Johnson Controls-Tyco Merger Brings Companies Scale, Tax Savings

Milwaukee-based Johnson Controls announced it has merged with Tyco, in a deal that the two said will deliver cost and tax savings to the combined company, which like Tyco will be headquartered in Cork, Ireland.

Johnson Controls’ (NYSE: JCI) product line includes heating and cooling equipment for buildings. CEO Alex Molinaroli said Tyco’s (NYSE: TYC) specialty in fire protection and security systems made it a logical merger candidate.

“Tyco aligns with and enhances the Johnson Controls buildings platform and further positions all of our businesses for global growth,” Molinaroli said in a press release.

Johnson Controls is Wisconsin’s largest public company, with sales reportedly totaling more than $37 billion last year.

The combined company will be named “Johnson Controls PLC” and continue to be traded on the New York Stock Exchange under the “JCI” ticker. Its primary operating headquarters will be in Milwaukee, according to the release, but its legal domicile will be in Ireland.

The practice of merging with a foreign-based firm to take advantage of lower tax rates, known as an “inversion”, has become more common in recent years. Tyco’s operating headquarters has long been in Princeton NJ; in 2014, the company moved its global headquarters to Ireland.

The combined JCI-Tyco entity will bring at least $500 million in cost savings during the three-year period after the deal closes, the companies said, plus an additional $150 million in tax savings.

The companies said both of their boards have voted in favor of the deal, but it still must receive the approval of shareholders and regulators.

An analyst with S&P Capital described the deal as an “equity merger valued at $36 billion,” according to a Milwaukee Journal Sentinel report.

Under the terms of the agreement, JCI shareholders will receive $3.9 billion in cash. They will own 56 percent of the combined company, with Tyco shareholders controlling the remaining 44 percent. JCI shareholders can either swap their shares for ones in the new company, or accept a cash payment of $34.88 per share. That figure represents the most recent five-day weighted average of JCI’s stock price before the two sides reached a tentative deal.

Tyco’s stock price climbed 11.6 percent during trading Monday, while shares in JCI were down 3.9 percent at market close.

The Wall Street Journal reported on Sunday that a deal between the two was imminent. Following that news, Robert W. Baird & Co. analysts wrote in a research note that the agreement could be a “game changer.”

“This combination would bring scale to Johnson Controls in markets/products adjacent to its core HVAC products/services in Building Efficiency,” the Baird analysts wrote. “We believe the addition of Tyco’s fire safety/security products and services is very attractive with meaningful customer/geography overlap coupled with significant revenue/cost synergies.”

The combined company will have 11 directors on its board, six of whom will come from JCI, the companies said.

Once the deal closes—expected to be before the end of September, when JCI’s fiscal year ends—Molinaroli will lead the new entity as CEO and chairman for 18 months. After that, Tyco CEO George Oliver will become CEO, and Molinaroli will become executive chairman for one year. When that period passes—thirty months post-closing—Oliver will serve as both CEO and chairman.

In addition to ventilation and climate control systems for buildings, JCI is a leading supplier of seats and high-tech batteries for cars and trucks. Under Molinaroli, the company has worked to “diversify its portfolio,” which has meant shifting some of its focus from its automotive businesses to other industries.

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