Tyco’s Security Division Not Likely to Change—for Now, Analysts Say


The announcement by Tyco Int’l Ltd. that it is splitting itself into four independent, publicly traded companies has caused quite a stir, especially so close in timing to reports of alleged accounting improprieties by energy trading company Enron. Those following and analyzing Tyco’s actions are waiting to see what will happen to the conglomerate’s security and electronics division once investor skepticism and media coverage on its own accounting practices die down. 

“I don’t believe that that business will be split up by choice to raise money. I do believe Tyco is a pretty strong company. With a group this big—in excess of $20 billion—there’s nobody close in size,” says Jeff Kessler, senior vice president and analyst for New York-based investment firm Lehman Brothers. “The problem with Tyco is it keeps being hit with newspaper revelations. Everybody keeps thinking that there’s more and more and it just has to settle down at some point in time. I believe everybody is waiting to see what will happen.”

Since Tyco’s announcement, made Jan. 22, the media has kept a close eye on the conglomerate’s shares and accounting practices. However, analysts say that, despite the doubts, Tyco is still a sound company.  At this point, however, diffusing the negative aura may take a while—possibly for most of 2002.

To go ahead with the split, Tyco must prepare special documents filed with the Securities Exchange Commission (SEC) that are first sent to investors for the public offerings of the divisions. Once the SEC approves the documents and all their financial disclosures, which break out in great detail all the performances of each division, they will become public record. According to John Mack, CEO of financial services company U.S. Business Exchange (USBX) and former CEO and board member of Protection One Inc., this process can take several months to complete.

Mack believes that further exposure or interest by the media on those documents could take place on any accounting issues that may arise from the SEC’s review. “Tyco’s goal is to get this done by the end of the year, but that is considered ambitious,” he says.

Mack adds that once Tyco splits, the possibilities are endless for the division. He says the newly independent company could explore opportunities for vertical integration—combining its security manufacturing business with its electronic components business.

Other possibilities are post-Sept. 11 opportunities in the bomb detection equipment market. Tyco officials have not expressed any interest in this market. Mack says, “I believe the likely scenario is that Tyco will buy other security equipment manufacturers closer to its core business, and then continue to do strategic buyouts on the dealer monitoring side.”

In the meantime, Tyco Chairman and CEO Dennis Kozlowski stands behind the company and its accounting practices. Some within the industry believe he will have a strong impact once he heads the security and electronics division.

Jack Mallon, founder and principal of New York-based Mallon & Associates, an investment banking firm serving the security industry, says that Kozlowski’s decision to stay with the security division is an interesting and important factor, indicating that Kozlowski apparently believes that’s where the action will be. Mack adds that Kozlowski staying with security is “an important indication in his belief that, potentially, it’s the one division he has the most passion for. The other markets will have a harder time with a CEO without a track record.”

According to Tyco spokeswoman Maryanne Kane, the split will have no operational impact whatsoever with the security division and its companies. However, Tyco’s move to separate fire from its security division has puzzled many industry insiders. According to Kane, the analysis from management to combine security and electronics and telecommunications was considered a better fit. Adds Mack, “Tyco’s assumption is that fire is linked more with the sprinkler business than the alarm business.”

Regardless of what Kozlowski decides to do with the security and electronics division, the company has some real challenges in the year ahead. “The security business has the potential to be the most valued business post break-up, and Dennis has been historically acqucisitive,” Mack says.

Richard Chace, executive director for the Security Industry Association (SIA), says, “We are looking to see what the action will ultimately reveal.”

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