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| © REUTERS/Regis Duvignau |
By moving its headquarters to Cork, Ireland, Johnson Controls would become the latest major U.S. company to carry out a so-called tax-inversion after drug giant Pfizer Inc (PFE.N) structured such a deal with Irish peer Allergan Plc (AGN.N) last November.
While the tax benefits are not as profound as is the case of Pfizer's deal with Allergan, the news was enough to stir controversy among politicians in a U.S. presidential election year.
"I have a detailed and targeted plan to immediately put a stop to inversions and invest in the U.S., block deals like Johnson Controls and Tyco, and place an 'exit tax' on corporations that leave the country to lower their tax bill," Democratic Presidential candidate Hillary Clinton said in a statement.
Vermont Senator Bernie Sanders, Clinton's opponent for the Democratic Presidential nomination, also criticized the deal, calling it a disaster for American taxpayers. Others saw it as an opportunity to also highlight what they argue are the weaknesses of the U.S. tax system.
"Absent comprehensive tax reform that includes shifting to a territorial tax system with base erosion protections, Congress ought to examine viable bipartisan solutions that will effectively target and combat inversions and not tip the balance to tax-driven foreign acquisitions of U.S. firms," said U.S. Senate Finance Committee Chairman Orrin Hatch, a prominent Republican.
The merger will combine Johnson Controls' commercial buildings business with Tyco's fire security offerings, accelerating Johnson Controls' transformation following its decision to spin off its automotive parts unit.
Milwaukee-based Johnson Controls has a market value $22.5 billion, while Cork, Ireland-based Tyco, which specializes in fire protection systems is valued at $14.2 billion.
The deal will create savings of at least $500 million in the first three years, the companies said. They expect to save an additional $150 million a year through tax synergies.
"The move would be consistent with Johnson Control's strategy of transforming from an auto supplier into a multi-industry leader," UBS analyst Colin Langan said in a client note.
Johnson Controls' shares ended trading in New York on Monday down 3.9 percent at $34.21, while Tyco's shares ended up 11.6 percent at $34.15.
Tyco was ahead of many big U.S. industrial companies in seeking tax relief by moving its legal residence offshore. The company moved its headquarters to Bermuda from Exeter, New Hampshire in 2007, then to Switzerland in 2009, and to Cork in 2014.
Tyco said in 2014 that its move to Cork was tax-neutral and that it occurred because of Swiss laws capping executive pay and tighter immigration rules.
TREASURY THRESHOLD
Johnson Controls' shareholders will own about 56 percent of the combined company, with Tyco shareholders owning the remainder, thanks in part to a cash consideration of about $3.9 billion that Johnson Controls shareholders will receive.
Keeping Johnson Controls' shareholders ownership of the combined company below 60 percent was important for the company because the latest U.S. Treasury rules, in a bid to limit inversions, placed some restrictions on deals that cross this threshold.
"The cash consideration is supplied by Tyco very much with the tax inversion in mind. This way you can engage unrestricted in strategies that free up your undistributed foreign earnings," said Robert Willens, a corporate tax and accounting consultant.
The new company, Johnson Controls Plc, will be initially headed by Johnson Controls Chief Executive Alex Molinaroli and will continue to trade on the New York Stock Exchange. After 18 months, Tyco's George Oliver will become CEO and Molinaroli will become executive chair for one year, after which Oliver will become chairman and CEO.
Johnson Controls has been preparing to spin off its automotive seating and interiors business and said on Monday the spinoff was on track for early first fiscal quarter of 2017.
Shares of Johnson Controls have lost more than a quarter of their value since the start of 2015, while Tyco's shares have fallen over 30 percent.
Tyco was broken up into three companies after turnaround expert Edward Breen took the helm from former CEO Dennis Kozlowski, who was convicted in 2005 of grand larceny, securities fraud and other charges.
Under Breen, Tyco spun off its electronics and healthcare businesses in 2007. He expanded Tyco's security business with the $1.9 billion acquisition of Broadview Security in 2010.
In 2012, Tyco was again broken up into three pieces - one selling valves and controls for the energy market that merged with Pentair Inc (PNR.N), while its commercial fire and security businesses combined into "New Tyco" and traded under Tyco's symbol. The third piece consisted of the ADT North American residential security business, now ADT Corp (ADT.N).
Breen is CEO of U.S. chemical giant DuPont (DD.N), which last month agreed to combine with Dow Chemical (DD.N) in a $120 billion merger. Tax savings were seen as a primary driver of that deal.
Centerview Partners and Barclays were financial advisers to Johnson Controls, while Lazard and Goldman Sachs advised Tyco. Citigroup Inc (C.N) provided financing for the transaction.
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