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Minyu Zhou

TYC AT A GLANCE

 

 

 

 

 

 

Tyco International Ltd (TYC) is a manufacturing and industrial services conglomerate. Its largest subsidiary (41% of revenue) is the electronic security company ADT Worldwide, which provides safety devices like fire and burglar alarms and monitoring services. Tyco's other subsidiary divisions include Fire Protection Services, Flow Control, Safety Products, and Electrical and Metal Products.

In each of its five main industries, Tyco is the largest player among a highly fragmented group of smaller competitors. This gives the firm a great advantage in controlling costs and funding research, and its large capacity helps it land major contracts to distribute its products. Tyco's Fire Protection Services segment, for example, benefits from a vertical market approach, meaning the company sells large contracts to organizations that operate in multiple locations, such as the health care, government, education, and commercial sectors.^[1]

Tyco operates in over 60 countries, and 53% of its 2007 revenue came from overseas. The weakness of the dollar has boosted Tyco's revenues, as American-made goods are cheaper to buyers in foreign countries, increasing sales. In 2007 revenues grew to $18.8 billion, an 8.3% increase over the previous year. Operating income declined 125% for the year, however, because of lawsuits filed by investors who claimed that the company had misrepresented its earnings and assets in SEC filings. The company agreed to pay $3 billion to settle 32 class action lawsuits related to this scandal.

Company Overview

Tyco is divided into five main segments:

• ADT Worldwide sells electronic security systems to residential, commercial, industrial, and government customers. Sales from this segment worldwide comprised about 41% of 2007 revenue.
• Fire Protection Services deals with fire detection and suppression systems. This group works with customers such as airports, shipping companies, fire departments, and homeowners. Sales from this division comprised 19% of 2007 revenue.
• Flow Control makes valves, pipes, fittings, and similar products for energy markets, and comprised 20% of 2007 revenue.
• Safety Products manufactures and sells fire suppression, security, and life safety products like breathing apparati, video management systems, and intrusion security systems. It also makes the electronic systems sold by ADT and Fire Protection, and comprised 9% of 2007 revenues.
• Electrical and Metal Products deals with steel tubing and pipe products, and comprised 11% of 2007 revenue.^[2]

In June 2007 Tyco International spun off its Healthcare and Electronics divisions into Covidien and Tyco Electronics. Each Tyco shareholder received 0.25 shares of common stock each of Covidien and Tyco Electronics for each share of Tyco International common stock held.^[3]

Business Financials

Tyco's 2007 revenue was $18.8 billion, an 8.3% increase over the previous year's revenue. The main forces behind the revenue growth were increased sales and favorable exchange rates. The dollar depreciated last year, which made American-made goods seem cheaper to buyers in foreign countries, increasing sales. Sales grew in Asia, Latin America, the Middle East, and Africa. Additional revenue also came within North America, where there were more commercial installations. Strong growth ADT growth in Asia and Latin America boosted overall growth, and Fire Protection Services revenues increased $225 million.^[4]

Operating income decreased over 125% from the previous year, resulting in an operating loss of $1.7 billion. This loss was due to settlements Tyco made in several class action lawsuits, in which the plaintiffs accused Tyco of misleading investors into buying overpriced Tyco stock by overstating its earnings figures while a few executives sold over $100 million of stocks.

Corporate Fraud

In May 2007, Tyco agreed to set up a fund to pay nearly $3 billion in claims filed by shareholders. This capped one of the largest corporate fraud cases in recent memory. The plaintiffs argued that over a period from December 1999 to June 2002, Tyco misled investors about the true value of Tyco's stock, inflating its value to the benefit of a few key executives. Former Chief Executive Officer Dennis Koslowski and Chief Operating Officer Mark Swartz looted the company to the tune of $600 million in assets; both were convicted of multiple counts of grand larceny, conspiracy, securities fraud and falsifying business records in New York State court in 2005 and are serving time in prison.^[6] Tyco reached a final settlement of this issue in May 2007, agreeing to pay $3 billion to settle 32 class action lawsuits. At the same time, the company finalized its plans to break up into three separate companies - Tyco Healthcare, renamed Covidien; Tyco Electronics; and Tyco International, which includes the fire and security and engineered products units. The breakup was delayed twice, but finalized in June 2007.^[7]

