Security

Johnson Controls & Tyco International Merge in Huge Inversion Deal

Johnson Controls Inc, a leading industrial-systems, HVAC and battery maker, announced on Monday it will merge with Tyco International, fire protection and security technology firm – combining the companies' building control businesses and taking on Tyco’s Irish tax address. “We see from day one being able to leverage the combined distributions, the combined customer base that we serve”, said Tyco chief executive George Oliver. “More importantly, leveraging a lot of our innovation will enable us to put all of our capabilities together to be able to capitalise on the trend in smart buildings”. The deal marks the latest attempt by a US company to reduce its tax bill through a so-called inversion, a manoeuvre that allows US corporations to acquire foreign-domiciled companies and shift their legal address to reduce their tax rates. The corporate tax rate in Ireland, where the new JCI will be based, is 12.5%, among the world’s lowest, compared with 35% in […]

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Johnson Controls Inc, a leading industrial-systems, HVAC and battery maker, announced on Monday it will merge with Tyco International, fire protection and security technology firm – combining the companies' building control businesses and taking on Tyco’s Irish tax address.

“We see from day one being able to leverage the combined distributions, the combined customer base that we serve”, said Tyco chief executive George Oliver. “More importantly, leveraging a lot of our innovation will enable us to put all of our capabilities together to be able to capitalise on the trend in smart buildings”.
Mergers

The deal marks the latest attempt by a US company to reduce its tax bill through a so-called inversion, a manoeuvre that allows US corporations to acquire foreign-domiciled companies and shift their legal address to reduce their tax rates. The corporate tax rate in Ireland, where the new JCI will be based, is 12.5%, among the world’s lowest, compared with 35% in the US, the highest in the developed world.

The companies project at least $650 million in savings, which they said would be achieved over three years, including $150 million in annual tax savings. The merged company will start to see some tax benefits immediately, meaning the estimated synergies aren’t “back-end loaded”, JCI’s Chairman and chief executive Alex Molinaroli said in a conference call with analysts.

The move would also bring an end to Tyco as a stand-alone company after it transformed from a diversified holding company into an operating one focused on fire and security products that should complement JCI’s buildings-efficiency business.

We believe Johnson Controls will be very happy to get their hands on Tyco's Fire and Security portfolio. There are obvious synergies here with their Buildings Division. And JCI have not kept up with the pace of innovation in Fire and Security. They remain strongest is Building Management Systems and HVAC Controls which have much more in common with their other divisions such as Batteries and Distributed Energy Storage. Tyco on the other hand have been relatively busy in building up their businesses. They acquired a respected VMS provider Exacq in 2013, and more recently retail analytics companies like ShopperTrak and FootFall. These join a list of well known brands such as SimplexGrinnell, Kantech, Visonic etc

Tyco itself got a foreign tax address in the late 1990s through an inversion, as part of a takeover of the security company ADT, which was incorporated in Bermuda. Since 1982, more than 50 American companies have reincorporated in low-tax countries, with Ireland becoming a popular corporate home.

Inversions have become more frequent since 2012 and have emerged as an issue in the US presidential race, with democratic presidential candidates Bernie Sanders and Hillary Clinton slating the merger. “The potential Johnson-Tyco merger would be a disaster for American taxpayers”, Sanders said in a statement Monday. "Profitable companies that have received corporate welfare from American taxpayers should not be allowed to renounce their U.S. citizenship to avoid paying US taxes. These corporate inversions must stop".

On Monday Clinton stated, "as I have said throughout my campaign, these efforts to shirk U.S. tax obligations leave American taxpayers holding the bag while corporations juice more revenues and profits", the former Secretary of State said. "I have a detailed and targeted plan to immediately put a stop to inversions and invest in the US, block deals like Johnson Controls and Tyco, and place an ‘exit tax’ on corporations that leave the country to lower their tax bill”.

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The announced merger comes about two months after U.S. pharmaceutical giant Pfizer announced it would invert by merging with Ireland-based Allergan. The deal also marks another big merger after a huge year for mergers and acquisitions in 2015 and, historically, mergers and acquisitions follow a familiar pattern. “There’s documented waves of M&A’s,” said David King, assistant professor of supply chain management at Iowa State University. They surge and break records one year; the stock market crashes the next.

“It’s almost one to one”, he said, pointing out that 2000 was a record M&A year before the 2001 dot com boom. Then 2007 was another record year before the economic catastrophe that unfolded in 2008, and after another boom year for M&A in 2015, we have seen 2016 get off to a dismal start in terms of markets. However, regardless of the political backlash and macro-economic foreboding, the deal underlines the promise in the smart building market.

The new JCI will have a combined $32 billion in annual revenue. That $32 billion revenue figure excludes the expected spin out next year of an automotive business called Adient after the merger is complete. The resulting new company, called Johnson Controls PLC, will combine Tyco’s fire and security business with JCI’s air conditioning, energy, and sensor business, to become a comprehensive player in the smart building arena.

In the industrial Internet landscape, the new Johnson Controls PLC will face off against its traditional rivals in the building space Honeywell, Siemens and UTC, all of which have been manoeuvring quickly to connect their own gear to the Internet. But the new JCI will also compete against the new entrant IT companies who have been moving into the Smart Building sector.

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