What Will Become of Tyco International?

Last Updated Aug 20, 2007 6:58 PM EDT

Tyco SubmersibleTyco International is nearing the end of its life as a $40 billion healthcare and capital goods conglomerate. The company has been planning its break-up since January 2006, with the actual separation scheduled to occur at the end of this month. The embattled conglomerate will be divided into three publicly traded companies; Tyco's healthcare business will become Covidien, its electronics business will become (fittingly) Tyco Electronics, and Tyco International will own and operate the fire protection and engineered products businesses. Tyco's investor meeting today revealed some insight into the new companies' growth strategies. A Reuter's article by Scott Malone reports that the new Tyco International will divest some businesses (including Earth Tech) and focus on internal development:
"We are going to focus on organic growth initiatives," Edward Breen, Tyco International's chairman and chief executive, told investors in New York. Referring to the fire, security and engineered-products segments, he said: "They are extremely fragmented industries from a competitive standpoint ... that's one of the keys to the future success of Tyco, is how we go about changing that landscape." By way of example, Breen estimated that the world electronic security market is a $65 billion business. He said that Tyco's 11 percent share of that market makes it the leader, with "thousands" of companies carving up about 75 percent of the market.
A Reuter's article by Bill Berkrot says Covidien will ramp up research and development to hit ambitious forecasts:
The health-care business of Tyco International, which will be known as Covidien after the split into three companies this month, said it was aiming for double digit earnings per share growth in 2009, but it expects net income to decline in its first year. [...] Covidien said research and development spending would grow at a faster rate than sales in 2008 as part of its efforts to compensate for years of underspending on R&D.
And a pre-meeting AP article relays some analyst insight on the new Tyco Electronics:
Deutsche Bank Securities analyst, Carter Shoop, in a client note, kept a "Hold" rating and $32 target price on Tyco International shares. Investors appear optimistic about Tyco Electronics' turnaround potential, the analyst wrote, saying he wants to hear more about the soon-to-be independent company's strategy to reaccelerate growth and improve margins. "We believe Tyco Electronics will struggle to gain market share in the components industry while at the same time driving margin expansion," wrote Shoop.
In any event, it's easy to see that a conglomerate of disparate activities is harder to manage successfully than three independent, agiler organizations managing themselves. And that's why Goldman Sachs and other investment banks see a brighter future ahead for the new companies.

(Image of Tyco Submersible by Tom Jervis, CC 2.0)