Call it the luck of the Irish. Tyco International PLC’s (NYSE:TYC) headquarters in Cork, Ireland served as the ultimate deal sweetener in Johnson Controls Inc’s (NYSE:JCI) takeover in a deal that could be a game-changer for TYC stock.
As most shares were crashing in North American markets, Tyco stock surged by more than 10%. Johnson Controls, which specializes in automotive equipment, estimated that settling in Ireland will save the company $150 million in taxes per year. In addition, Johnson Controls hopes to switch from supplier status to that of a “multi-industry leader,” from construction to technology.
The company resulting from the merger will be listed on the New York Stock Exchange under the ticker “JCI.” The deal suggests there is still appetite for merger and acquisition (M&A) activity on Wall Street and that the market is still hungry for deals after a very fruitful 2015.
Johnson Controls, based in Milwaukee, has long tried to shift to more profitable businesses and away from automotive components, especially seats and car interiors, aiming for car batteries instead. (Source: “Johnson Controls to Explore Options for Separation of Auto Unit,” Bloomberg, June 10, 2015.)
This Is Behind JCI/TYC Stock Merger
Automotive batteries will be one of the top in-demand items in the next few years, as many car companies start to introduce new hybrid and all electric models to their product ranges. Johnson Controls also hopes to capitalize on the energy efficiency trend in the construction sector.
The merger of Johnson Controls and Tyco in a $32.0-billion entity, apart from sending TYC stock surging, sends an important signal to the markets that suggests that the current instability of the stock market is no match against companies securing strategic transactions. (Source: “Johnson Controls Said to Be in Advanced Talks to Combine With Tyco,” The Wall Street Journal, January 24, 2016.) In this case, the recipe involves an estimated $500 million savings in synergies and over $150 million in tax cuts.
Johnson Controls stock had a high of some $53.00 in 2015 and the merger should see it return to at least that price in the first half of 2016. Based in Milwaukee with a capitalization of $23.0 billion, JCI wants to become a multi-industry leader. Tyco was divided into three companies after arrival at the general direction of corporate turnaround specialist Edward Breen. Breen oversaw the sale of the company’s electronics and health segments in 2007 and assisted in enhancing its security division through the acquisition of Broadview Security in 2010.
In 2012, Tyco split into three again: valves and control systems for the energy market merged with Pentair, while security systems and fire were grouped into “New Tyco.” ADT North America, a home security specialist, was the third entity to emerge out of the split. (Source: “Tyco officially separates,” Security Info Watch, October 1, 2012.)
Fears of Changes to Tax-Inversion Rules Accelerated TYCO-JCI Merger?
Nevertheless, tax inversion is one of the main drivers of the deal and one of the main drivers of value for JCI stock. The tax inversion practice involves shifting headquarters to a country offering more favorable corporate tax rates through a merger or acquisition will certainly raise a few political eyebrows, even as it generates smiles on Wall Street.
The Obama Administration is not keen on this type of agreement, but the boards of both Tyco and JCI have unanimously approved the deal, which should be closed by the end of fiscal 2016. Owners of JCI stock will account for roughly a 56% stake in the new company and they will receive an amount in cash equal to total approximately $3.9 billion.
Tax inversion and potential changes to U.S. legislation may have accelerated JCI’s decision to acquire TYC stock. Both the leading Democrat and Republican candidates for this year’s presidential race, Hillary Clinton and Donald Trump, have promised to discourage the practice, even if through different means.
Hillary Clinton said she would introduce an “exit tax” to deter companies from resettling to other jurisdictions: “It is outrageous when large multinational corporations game the tax code and shelter money overseas to avoid paying their fair share, including through maneuvers like inversions,” she said. (Source: “Johnson Controls’ $20bn Tyco deal revives inversion debate,” The Financial Times, January 25, 2016.)
Donald Trump, meanwhile, has offered a more incentive-focused approach, proposing a 15% flat tax solution in order to discourage any U.S. company from leaving, given that they currently pay as much as 35%. in Ireland, a company like JCI would pay 12.5%, a factor that JCI stock will inevitably reflect.