Manufacturing companies Johnson Controls (NYSE:JCI) and Tyco International (FRA:TYI) plan to merge. The merge will create an industrial conglomerate with $32 billion in annual revenue. The companies’ merger is a form of tax inversion.
This merger is an example of a corporate inversion, which is when a U.S. - based company acquires a foreign firm and switches its headquarters to the foreign firm’s home to lower its tax bill.
Johnson Controls is based in Milwaukee but its legal and global headquarters will relocate to Cork, Ireland where Tyco International is based. Johnson Controls will house their main operational headquarters in Milwaukee.
The two companies hope that the merger will combine their businesses such as heating and air-conditioning systems, fire protection and security technology. The home-products industry is going thru a transition towards a new world that revolves around smart, connected products known as the “Internet of Things.”
“The technology is converging,” Johnsons Controls CEO Alex Molinaroli said on a conference call. “That’s the real opportunity that’s coming along.
Johnson Controls’s shareholders will own 56% of the merged company. The company will then be known as Johnson Controls plc, and receive $3.9 billion in cash. Shareholders of Tyco will own 44%.
Johnson Controls will continue with its plans to make its remaining automotive seating and interior businesses its own business called Adient at the beginning of 2017.
The first three years of the deal the companies will expect to lose $500 million in costs and then expect to save $150 million in annual taxes.
S&P Capital IQ analyst Efraim Levy said in a research note that there is a “significant potential” for saving through the combined operation.
Johnson Controls, known as JCI in the industry has been recently selling its automotive electronics business and global workforce solutions unit. JCI primary business are batteries and building products such as heating and air conditioning technology.
Since 2012, Tyco has been broken up into three companies. They now focuses on fire protection and security products, including service, installation and monitoring.
First 18 months the companies will be run by Molinaroli who will be the chairman and CEO while the deal will be completed. Tyco CEO George Oliver will be president and chief operating office during the same period. Once the merger is complete Oliver will be the CEO and Molinaroli will become the executive chair.
"This is a transformational transaction that will help us both service our customers more comprehensively and innovatively," Molinaroli said. "It uniquely positions us to provide the most comprehensive portfolio of building and energy solutions."
The new board of directors will consist of six employees of Johnson
Controls while five is from Tyco International.
Oliver said the deal will position the new company to provide Internet-connected solutions to customers in increasingly urbanized world with smart mega cities.
"The world is headed toward a more connected future," he said on the conference call. "Together we will be more strongly positioned to (capitalize on the) Internet of Things."