Postscandal Tyco splits into three

Shares drop 10.5 percent on news that Tyco's breakup with its electronics and health care businesses will cut profits, cost $1-billion and take a year.

Associated Press
Published January 14, 2006

TRENTON, N.J. - Tyco International Ltd., still recovering from scandals that saw its longtime former chief executive sentenced to prison, said Friday it plans to split into three public companies.

Carving Tyco's electronics and health care businesses from its remaining operations was expected, but Wall Street punished the company on news the breakup would reduce profits, cost $1-billion and take a year to complete.

Tyco, best known for its ADT home alarm systems, warned its first quarter and full-year 2006 earnings from continuing operations would be lower than expected.

Its shares tumbled $3.19, or 10.5 percent, to close at $27.12 in trading on the New York Stock Exchange.

Tyco said the breakup followed an extensive strategic review and will strengthen the businesses. Operations remaining in the core company include security and fire-protection services.

"We believe that separation is a logical next step in Tyco's evolution," chairman and chief executive Ed Breen said. He said the board concluded the current structure was inhibiting growth possibilities of the health care and electronics businesses, both leaders in their respective fields.

In a move expected to be completed in the first quarter of 2007, Tyco will separate the companies through issuing tax-free stock dividends to shareholders, who will own dividend-producing stock in all three companies.

Each of the new companies, still based in Bermuda, will be governed by an independent board of directors who will continue to refine those portfolios with possible selloffs or acquisitions, Breen said.

Tyco has been recovering from accounting scandals that resulted in the convictions in June of former CEO and longtime leader L. Dennis Kozlowski and former chief financial officer Mark Swartz, who were sentenced to prison last year for grand larceny, conspiracy, securities fraud and falsifying business records, and are appealing their convictions.

"Over the past three years, Tyco has come a long way," Breen said. "We have a strong and independent board, a rebuilt management team, outstanding corporate governance rankings and an operational culture that puts growth and operating excellence at the top of the management agenda."

In November, the company said it might split up its businesses to boost the value of the stock, and there had been reports this week that it was close to a decision. It also considered a breakup four years ago.

Breen said Friday the board considered a range of options, including selling certain businesses, and separating only one of the operations.

Some analysts questioned whether a divided Tyco will succeed as executives hope.

Forecasting tumultuous times ahead, Prudential Equity Group analyst Nicholas Heymann said the segment of Tyco's growth not tied to new acquisitions or currency fluctuations has been flat.

Heymann said the electronics business is subject to cyclical ups and downs, while ADT soon will begin facing competition from cable TV providers offering less expensive home-video monitoring.

Ravi Chanmugam, a lead partner at management consulting firm Accenture, recently called splits such as Tyco's "hangover breakups" - done by companies suffering the effects of deals done in the late 1990s.

"Now, in retrospect, people are seeing that the strategic rationale and financial debt load did not make sense," he said.