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

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Economics

    The 4 Countries That Produce the Most Chocolate

    Discover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
  7. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  8. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  9. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  10. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  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 >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!