Why Tyco Should Get Back in the Mergers and Acquisitions Chase

NEW YORK (The Deal) -- The old Tyco International (TYC) under CEO Dennis Kozlowski was never shy about deal-making. Much has changed at the company since Kozlowski's fall from grace last decade. But after a lackluster quarter marked by tepid guidance, there are calls for the industrial firm to again rev up the M&A machine.

Dublin-based Tyco on April 24 reported quarterly results that topped estimates, but its shares traded down more than 5% after warning that its fiscal third quarter would come in well below expectations. The company mentioned forex issues, weather-related construction delays, and a slowdown in energy spending when discussing the weakness.

Tyco management is committed to cutting expenses, and believes that margins will expand over time as it improves its mix of high-tech building controls and safety products. But more drastic actions could be needed.

Barclays analyst Scott Davis in a note said that if growth continues at a slow rate, "we'd expect management to be more aggressive." Tyco is under-leveraged relative to its peers, the analyst said, and according to Davis has a corporate structure ready-made to support a larger entity.

The company has dabbled in M&A already, earlier this year closing its $329.5 million purchase of flame and gas detection equipment maker Industrial Safety Technologies from Battery Ventures. Davis did not offer specific targets for Tyco, but said he sees plenty of opportunities for the company to add scale. "When we attend fire/security trade shows there are a gazillion smaller niche folks out there," Davis wrote, adding there have "to be some roll-up opportunities" out there for the company.

On a call with investors, Tyco CEO George Oliver said the firm currently has "a rich pipeline of potential opportunities," saying the company is exploring deals priced in the $200 million to $500 million range that offer chances to increase its technology and services exposure and boost margins.

As an alternative, Tyco could put itself on the block. The company, despite its growth issues, has an attractive portfolio of security, monitoring, fire suppression and safety products used in smart buildings, and seems well-positioned to benefit from the non-residential construction recovery and an effort by owners of older buildings to modernize by adding smart systems to their properties.

Tyco would be highly complementary to Honeywell International (HON), a company that after years of playing it safe when it comes to M&A has given signals it is looking for a larger deal. Honeywell's last big deal was its 2009 purchase of French safety gear manufacturer Sperian Protection for $1.4 billion, but the company has been linked to a number of large assets that have hit the block in recent years.

In 2002, after regulators stymied an effort by General Electric (GE) to acquire Honeywell, rumors heated up that Kozlowski's then high-flying conglomerate was ready to pounce. The tables have since turned, as Tyco was left reeling in the aftermath of the scandal, and more recently split itself into three smaller parts; it's now a relative minnow, with a $16 billion market capitalization compared to Honeywell's $80.3 billion.

If Tyco doesn't boost growth soon, it could find itself as the hunted instead of the hunter.

 

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This article was originally published at 3:51 p.m. ET, May 4, on The Deal.

 

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