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Tyco to split into four
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January 22, 2002: 2:34 p.m. ET
Manufacturing conglomerate will break into separately traded companies.
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NEW YORK (CNN/Money) - Tyco International Ltd., which built itself into a big conglomerate through acquisitions, said it will split into four separate companies this year in a move "to unlock tens of billions of dollars" of value for its shareholders.
The company said Tuesday it plans to take its health care, fire protection and financial services units public through a series of initial public offerings, leaving its security and electronics business as the fourth publicly traded company.
Goldman Sachs is acting as Tyco's financial adviser.
Shares of Tyco (TYC: up $2.04 to $48.49, Research, Estimates) jumped at midday on the New York Stock Exchange.
The company said it will take its financial services unit, Tyco Capital, public in the second quarter of 2002. The company expects to complete the other offerings by the end of the year.
"Clearly this is a shock," said Brian Langenberg, analyst with Wachovia Securities. "But clearly in our mind it is going to validate the inherent value of the company."
Langenberg said Wachovia has a share-price target of $65 for the company, but a split Tyco could easily exceed that number.
The Pembroke, Bermuda-based company also said it will sell its plastics unit, which could raise $3 billion to $4 billion.
Tyco Chairman and CEO Dennis Kozlowski told analysts during a
conference call the company has been approached about its plastics business and would entertain selling its other businesses if the right offers came along.
Tyco said it plans to use proceeds from the initial offerings and the sale of the plastics unit to cut at least $11 billion in debt by buying back bonds issued by Tyco International Group S.A. and its security and electronics unit.
"The plan announced today is designed to close that gap -- the gap between Tyco's market value in recent years and the value of our businesses," Kozlowski said in a statement. "Our objective has always been to deliver value to our shareholders. That is why we are taking this action today and why we are all very excited about the future."
"I have always told you that I wanted to build wealth, not an empire, and that we would split up the company if it made sense for shareholders, which it does," Kozlowski said in the conference call.
He also said that, looking at the value of peer companies, Tyco believes there is "well over a 50 percent upside" compared with the current market value of the stock.
Kozlowski will become chairman and CEO of the security and electronics company.
Move not in response to rumors
Shares of Tyco have been buffeted lately as rumors swirl about the company.
At the start of Tuesday's call, Kozlowski denied the company was buying Honeywell International (HI: down $0.61 to $54.24, Research, Estimates). He also said that Tyco has limited exposure to Kmart (KM: down $1.01 to $0.73, Research, Estimates) and Enron, that it is not affected by Argentina, that there was no Securities and Exchange Commission investigation of Tyco, and that neither he nor CFO Mark Swartz is leaving the company -- all rumors that have hurt Tyco's stock.
But Kozlowski also said the move to split the company is not in response to those "ridiculous rumors" or the fact that the stock has dropped into the 40s.
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Tyco Chairman and CEO Dennis Kozlowski comments on rumors.
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"We are strictly playing offense here," he said. "We were fully prepared to do this when the stock was in the mid-50s," he added.
"So many rumors were thrown at this company that we basically consider unwarranted," Wachovia's Langenberg said. "This really validates the integrity of the management."
But he said he believes that without the pressure from rumors and the drop in stock price Tyco management would not have split the company.
"It's a shame they do feel the need to break it up," Langenberg said.
Kozlowski also said the four individual companies will have more transparency in accounting and other areas.
Daniel Epstein, a credit products analyst with investment bank ANZ, said the company's promise to be more transparent in its accounts was very positive.
"It's pretty hard to hide something as you go on (IPO) road shows for several months," Langenberg said.
Two of the new companies, the security and electronics business and the fire protection and flow control business, will be marketplace leaders, Tyco said.
The company said that with 2001 sales of about $17.6 billion excluding one-time items, the security and electronics business is the largest in residential and commercial security and is also a leading maker of electronic components.
Check other manufacturing stocks here
Tyco's fire protection and flow control business had sales of $7.6 billion last year.
With 2001 sales of $7.1 billion, Tyco's health care business ranks No. 2 in medical devices behind Johnson & Johnson's (JNJ: down $0.81 to $58.89, Research, Estimates) sales of $11.2 billion, and ahead of Medtronic (MDT: up $0.55 to $49.03, Research, Estimates).
The financial services company will be far down in the ranking, with 2001 revenue of $5.4 billion, but will have a strong position in specialty areas such as construction equipment financing and Small Business Administration loans, the company said.
Langenberg said all the companies should be able to keep their strong positions in their respective markets once they separate.
"[Kozlowski] will still be on all four boards, although only chairman of one, and you have some real operation synergies," he said. "These guys aren't just going to lose each other's phone numbers." 
-- from staff and wire reports
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