equipment for
skyscrapers, schools, hospitals and other structures with Tyco's
lines of security and fire-suppression gear into a company with
more than $30 billion a year in sales.
Johnson Controls shareholders will own about 56% of the new
company, which will be renamed Johnson Controls PLC but will
maintain Tyco's Irish legal domicile -- making the deal the latest
in a string of so-called inversions that bring shareholders tax
benefits but have stirred controversy.
Both Tyco and Johnson Controls in recent years have made moves
to unstitch businesses that had grown sprawling and unwieldy from
previous acquisitions. Tyco, which today has about $10 billion in
annual revenue, shrank itself from a conglomerate with some $41
billion in sales and segments that made electronics components and
surgical equipment. Johnson Controls has moved to shed
automotive-parts units that once accounted for more than two-thirds
of its revenue as Chief Executive Alex Molinaroli has sought to
focus on higher-margin businesses.
Those changes reflect, in part, a broader dissatisfaction among
shareholders -- especially some activist investors -- with the
concept of sprawling conglomerates that have tentacles in widely
arrayed industries. At the same time, executives still see value in
combining businesses in the same or similar industries to give them
greater market clout.
Similar dynamics have been evident in some other big recent
deals. In November, Pfizer Inc. and Allergan PLC agreed to combine
in a $155 billion deal, then promptly announced that it was
considering splitting the final company. Last month, Dow Chemical
Co. and DuPont Co. agreed to combine into a chemical giant worth
more than $120 billion before splitting up into three companies
focused on three separate sectors. DuPont CEO Edward Breen was
Tyco's CEO when it did much of splitting, and remains its
chairman.
Monday's deal, which The Wall Street Journal reported on Sunday
was imminent, comes as both companies look to boost their stock
prices in the face of slowing industrial activity. It represents a
watershed for two industrial companies with long and distinct
corporate histories. For Tyco, the merger would be the final
chapter of a decadelong dismantling of a holding company that was
once one of the largest industrial conglomerates in the U.S. under
former CEO L. Dennis Kozlowski.
The combination would allow Johnson Controls to offer building
owners and managers a more complete suite of equipment along with
data-collection services to analyze and manage power consumption
and predict maintenance requirements.
The companies said the merged entity would save at least $150
million a year on taxes and at least $500 million in costs over the
first three years after the completion of the deal.
The merger "will create a better company," Mr. Molinaroli said
on a conference call, "that will transform our ability to capture
opportunities in a fast-moving market place."
Mr. Molinaroli will lead the new company for 18 months after the
tie-up is complete. Tyco CEO George Oliver will then become CEO and
Mr. Molinaroli will become executive chairman for a year, before
ceding that title to Mr. Oliver as well. Mr. Breen will give up his
chairmanship of Tyco.
As a result of Johnson Controls' inversion, the company's
effective tax rate will be 18% or 19%, said people familiar with
tax structure. Tyco paid 12% of its profit in taxes over the past
three years, versus an average 29% by Johnson Controls, according
to S&P Capital IQ. Johnson Controls said its effective tax rate
before certain items was around 19% over the past two years ended
Sept. 30.
The deal started to take shape in late summer when Tyco's Mr.
Oliver approached Mr. Molinaroli about a smaller deal involving the
Johnson Controls' system controls business. As talks progressed,
Mr. Oliver in the past few months broached the idea of a full
merger, according to the companies.
The two sides had to negotiate the final details with an
impending snowstorm which made air travel difficult.
Mr. Molinaroli was at last week's World Economic Forum in Davos,
Switzerland, and managed to make it out of Switzerland on Friday
night before airports closed, said a person familiar with the
matter.
Over the weekend, Johnson Controls' board met in Milwaukee.
Meanwhile, Tyco's board met in Ireland where they are required to
meet on major strategic decisions because of its Irish domicile,
people familiar with the matter said.
Under the deal, Johnson Controls shareholders will receive one
share of the combined company or cash equal to $34.88 a share, a
weighted average of the price of Johnson Controls' shares over the
past five trading days. Company representatives didn't immediately
respond to requests for comment on the deal's overall value.
Tyco shareholders will receive slightly less than one share of
Johnson Controls stock for each of their Tyco shares.
Johnson Controls paid an 11% premium for Tyco, which is lower
than typical premiums in deals billed as "merger of equals." The
average premium paid in a merger of equals last year was 20%,
according to data provider Dealogic.
A large portion of the deal is structured in stock, which made
recent market volatility easier to deal with than if it would have
been a cash deal with a set premium, said some of the people.
---
Michael Siconolfi and Joann S. Lublin contributed to this
article.
(END) Dow Jones Newswires
January 26, 2016 02:47 ET (07:47 GMT)
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