Is Tyco the Pete Rose or the Mark McGuire of the Deal-Making World?
Wall street Journal, January 19,2010
Tyco International is back at home plate, swinging for a dinger again in the deal-making world. Or, maybe, it is going for doubles and triples?
After a near eight-year hiatus from acquisitions and with fraud scandals and spin-offs behind it, Tyco today announced a $2 billion acquisition of Brinks Home Security Holdings, also known as Broadview Security, for its ADT Security business.
The company, led by a new set of managers, is showing the swagger of an aged, reformed and wiser Pete Rose or Mark McGuire-–playing in a municipal softball league at the moment. “This, maybe, is a little bit on the larger side [of deals]” said Tyco Chairman and Chief Executive Ed Breen in a conference call Tuesday with analysts about the deal. But “It’s right down the middle of the plate for us.”
Breen points out that security systems is now one of three primary business units at Tyco (the other two being fire protection systems and flow control). He said the company has operated its way past the “management issues” of the past (read: Dennis Kozlowski imprisonment and fraud settlement), has jettisoned or spun off noncore businesses and is now ready to think about expanding organically or through acquisitions.
Analysts such as Deane Dray at FBR Capital Markets in New York point out that Tyco is consolidating in a fragmented space as the top five companies in the $14.4 billion security market only represent 40% of the market and the top 100 competitors represent just 60% of the industry. Tyco’s move adds the No. 2 competitor (Brinks, with 4% of market share in North America) to the No. 1 competitor (ADT, with 22% of market share in North America).
Will Harrington, a merger arbitrage analyst at Wall Street Access, said he estimates market share of the two companies to be closer to 33% than the 26% the company has stated. And given that the top two players in North America have combined, he estimates a 60% or 70% chance that the Department of Justice will take a second review on the proposed deal and mandatory divestitures aren’t out of the question.
People familiar with the matter say Tyco has been shopping for acquisitions in the past 18 months in its core businesses and began talks with Brinks around November. This first deal is significant in helping new management feel as if they are moving from beyond the shadow of Kozlowski’s imprisonment for fraud and his $6,000 shower curtain, which became a symbol of corporate greed, excess and corruption. They say Tyco is NOT aiming to become a sprawling conglomerate again and that the legacy of Kozlowski’s excess and misdeeds loom in the minds of employees and informs actions by the new leadership team. Kozlowski built a massive conglomerate by a spate of acquisitions from health care and electronics to industrial equipment.
Analysts are cheering Breen and his team on for the first deal in eight years and are pleased that it will be accretive to earnings right away, adding $565 million in revenue to ADT revenue and 3% to total Tyco revenue in the first year. Dray estimates it will add seven cents a share to earnings in the first year and 14 cents a share in the second year.
“Many investors may be concerned that Tyco is jumping back into acquisitions with too big a deal given the history under the prior management team,” wrote Bernstein Research analyst Steven Winoker in a note. He calls the deal a “big step forward” and “bulls-eye acquisition” for Tyco. “Tyco has earned the right in our view to re-start acquisitions in its core businesses given its operational improvements.”
Breen, 53 years old, is a straight-talker who came to Tyco in 2002 after several top operations roles at Motorola. He suggests that Tyco is keeping its operations, ambitions and acquisitions in check this time. “During the next year, we might have a bolt-on or two that makes strategic sense for us” on one of the three primary businesses, he said during the call. He said the company wouldn’t be looking for more deals as large as Brinks in the next year but could do deals that add up to $300 to $500 million.
Simpson Thacher & Bartlett acted as legal counsel and Citigroup acted as financial adviser to Tyco in connection with the transaction. Fulbright & Jaworski was legal counsel and Morgan Stanley was financial adviser to Brink’s Home Security Holdings.