Johnson Controls expects to reap at least $150 million in annual “tax synergies” as a result of its merging with Tyco International, a deal that will include Milwaukee-based Johnson Controls moving its headquarters to Tyco’s home base in Cork, Ireland.
The acquisition, valued at $20 billion, is the latest example of corporate “inversion,” where an American-based corporation seeks to significantly reduce its U.S. tax liability by moving its corporate domicile to the foreign location of the company with which it merges.
However, Johnson Controls intends to keep its operational headquarters in Wisconsin. Tyco’s U.S. headquarters is in Princeton, N.J.
The Johnson Controls-Tyco deal—a reverse takeover in which Tyco shareholders own 44% of the combined group, and Johnson shareholders own the rest and receive a $3.9 billion cash distribution—is similar to the pharma giant Pfizer’s $160 billion combining with Ireland-headquartered Allergan, a competitor, a few weeks ago.
Ireland’s corporate tax rate is under 20%, compared to a corporate tax rate in the U.S. that can be as much as 35%. Aside from its U.S. tax reduction, Johnson Controls expects this deal to reduce it operating costs by $500 million over the first three years.
According to news outlets including the Financial Times, the Tyco brand will disappear as a result of this deal. That brand was besmirched when, in 2005, its former high-flying CEO Dennis Kozlowski and its CFO were convicted of fraud and embezzling $150 million. A 2012 spinoff from the conglomerate broke the current Tyco International into three entities, the others being Pentair and ADT. Its businesses now focus on fire protection and security products.
USA Today reports that Johnson Controls still plans to spin off its remaining automotive business into an independent company called Adient next year. Johnson Controls will focus on its primary businesses, which include batteries, building products such as HVAC units under the York brand, and climate control systems.
The combined company, with annual revenue of $32 billion, will have six Johnson Controls board members and five representing Tyco. Alex Molinaroli will be chairman and CEO. George Oliver, Tyco’s current CEO, will be president and COO for 18 months, at which point Oliver will become CEO and Molinaroli executive chairman for one year. After that, Oliver assumes the chairmanship.
“The proposed combination of Johnson Controls and Tyco represents the next phase of our transformation to become a leading global multi-industrial company,” Molinaroli said in a statement.
This deal, which is expected to be completed by the end of the year, comes at a time when both companies have been struggling to bolster their stock prices, according to the Wall Street Journal. Johnson Controls’ share price has fallen by more than 20% from its recent high, while Tyco’s price has dropped by 25%. Johnson Controls shareholders will receive one share of the combined company or cash equal to $34.88 per share, the average of Johnson’s stock price over the past five trading days.