Johnson Controls to merge with Tyco

Deal brings security capabilities to building automation strategy, tax inversion benefit
Monday, January 25, 2016

MILWAUKEE and CORK, Ireland—In a deal that brings strategic security capabilities and substantial tax benefits, Johnson Controls announced today that it will merge with Tyco. The deal was approved by the board of directors of both companies and is expected to close at the end of 2016.

Johnson Controls shareholders will own approximately 56 percent of the equity of the combined company and receive aggregate cash consideration of approximately $3.9 billion. Current Tyco shareholders will own approximately 44 percent of the equity of the combined company.  

“I think the deal was motivated on both sides by dynamics of the market; both companies have had a lot of challenge growing,” Alper Cetingok, managing director of Raymond James, told Security Systems News.

Cetingok noted that Johnson Controls is divesting its automotive business, Adient, which had been underperforming. Security is a better fit for a conglomerate like Johnson Controls that is working to become a building-technology, building-automation giant, he said.  

“Security is at the core of anything automation, whether it’s on the residential side or the commercial side. Strategically, security is a much stronger business to help Johnson Controls prosecute its building automation strategy,” he said.

In addition, Johnson Controls will benefit from the tax inversion. The combined company will be headquartered at Tyco’s current headquarters here in Cork, Ireland. The primary operational headquarters will be in Milwaukee.

The tax inversion “will save the company 20-plus percent on the corporate tax rate, which from an earnings-per-share standpoint is very significant,” Cetingok said.  

Johnson Controls has an enterprise value of $14.6 billion; Tyco has an enterprise value of $29.07 billion. JCI's market capitalization is $13.9 billion and Tyco's is $22.3 billion.

The combined company will be renamed Johnson Controls. After closing, Alex Molinaroli will be the chairman and CEO of the combined company. George Oliver will serve as president and COO and serve as a director on the new board, with responsibility for the operating businesses and leading the integration. 

After 18 months, Oliver will become CEO and Molinaroli will become executive chair for one year, after which Oliver will become chairman and CEO.

The board of directors of the combined company is expected to have 11 directors, six directors from Johnson Controls and five from Tyco.

In a prepared statement, Alex Molinaroli, Johnson Controls chairman and CEO, Johnson Controls said that "Tyco aligns with and enhances the Johnson Controls buildings platform and further positions all of our businesses for global growth." The deal will allow JCI to "further invest globally, develop new innovative solutions for customers and return capital to shareholders," he said.

In September, Johnson Controls sold JCSS, its security installation business focused on the federal government. JCI retained a large security integration business that does about $300 million in business annually. At that time, Michael McManus of Imperial Capital told SSN: “They still consider security integration to be core to them because its goes well with building controls, but JCSS was set off in its own silo at JCI."

Johnson Controls is a global diversified technology and industrial company with 130,000 employees. It does business in 150 countries. Its products, services and solutions include those designed to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and seating components and systems for automobiles.

Tyco is pure-play fire protection and security company. It has 3 million customers and 57,000 employees, 900 locations. It does business in 50 countries. Ten years ago, Tyco was a giant conglomerate, which had been assembled by former Tyco CEO, Dennis Koslowski, in the 1990s. It began spinning off non-core businesses in 2006. In 2011, it announced plans to split Tyco, ADT and its former Flow Control business into three separate.

Centerview Partners is serving as Johnson Controls' lead financial advisor. Barclays is serving as financial advisor for Johnson Controls. Wachtell, Lipton, Rosen & Katz and A&L Goodbody are acting as its legal advisors.

Lazard is serving as Tyco's lead financial advisor. Citi is providing the committed financing for the transaction and Goldman Sachs is serving as financial advisor for Tyco. Simpson Thacher & Bartlett and Arthur Cox are acting as its legal advisors.