Tyco and JCI Mega Merger

One of the biggest security manufacturers and integrators (Tyco) and one of the biggest building management providers (JCI) are combining. The two companies together will do over $40 billion in revenue. The combined corporate name will be "Johnson Controls" but the legal domicile (for tax savings) will be Tyco's HQ in Ireland.

In this note, we breakdown their revenue, 'synergies' and a potential challenge from UTC.

JCI Needs

This is far more a reflection of Johnson Controls needs than a sign of problems in the physical security market.

Automotive Issues

JCI's main business historically is the 'automative experience' market, which has its problems. Indeed JCI is spinning out its automotive business (Adient).

Tax Inversion

Equally importantly, JCI is doing a 'tax inversion' here moving their legal domicile to Tyco's HQ in Ireland, which alone may generate hundreds of millions in profits annually.

Tyco / JCI Revenue

Tyco does ~$10 billion annual revenue (relatively flat) roughly split between ~$4 billion North America integration (i.e., Tyco Integrated Services), ~$4 billion Rest of World Integration, and ~$2.5 billion product sales (including Tyco Security Products).

Of JCI's ~$37 billion annual revenue (also relatively flat), ~$10 billion of that is from building management, the rest from power and automotive. While Johnson Controls does some security system integration, it is a distinct minority of that revenue, with the core strengths being more in HVAC, air systems, refrigeration, etc.

From the merger presentation, this slide overview the revenue / breakdown of the combined companies:

'Synergies'

Tyco / JCI have cited cross-selling benefits and reducing overlap between the companies, noting:

"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."

"The new company expects to deliver at least $500 million in operational synergies over the first three years after closing. These annual cost synergies are expected to be achieved by increasing efficiencies, eliminating redundancies, integrating the global branch networks"

This sounds reasonable. The main limitation we see is how powerful (or not) it will be to cross-sell HVAC / building management systems with video, access control, retail systems, etc. Building and security systems are generally bought and managed separately.

The combined companies see themselves selling everything in a building end-to-end:

In practice, though, we think selling all these products end-to-end will be challenging for most end users.

Here is JCI / Tyco's overview of the combined companies, brands and products:

Exacq Impact?

When and if this merger is completed, Exacq will not only be owned by Tyco the integrator but JCI the integrator as well, posing even further concerns about channel conflict between these mega integrators and regular security dealers.

JCI Strange CEO To Be Phased Out

JCI's CEO is going to be phased out and replaced by Tyco's CEO over the next few years:

"Mr. Molinaroli [JCI] will serve as chairman and CEO for a term of 18 months after the closing. At that time, Mr. Oliver [Tyco] will become CEO and Mr. Molinaroli will become executive chair for one year, after which Mr. Oliver will become chairman and CEO."

Molinaroli has been in the news over the past few years getting scammed by a Ponzi schemer plus an affair with a company consultant triggering an explosive breakup with his wife, causing distractions for the company.

"Integrating The Global Branch Networks"

One logistical impact is likely their proposed integration of branches, key to 'efficiencies' / cost reduction. Both JCI and Tyco have branches in most mid to large North American cities. Combining them and reducing 'redundant' personnel will surely save them money but is likely to be a painful and distracting process for the next few years as it is executed.

UTC Challenge?

However, one analyst thinks this might not be a done deal:

"JPMorgan analyst Stephen Tusa says other bidders could emerge. United Technologies (UTX) may have interest in Tyco and could likely extract more value than Johnson from the lower tax rate"

UTC could clearly benefit from acquiring Tyco integration as well as the tax inversion benefits.

Update Sep 2016 - Done Deal

The merger is final.