Trends and Forces

• Tyco is the largest firm in several fragmented markets: Tyco is often the biggest player in each of its industry segments, because of the fragmented nature of these markets. This gives Tyco a huge advantage, as its scale provides the production capacity for large projects and allows it to devote more resources to new product development. Being a larger company also gives Tyco a higher profile and brand recognition than its competitors, which facilitates attracting new customers. However it should be noted that many of its businesses have a heavily labor-intense component.

• Tyco's diverse portfolio and international focus can create problems: Because Tyco has a presence in several industries and many countries, it needs to appeal to consumers in all these markets, which may be extremely costly and take away from synergies between its segments. For example, sales growth in Europe was directly related to the depreciation of the dollar, which could tempt the company to expand European operations. But the dollar is volatile, and basing growth strategy on currency rather than a country's economic growth and infrastructure needs is a perilous strategy. Tyco risks being overextended and incurring too many unnecessary costs as a result.

• Tyco is susceptible to exchange rate volatility and political risk in foreign affairs: Tyco is heavily affected by fluctuations in exchange rates. Since 53% of Tyco's revenue comes from overseas, Tyco would prefer a weak dollar compared to other currencies like the euro. When the dollar is weak, Tyco's products will seem more attractive, and the company's revenue and income will do well. Other international factors, like foreign laws (which could be quite different from US regulations), different markets and consumer tastes, are all risk factors for a company heavily focused on international sales. Another potential issue is political instability and nationalization of industry in developing countries, which could hurt a private company like Tyco.^[8]

• Rising commodity prices may hurt Tyco's margins: Tyco is a large buyer of metals like steel. If steel prices rise, then Tyco's costs will rise. This has already caused problems in the company's 2007 operating income, already poor due to lawsuit settlements but dragged down further by high steel and copper prices. Tyco may not be able to pass the higher costs of materials onto customers, which would hurt performance.^[9]

Competition

Tyco competes with a few large companies and a host of smaller companies, including some overseas. Tyco's strategy is to look for ways to decrease costs of production and target specific markets where profitable opportunities exist, using its size to handle different types of products. ^[10] Some of Tyco's biggest competitors in the United States are big conglomerates, including 3M and United Technologies. None of these companies compete with Tyco in all the fields Tyco is in. Below is a table summarizing a few figures about these companies.

While it is necessary to note who Tyco competes with in its segments, these companies often cannot compare to Tyco in size, so they were not included in the table. Below is a small sample of Tyco's many competitors in the US by segment:

• ADT Worldwide: Bosch Security Systems, Inc.; Protection One, Inc.
• Fire Protection Services: APi Group, Inc; Keystone Fire Protection Co.
• Flow Control: The Davidson Group; AP Supply Company
• Safety Products: Aearo Technologies; Top Safety Products, Inc.
• Electrical and Metal Products: Wheatland Tube Company; Continental Steel & Tube Company

References

1. ↑ TYC 2007 10-k report, pages 3-4
2. ↑ 2007 10-k report, pages 5-10
3. ↑ 2007 10-k report, page 1
4. ↑ 2007 10-k report, pages 55-58
5. ↑ Data on graphs from 2007 10-k report, pages 52-59
6. ↑ ABC News, May 2007
7. ↑ Seekingalpha.com, June 2007
8. ↑ 2007 10-k report, pages 17-18
9. ↑ 2007 10-k report, page 18
10. ↑ 2007 10-k, pages 5-11
11. ↑ Source: 10-k reports of each company