By Mark Bern
Tyco (NYSE:TYC) isn’t the glamour stock it once was. The image was destroyed by one CEO (D. K.) and even though his replacement has done much to restore the company’s credibility, the luster may be gone forever. Growth has slowed but become more stable since the financial crisis of 2008-09. Rumors are swirling about a takeover bid but the price is still moving with the market. There just doesn’t seem to be much that can help poor Tyco to differentiate itself from the pack. Honestly, as the company is currently configured, I don’t see anything very exciting either. But let’s take a closer look at the company’s latest plan to unlock shareholder value.
Tyco management has decided that the company would be better off if split into three separate companies, each focusing on it end market customers and its own line of products and services. There may be some truth to that, but there is something else in this scenario that me thinks smells of greater opportunity.
The company, as it is currently formed may be just too big for an acquisition or, more likely, it may not be that appealing as a whole to any one suitor. Therefore, I suspect that the better value that could be realized for shareholders comes after the split into three separate companies. Each new company will be a leader in its respective industry. Each will pay a dividend and be well capitalized, financially stable, and maintain an investment grade credit rating. What once was not so appealing to any one potential buyer may look more appetizing to three different potential buyers. Herein lays the hidden value: once split up, each company will be able to consider the best path to enhancing shareholder value. That may work out differently for each business. If one or more of the three companies finds that acquisitive potential buyers are willing to pay a significant premium to the market price, that management may seek competition from multiple bidders and find they can achieve an immediate increase of value to its shareholders of 40 percent or more. I suspect that this is the likely outcome and I also suspect that the current management knows it. They may not be able to sell the combined company for the full value that they believe shareholders can receive so why not split it up and get the premiums on those parts that buyers really crave?
It will be interesting to see which of the three companies the current top execs migrate to when the split occurs. I am guessing, but I’d be willing to wager that company will go to the auction block first and that those managers in charge of it will be getting outsized severance packages. Those in the know always seem to end up in the right place at the right time.
So, where is the opportunity in all this for the lowly retail investor? I am considering buying Tyco once regulators have given their approval and the final vote is scheduled for shareholders. I want to own the stock before the break up, watch where the top executives of the parent end up, and buy more of that company(s) after the split and wait for the offers to come. The key officers that I’ll be watching are the CEO, the CFO, and the COO all of whom should be privy to the detailed intentions of the split and the potential end results. I will follow the CEO first since that is where the real money should show up, in my humble opinion. I would expect the deals to start showing up sometime after the first six months of the split, but the possible wait for action may take as much as 18 months. If nothing has shown up by then I would reconsider the holdings based upon the merits of continuing operations without the buyout opportunity.
Of course, I may have it all wrong and an investor may just end up with the three separate companies that pay the same dividend of about 2.2 percent and growth appreciation prospects of the current two to five percent per year. Not great, but it may be worth accepting for the potential reward just in case. That is the question each investor must determine for themselves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.