Neil Sedaka may have once thought that breaking up was hard to do, but Tyco (NYSE:TYC) apparently has no such problems. Though rumors had started to creep out a few days ago, Tyco announced Monday morning that it was undertaking a significant corporate reorganization that would effectively result in splitting up the company's three main businesses into independent publicly-traded entities.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The New Tycos to Come
After setting Tyco Electronics (NYSE:TEL) and Covidien (NYSE:COV) free in 2006, Tyco has been operating as a three-pronged business entity. There is the ADT security business, a flow control business that sells valves, controls, actuators and the like to industries including power, water, and chemicals, and a commercial fire and safety business.

Now the company is going to undertake a year-long process of restructuring and tax-free spin-offs (technically conducted as stock dividends) that will result in the three companies operating and trading as free-standing independent entities. As part of the process, the company expects to incur something on the order of $700 million in expenses. (For related reading, see Parents And Spinoffs: When To Buy And When To Sell.)

Three New Companies
Tyco's ADT business is the largest North American residential security business, with not only close to one-quarter market share, but reportedly seven times the customer count of the nearest competitor. Tyco competes with largely with Siemens (NYSE:SI), United Technologies (NYSE:UTX), Honeywell (NYSE:HON), and Secom in a very large addressable market. ADT is Tyco's smallest business in revenue terms, but it has the highest operating profit margin and a very attractive cash-generating subscription-based business model.

The flow control business is the second-largest (or second-smallest) in revenue terms, and has the lowest operating profit margin (though still in double-digits). More than one-third of the segment's markets can be grouped into energy or "process" verticals, and it would look as though the company has captured about 10% of the $40 billion in addressable market revenue. Tyco's biggest rivals here include ABB (NYSE:ABB), Emerson (NYSE:EMR), Flowserve (NYSE:FLS), Honeywell, and Rockwell (NYSE:ROK).

Last and by no means least is the company's commercial fire and safety business - a unit that sells products like fire alarms, fire extinguishers, and fire suppression systems. This is a large business (over $10 billion in revenue), with good margins (low teens) and a large global addressable market. Tyco's biggest rivals here are familiar names - Honeywell, Siemens, and United Technologies.

What Does Tyco Know That It's Rivals Don't?
Looking over Tyco's competitive profile, something jumps out right away - major rivals like Honeywell, United Technologies and Siemens frequently pop up in multiple markets. It leads to a worthwhile question as to what Tyco thinks it can gain from breaking up that these other companies don't see. Likewise, companies like Danaher (NYSE:DHR) and Berkshire Hathaway (NYSE:BRK.A) continue to embrace the conglomerate structure.

There are certainly some positive arguments for a conglomerate in the sense that low-growth cash-rich businesses can be used to generate low-cost capital for growing businesses with hefty capital appetites. Likewise, a diverse array of businesses can smooth itself out and make a business seem less volatile overall.

On the flip side, there are costs. It is hard enough to find a management team that properly understands one business, let alone many. Moreover, it can be very tempting for a management team to "harvest" cash from a business when the development timelines are lengthy and uncertain - Covidien, for instance, as thrived since its independence in large part because management has been able to make appropriate long-term investment decisions and has not been forced to stint on R&D spending. (For related reading, see Cashing In On Corprorate Restructuring.)

The Bottom Line
The worst that can be said about the Tyco break-up is that $700 million seems a bit expensive and maybe separating the security and fire/safety businesses is not completely intuitive. It would not be shocking to see the flow control business grab a bid somewhere down the line, while the security and fire safety businesses both look to have a lot of untapped potential ahead of them. With more information likely to come out in the months ahead (including prospectuses), shareholders will be able to better value each independent segment, but for now the stock looks only slightly undervalued.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  2. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center