The End Of A Conglomerate – ADT & Tyco International Both Scooped Up

Grab a tissue and say farewell to the Tyco (TYC) name. The former high flying conglomerate has a complicated history full of acquisitions (lots of those), strategy shifts, scandal ($6,000 shower curtains!) and of course, a lot of spinoffs. Current DuPont (DD) CEO Ed Breen smashed the company apart not once, but twice, creating three entities in both 2007 and in 2012. The company is even a grandparent! With the recent deals for Tyco International and ADT though, it also seems like its days are over. Lets take a look at the different pieces of the company and what has happened to them over the past 10 years:

  1. Covidien – the former Tyco Healthcare business, this company was formed as part of the 2007 breakup. It spun off its pharmaceuticals business Mallinckrodt (MNK) back in 2012 in order to remain focused on medical supplies. Covidien was then acquired by Medtronic (MDT) in a very public ‘inversion’ deal last year in a big win for shareholders.
  2. Tyco Electronics – manufactures sensors and connectivity solutions and was formed during the 2007 breakup. The company ultimately ended up dropping Tyco from its name in 2011, rebranding itself as TE Connectivity (TEL) in order to better represent its market position.
  3. Flow Control Business – as part of the breakup in 2012, this business was merged with Pentair (PNR). Even though Tyco shareholders retained the majority of the company and its headquarters were officially in lower-tax Switzerland (noticing a trend here?), the company kept the Pentair name and senior execs.
  4. ADT (ADT) – private equity firm Apollo Global announced yesterday that it would acquire ADT for $6.93b or $42 per share. The deal will bulk up Apollo’s Protection 1 security business and create more scale (and synergy) in the fragmented home security business. ADT started off strong, but ran into earnings issues leading to a massive decline in price despite hefty share buybacks. It has since recovered a bit and worked on improving its operating metrics leading to some share price improvement. The deal is all cash, but it does allow for a ‘go shop’ period, although the market doesn’t seem to anticipate another bidder stepping in. Many thought private equity was a natural buyer for this business given its strong monthly cash flow, but tight credit markets have made it a bit tougher for those firms. The WSJ has a good piece examining the proposed financing for this deal and it includes more equity and some ‘alternative’ lenders. Assuming the deal closes at this price, shareholders of the spin should come out ahead.
  5. Tyco International – the most recent incarnation of this company was focused on commercial fire and security or basically what was left after getting rid of the other companies in the 2012 breakup. The big news last month was that Johnson Controls (JCI) and Tyco will merge, creating a company that will be a ‘leader in building products and technology, integrated solutions and energy storage’. Note no mention of auto parts, Johnson Controls’ legacy (and lower margin) business, which it is in the process of spinning out. JCI’s shareholders will receive an aggregate $3.9b in cash (the per share cash will depend on shareholder choice) and end up with ~56% of the combined entity, which will retain the Johnson Controls name. As an inversion deal, the impetus for the deal appears to be tax driven as the combined entity will keep Tyco’s Cork ‘headquarters’. Of course, JCI’s CEO Alex Molinaroli touts the deal as expanding JCI beyond its traditional low margin auto parts business. Speaking of the CEO, another possible motivation could be greed, as Mr. Molinaroli stands to get paid big time as part of the deal. According to Fortune, Mr. Molinaroli ‘will receive at least $20.5 million and as much as $79.6 million for doing the deal over the next 18 months’. A big chunk of that $79.6m comes from a termination fee due to change of control – coincidentally, Mr. Molinari will lead the company for just 18 months after which Tyco’s current CEO George Oliver will take the reins. Can’t blame the guy!

Look at what ten years and Ed Breen can do! It’s hard to believe anyone was surprised at how the Dow/DuPont situation has played out. Only the former Tyco Electronics, now TE Connectivity, will remain an independent company and no public company will carry the Tyco name. Pretty incredible!

For the most part, shareholders have come out ahead from these deals although the recent spinoffs had all previously been at higher levels above the buyout prices. The outcome here also seems to support the idea that conglomerate breakups produce more focused and thus digestible pieces, ultimately leading to increased M&A activity.

Farewell Tyco and thanks for all the content!

Disclosure: Author holds no position in any stock mentioned.