(Bloomberg) Johnson Controls Inc., already exiting the auto-industry’s supply chain after decades as a key player, is now seeking to shed its U.S. corporate citizenship in a multibillion-dollar tie-up with Tyco International Plc.
The deal, announced early Monday, marks the latest attempt by a historic U.S. company to reduce its tax bill through a so-called inversion, a maneuver that allows U.S. corporations to acquire foreign-domiciled companies and shift their legal address to reduce their tax rates.
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 complement Johnson Controls’ buildings-efficiency business. 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. Inversions have become more frequent since 2012 and have emerged as an issue in the U.S. presidential race, with Donald Trump and Hillary Clinton among those calling for an end to the practice.
U.S. Senator Bernie Sanders, a Vermont Democrat seeking the party’s presidential nomination, said the merger “would be a disaster for American taxpayers.”
“If you want the advantages of being an American company then you can’t run away from America to avoid paying taxes,” Sanders said in an e-mailed statement.
The corporate tax rate in Ireland, where the new Johnson Controls Plc will be based, is 12.5 percent, among the world’s lowest, compared with 35 percent in the U.S., the highest in the developed world.
Certain corporate tax laws mean an independent U.S. company could end up paying more taxes than an identical U.S. company owned by a foreign parent. Since 1982, more than 50 American companies have reincorporated in low-tax countries.
Tyco, which is based in Ireland and run from Princeton, New Jersey, is now a maker of commercial fire and security systems with a stock-market value of $13 billion as of Friday. The combined company will have its primary operational headquarters in North America in Milwaukee.
The companies project at least $650 million in savings, which the companies 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,” Johnson Controls’ Chairman and CEO Alex Molinaroli said in a conference call with analysts. The cost of executing the cost-savings will be about the same $650 million.
“We see from day one being able to leverage the combined distributions, the combined customer base that we serve,” said Tyco CEO George Oliver. “More importantly, leveraging a lot of our innovation will enable us to put all of our capabilities together to be able to capitalize on the trend in smart buildings.”
Shareholders of Johnson Controls will own about 56 percent of the combined company and receive aggregate cash consideration of about $3.9 billion, the companies said in a statement Monday. The companies expect the deal to close by the end of September. Johnson Controls shareholders may choose one share of the combined company or $34.88 a share in cash.
Johnson Controls is continuing with its plan to spin off its automotive-seating operations, slated by year-end. A consummated deal would complete the transition of Johnson Controls from a diversified manufacturer of auto parts, batteries and building controls into two more focused companies. A merger also would end of one of the last vestiges of Tyco, the onetime conglomerate that divided into multiple companies after former Chief Executive Officer Dennis Kozlowski was forced out in 2002 and later went to prison.
Milwaukee-based Johnson Controls has been trying to reduce its reliance on the auto-parts industry, which accounted for about 54 percent of its fiscal 2015 sales. Molinaroli will remain chairman and CEO of the combined company for 18 months after the closing, while Oliver serves as president and chief operating officer, as well as director. Then Oliver will become CEO while Molinaroli serves as executive chairman for a year, until Oliver takes both roles.
“Johnson Controls has been on a multiyear trajectory to transform into a true industrial growth company. I think this acquisition fits well in that strategy,” said Noah Kaye, an analyst at Oppenheimer & Co. “Fundamentally, we see this as a company with advanced energy storage and advanced building controls capabilities and the Tyco products should integrate well.”
“Johnson Controls’ recent announcement that it will merge with Tyco International plc shows that U.S. companies are still seeking, and finding, ways to change their incorporation to foreign countries, despite hot pursuit of expatriation devices by Treasury and the IRS,” said Bloomberg BNA managing editor for international tax Bruce Reynolds, in a statement emailed to Accounting Today.
Johnson Controls also said that it earned an adjusted profit of 82 cents a share in its fiscal first quarter, while Tyco said it earned 42 cents. Both figures were within or better than the companies’ forecasts. Johnson Controls will report full earnings Jan. 28 and Tyco on Jan. 29.
Tyco shares jumped 11 percent to $33.99 at 2:29 p.m. New York time. Johnson Controls slipped 2.5 percent to $34.70.
Johnson Controls is falling because executives never clearly explained the benefits the deal would bring for shareholders, said Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co. Shah also said Oliver estimated Tyco shareholders would receive at least a 30 percent premium for their shares in the proposed deal. The company never explained the math behind that premium, which left him with little confidence in the transparency of the deal, Shah said.
“This in theory—and strategically as well—could be a good deal,” Shah said. “But the terms seems inadequate. The communication—there’s a dislocation between what they’re saying and what the terms are.”
Oliver said on a conference call that the 30 percent is based on potential gains such as “at least $650 million in synergies over the next few years.” The premium is 13 percent based on the 30-day volume-weighted average share price, he said.
Centerview Partners and Barclays Plc provided financial advice to Johnson Controls. For Tyco, Lazard is lead adviser, Citigroup Inc. is providing financing and Goldman Sachs Group Inc. also provided financial advice.
Wachtell, Lipton, Rosen & Katz and A&L Goodbody are legal advisers to Johnson Controls; Simpson Thacher & Bartlett and Arthur Cox are Tyco’s legal advisers.
—With assistance from David Welch, Ed Hammond, Zachary R. Mider, Phil Serafino and John Lear.