Tyco International: Breaking Up Is Hard To Do

June 12, 2008
2007 was a busy year for Tyco International Ltd. On June 29, it split into three publicly held companies—Covidien (formerly Tyco Healthcare Group), Tyco Electronics, and the new Tyco International (formerly Tyco Fire & Security and Tyco Engineered

2007 was a busy year for Tyco International Ltd. On June 29, it split into three publicly held companies—Covidien (formerly Tyco Healthcare Group), Tyco Electronics, and the new Tyco International (formerly Tyco Fire & Security and Tyco Engineered Products & Services). And now, Covidien and Tyco Electronics are classified as discontinued operations.

Tyco International, the last company standing, had a continuing revenue base of about $19 billion in 2007. Its 2006 revenue base was $41 billion, so the breakup cut the company in half. About half of these revenues come from overseas markets, and Tyco International now comprises five business segments: ADT Worldwide, Fire Protection Circuits, Safety Products, Flow Control, and Electrical and Metal Products.

With all of this activity, it should be no surprise that Tyco slipped from 57th place on our 2006 list to 60th place in 2007. While the downsized company saw positive growth in its number of employees and sales, these improvements were offset by declines in its debt to equity ratio and its design influence dollars. In fact, the biggest surprise may be its relative stability, considering its significant changes behind the scenes.

In 1991, Dennis Kozlowski became CEO of Tyco. During the next 10 years, Tyco acquired close to 1000 companies under an aggressive strategy. Prior to a stock split in 1999, rumors of accounting irregularities surfaced, but the company strongly denied them.

In 2002, however, Kozlowski and Tyco’s CFO Mark Swartz were charged with funneling $600 million from the company. They were convicted in 2005 and sent to jail in one of the largest corporate fraud cases in history. Between 2002 and 2006, Tyco had to take numerous writeoffs in value of acquired businesses that had been improperly valued on the balance sheet. In 2004, it started a review of what its core businesses should be, leading to the 2007 spinoffs.

Sales grew by 8% in 2007, partially due to favorable exchange rates. Yet operating profit declined by 125%, as Tyco paid out $3 billion in May 2007 to settle 32 class action lawsuits stemming from previous misrepresentation of assets and earnings in Securities and Exchange Commission filings under Kozlowski’s stewardship. Still, the ADT division saw strong growth in Asia and Latin America, and Fire Protection Services and Flow Control experienced growth as well.

Tyco’s largest business unit is now ADT Worldwide, which sells electronic security systems and accounts for about 40% of sales. Fire Protection Services sees around 20% of sales, Flow Control accounts for around 20% of sales, Safety Products produces around 9% of sales, and Electrical & Metal Products is responsible for around 11% of sales.

In each of these market segments, Tyco is the biggest player among a highly fragmented group of smaller companies. This lets Tyco control costs and fund research in new product development. This size also helps it land major contracts, inking deals with organizations that have multiple locations in like healthcare companies, government, educational institutions, and commercial bodies. Tyco’s higher profile and brand recognition are better than its competitors as well.

With a presence in several industries and many countries, though, Tyco needs to appeal to consumers in all of these markets. That can be costly, and more importantly, creating synergy between these different segments can be difficult.

Exchange-rate volatility also has a great effect on Tyco, since around 50% of its revenue base comes from overseas markets. In 2007, it greatly benefited from a weak dollar, especially in Europe. But the company needs to be careful not to base its growth strategy on continued favorable currency exchange projections. Instead, it needs to look at each country’s growth prospects and infrastructure needs to avoid overextending itself.

Other factors like foreign laws, different market and consumer preferences, political instability, and the potential nationalization of industry in developing companies are additional risks for a company that relies on overseas markets. Furthermore, Tyco is a large buyer of metals. High commodity prices on steel and copper could depress margins if Tyco can’t pass them on to consumers. Tyco already saw some of these high prices in 2007.

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