End of an Empire: Tyco Plans SplitBy JOANN S. LUBLIN And BOB TITA
Tyco International Ltd. is breaking up for the second time in four years, sending another signal that the era of the conglomerate is drawing to a close.
The move, which follows plans for similar corporate divorces at ITT Corp., ConocoPhillips and Kraft Foods Inc., transforms a serial acquirer that bought literally hundreds of companies over the past five decades into a single $10 billion entity selling security and fire-suppression systems to business customers.
Tyco's other two big segments, which sell ADT residential alarms and industrial valves and pipes, will be spun off to shareholders. The decision sets up all three units to be more easily acquired by the next generation of empire builders—or to pursue takeovers of their own.
Chief Executive Ed Breen didn't rule out the possibility that Tyco, which has a market value of about $20 billion, would consider selling all or part of the conglomerate before completing the breakup. "We don't ignore any opportunity that comes along," he said.
The idea for the separation came in 2007, the last time Tyco split into three companies. Tyco directors began seriously to explore another breakup at strategic-planning retreats in September 2009 and September 2010, Mr. Breen said in an interview. "We analyzed every alternative," including Tyco's possible sale, Mr. Breen said.
Tyco's directors decided that a breakup "is going to be the best path to create long-term shareholder value," he said. The board made its decision at a meeting last week in Geneva.
Splitting up the businesses will give each greater flexibility to grow as it sees fit, Mr. Breen said. The units operate in fragmented industries that are being consolidated, offering the opportunity to be buyers or sellers.
Such thinking would have been anathema several years ago, when companies like Tyco were snapping up operations to bulk up offerings, turn into one-stop shops and diversify risks.
Academics long have argued that many acquisitions end up hurting the buyers' shareholders. And analysts have said that conglomerates often trade at a discount to the sum of their parts. Now, the economy's sluggish recovery has executives looking for ways to get their stock prices moving again.
J.P. Morgan analyst Stephen Tusa says the divided Tyco would be valued at a combined $54 a share in the worst case. At best, he said, the combined value could reach $65.
He said "the rationale for a split versus an outright sale" is that the company as a whole doesn't make sense for a single bidder, Mr. Tusa said in a note to investors. "But there are several that could see strategic rationale in the different pieces."
In a sign that investors aren't quite sold on the idea, Tyco's shares rose $1.05, or 2.4%, to $44.75 a share in 4 p.m. composite trading Monday on the New York Stock Exchange.
Such plans carry risks. It can take months to work out legal and financial details, during which time business conditions can deteriorate. Tyco estimates it will need to spend $700 million to execute the spinoff but said lower interest costs would offset some of that tab.
Companies including General Electric Co., which has completed a number of oil-and-gas acquisitions in the past year, and United Technologies Corp., which is said to be in talks to acquire Goodrich Corp., are keeping to the conglomerate path. ITT, whose shares jumped after it unveiled plans to break up, has seen the stock fall 16% from its level before the announcement.
Tyco made an art of acquisitions and divestitures. The company started in 1960 as a semiconductor and materials-science company and completed its first deal in the mid-1960s. More deals followed in the next two decades.
Calling It Splits
Several companies have announced plans to split themselves apart in recent months.
Acquisitions accelerated under Chief Executive L. Dennis Kozlowski, who was convicted with former Chief Financial Officer Mark H. Swartz in 2005 of systematically looting the company. Mr. Kozlowski's deals included the 1997 acquisition of ADT, which now will be spun off, and the 2001 acquisition of financial-services firm CIT Group Inc., which was sold a year later in an initial public offering.
Mr. Kozlowski in 2002 announced plans to break up the company but the idea was shelved because of shareholder concerns over Tyco's accounting. Mr. Kozlowski called the plan a "mistake."
"I am gratified to see the continuing strength of the company I left in 2002, including some of the business units that were acquired under my stewardship," the former CEO said from prison Monday in a statement issued by one of his lawyers.
The planned breakup will end Mr. Breen's decade-long tenure at Tyco's helm. On his first day on the job in 2002, investors holding more than 15% of Tyco's shares showed up unexpectedly and demanded that he replace the entire board. "Oh, this is going to be real good," Mr. Breen recalled telling himself.
Rather than spin of more operations then, Mr. Breen said directors opted to strengthen the remaining operations before sending them out on their own. Last year, Tyco bulked up its home alarm business by purchasing rival Broadview Security for $2 billion in cash and stock.
Tyco has been the subject of regular speculation about takeover attempts. Schneider Electric SA in April distanced itself from reports it was considering acquiring Tyco after news of the French company's interest drew a poor reception from investors.
Mr. Breen, 56 years old, said he might consider becoming a CEO elsewhere. The spinoff plan calls for him to become nonexecutive chairman of the commercial fire-and-security company, a director of the pipe-and-valve company, and a consultant to the ADT North America residential-security company.