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Transaction
Case Studies

Peter A. Sokoloff & Co. regularly analyzes transactions which occur within the industries covered. An archive of these case studies is kept online as a courtesy to our colleagues. To receive by e-mail new case studies as they are prepared, please e-mail bwalko@sokoloffco.com with your contact information.

Archives > Transaction Case Study 82

SOKOLOFF & COMPANY CASE STUDY:
Johnson Controls and Tyco Merge

DATE ANNOUNCED: January 25, 2016

BUYER: Johnson Controls (NYSE: JCI) 

SELLER: Tyco (NYSE: TYC)   

PURCHASE PRICE: $16.5 billion

FORM OF PURCHASE PRICE: This is a reverse merger whereby the form of the transaction is that Tyco will be the surviving corporation and, with a name change, will become Johnson Controls.  JCI is acquiring Tyco and Tyco shareholders will hold 44% of the stock of the merged business.  JCI shareholders will retain 56% of the business plus receive cash consideration of $3.9 billion.  The purpose of the cash consideration is to reduce JCI’s ownership in the merged company below 60%.  This is the threshold to allow what is called a corporate tax inversion.  Under the inversion JCI will enjoy reduced taxes (estimated to be $150 million per annum) as a result of now being domiciled in Tyco’s homes base, Cork, Ireland.

JCI shareholders may elect to receive in lieu of shares cash of $34.88 per share, which was the weighted 5 day average trading price as of the signing of the transaction. 

Tyco shareholders are receiving a value of about $34 per share, which is an 11% premium above the closing price the day before the announcement.  This value will move up and down as it is tied to both companies’ share price right up to closing.

TYCO’S FINANCIAL INFORMATION AND M&A MULTIPLES

Year

2013

2014

Trailing Twelve Months
through
September 25, 2015

Revenue

$10.1B

$10.3B

$9.90B

EBITDA

$1.23B

$1.07B

1.53B

Cash

 

 

1.46B

Debt

 

 

3.15B

Purchase Price

 

 

16.5B

Enterprise Value

 

 

18.19B

Multiple of Revenue

 

 

1.83

Multiple of EBITDA

 

 

11.88

TRANSACTION DRIVERS
According to JCI, “The combined company brings together best-in-class product, technology and service capabilities across controls, fire, security, HVAC, power solutions and energy storage, to serve various end-markets including large institutions, commercial buildings, retail, industrial, small business and residential.  The combination of the Tyco and Johnson Controls buildings platforms creates immediate opportunities for near-term growth through cross-selling, complementary branch and channel networks, and expanded global reach for established businesses.”

Tyco’s CEO, George Oliver further stated "The combination of Tyco and Johnson Controls is a highly strategic, value-enhancing step that brings together the unique strengths of two great companies to deliver best-in-class building technologies and services to customers around the world."

SOKOLOFF COMMENTARY:
This is a complex transaction with excellent financial metrics – i.e. - $150 million of tax savings plus $500 million of integration synergies expected annually.  Add in some sizzle with JCI’s planned spinoff of a new public company called Adient (JCI’s automotive seating business), planned for October of this year.  So shareholders get three companies for the price of one – the two merged into a single entity plus the new publicly traded Adient.

The products, services and geographies all fit extremely well; at a high level this looks like a brilliant play.  The key to success will be reconciling the cultures in each organization.  JCI has long prided itself on a corporate culture that is meticulous in detail.  Dress, office cleanliness, clearly defined command channels and an engineer’s attention to every customer detail are the very fabric of the organization.  Tyco has seen more historical change and tends to run at a faster, less formal pace internally.

Thus, developing cross selling opportunities, encouraging creativity and streamlining decision processes between the organizations are all apt to be challenging.

We wish the management and crew of both companies many good years together!

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