NEW YORK ( TheDeal) -- Stanley Black & Decker Inc. ( SWK ) has a long history of reinventing itself through deals, having transformed the company from a pre-depression era maker of bolts to a $10.2 billion manufacturer of tools, security systems and medical equipment. But there is reason to believe the New Britain, Conn.-based company's next deal might be driven more by tax policy than by product expansion. And that deal could also involve a combination with Switzerland-based Tyco International Ltd. Stanley shares fell 0.1% on Tuesday to $77.80 while tyco gained 1.6% to $31.68. New Britain, Conn.-based Stanley, which since 2009 has spent $4.5 billion for Black & Decker Corp. and another $1.2 billion for Niscayah Group AB, while shedding its hardware and home improvement group to Spectrum Brands Inc. for $1.4 billion, said last year it was curtailing acquisitions to focus on integration. But the company has a potential tax repatriation issue looming that could keep it from sitting on the sidelines for long. Stanley management at a February Barclays plc event addressed a question on how the firm could continue to fund its dividend in a tax efficient manner as an increasingly large portion of its cash is generated overseas. The answer given involved M&A, with company president and COO James M. Loree pointing to Switzerland-based Tyco and Eaton Corp. plc -- which gained a Dublin address as part of its $12 billion merger with Cooper Industries plc last year -- as role models to be emulated. Stanley has a history of looking abroad, having considered reincorporating in Bermuda in 2002 before backtracking due to public outcry. Loree said the company won't try that again, but hinted it could seek out a deal overseas. "I do think you're going to see more foreign purchases of U.S. companies," Loree said. The U.S. management team might run the combined entity, he said, but "it's just a reality that if you're going to create shareholder value and all your money is overseas and you don't want to pay a 25% tax ... that's the other alternative." Raymond James & Associates Inc. analyst Sam Darkatsh in a note Monday said a merger with Tyco could make the most sense. While stressing that he has no knowledge of any deal talk and calling his speculation "for entertainment purposes only," he said there seems to be only a few possibilities out there for Stanley should it decide to pursue a headquarters-shifting deal.
Darkatsh said that for a deal to work for tax reasons, Stanley would have to find a company domiciled in a country with favorable tax rates as well as a comprehensive tax treaty with the U.S., and Stanley shareholders would have to own at most only 80% of the combination, but perhaps just 60%. The treaty talk rules out companies based in Bermuda or the Cayman Islands, but would allow for a Swiss- or Irish-based partner. The problem is there are few potential targets of size that are based in those countries. One possibility is the security business of Ingersoll Rand Co. Ltd., set to be spun out of its Dublin-based parent later this year. But Darkatsh noted that the business is similar to the assets Stanley just sold to Spectrum, and so seemingly would be a poor strategic fit. Tyco, meanwhile, is focused on security products, an area where Stanley has been eager to grow. And the company is a prolific dealmaker. The $10 billion annual sales firm is comprised of the remnants of the conglomerate put together by Dennis Kozlowski, which in the years since Kozlowski was forced out has been split up on numerous occasions. Tyco in the past 18 months has split off its ADT home security system as an independent and its flow control business to Pentair Inc. in a tax-efficient Reverse Morris Trust transaction. Darkatsh called what remains "the clear global leader" in security with upward of 15% global market share, calling it the "optimal" dance partner for Stanley. The question is whether either company wants to dance. Neither offered any comment on the speculation. But as Stanley gets serious about solving its cash repatriation concerns and continuing to fund its dividend, a deal with Tyco could be its best bet. Written by Lou Whiteman in New York