Tyco to split, to create four companies

The $17 billion security division will stand on its own, headed by Kozlowski
Friday, March 1, 2002

PEMBROKE, Bermuda-Tyco International's security division is slated to become a standalone company sometime this year as part of the multi-billion dollar conglomerate's plans to create four independent, publicly traded companies.

Plans call for security and electronics to join together, becoming the largest of the four businesses. It reported $17.6 billion in revenues in 2001 and has well-known brands such as ADT Security Services, Sonitrol, DSC and the former Sensormatic manufacturing company.

Fire and flow control will also become its own company (see related story), while Healthcare and Tyco Capital, which may be sold, complete the deal. Tyco also plans to sell its plastics business. The division is expected to be completed by the end of this year.

The breakup, said Dennis Kozlowski, Tyco's chairman and chief executive officer, will allow the company to unlock shareholder value, create more agile companies and position them better for growth. He dismissed rumors that Tyco was under investigation by the Securities and Exchange Commission for accounting practices and plans to split the company were in response to that.

"We are strictly playing offense here," said Kozlowski. "I want to stress that this not a defensive response to the faceless, ridiculous rumors last week to the recent weakness in the stock price. We have studied our break up value from time to time over the years."

Joe Freeman, an industry analyst and president of J.P. Freeman Co., said that on it's own, Tyco's planned breakup was a strategic move that likely would boost value for the company's shareholders. The timing of the breakup, however, comes at the worst possible time for the company, amid swirling rumors of accounting improprieties brought on by the Enron scandal.

"Right now the market doesn't much like at all what's going on at Tyco, which is why the share price is down," Freeman said. Tyco stock closed at just over $30 a share at press time, down from a 52-week high of more than $60 a share.

During its 2001 fiscal year the company made 350 unannounced acquisitions, according to a report in the Wall Street Journal. The paper said Tyco spent $1.27 billion on the 10 largest of these purchases, which included buying Edison International's security arm, Edison Security. Another $1.28 billion was spent buying small security firms, according to the story.

To reassure investors, Tyco is now holding weekly conference calls to talk about the company and its stock performance.

Kozlowski said the split up regroups some businesses that historically were together. He said ADT will be combined with the electronic business, which makes strategic sense.

"There are substantial and growing manufacturing synergies between security and electronics, more so than between fire protection and security," said Kozlowski. "For example, security is manufacturing a growing amount of its own high-end equipment, such as access control, CCTV products, while electronics is already a leader in complementary products, such as low voltage circuitry, perimeter wiring, wireless equipment and touch screen. And of course, ADT uses a huge amount of our electrical, electronic and telecommunications interconnect products."

Kozlowski will become chairman and chief executive officer of the security company. He plans to remain active on the boards of the other companies, but will not head them.

These moves, said Jack Mallon, a security industry analyst and publisher of Mallon's Security Investing, speaks volumes.

"We're going to have pretty much of a pure play security company with billions of dollars in revenue which will dramatically increase the visibility of the industry," said Mallon. "It's also significant that (Kozlowski) decided to hook up with the security piece which indicates that that's where he thinks the action is going to be."

Kozlowski said about 25 percent of the combined security and electronic company's revenues come from the security business. Of that three-quarters is a result of recurring revenue.

Kozlowski said he expects tremendous growth opportunity for the security and electronics company as a standalone entity, which may work all too well, said Freeman.

The success of the security division would only make it more attractive to other corporate buyers, such as General Electric, whose Industrial Products division announced it would buy Interlogix in December.

"What we may be seeing is the end of the entrepreneurial era of security industry in America with the entrance of GE and possibly others," he said.