The CIT Deal Adds a Financing Arm to Tyco’s Mix of Businesses

Tyco International Ltd.’s $9.2 billion acquisition of CIT Group Inc. breaks new ground for the conglomerate as it adds a financing arm to its wide array of industrial businesses ranging from security systems to undersea communications cable. But the deal surprised many long-time Tyco watchers, and some have said that the transaction is not risk-free. “This is a deal that probably has the highest risk-reward ratio of any of the company’s acquisitions,” says Mike Holton, an analyst at T. Rowe Price Associates. “If successful, it is going to remake Tyco from being merely a manufacturer to a company with the ability to finance its customers’ purchases.” Tyco owns companies that produce electronics, fire alarm and security systems, water treatment systems, disposable medical supplies, and flow-control products. CIT Group is a leading source of asset-backed loans and other debt instruments. Tyco’s stock dropped 8% the day after the announcement, reflecting the concern with which some investors viewed the deal. In response to questions about Tyco’s lack of financial industry experience, Tyco’s CEO Dennis Kozlowski said that CIT chief Albert Gamper will be kept on to run the unit. CIT will be set up as a unit of Tyco and will have its own balance sheet. The acquisition of CIT is Tyco’s priciest deal since its 1999 takeover of AMP Inc. for $11.9 billion. More recently, the acquisitive conglomerate paid $400 million for Scott Technologies Inc., a producer of air quality systems. Toward the end of last year, Tyco plunked down $2.5 billion for Lucent Technologies Inc.’s power systems division, and it also bought Simplex Time Recorder Co., a maker of fire and security products. However, these deals, centered as they are on producers of industrial products, were standard operating procedure for Tyco and didn’t draw the criticism that the CIT acquisition has. “Tyco is going to be mixing apples with oranges with this deal,” says John Inch , a multi-industrial analyst at Bear Stearns & Co. He adds that Tyco’s plans to leave CIT’s senior management layer intact represents a departure from the way the company has done other acquisitions. “Usually Tyco takes the top tier of management out of the companies it buys and finds economies that previous management had overlooked. This doesn’t seem to be the plan for CIT.” Embracing the GE model One obvious attraction that CIT holds for Tyco is that the acquisition is another step in the company’s ongoing emulation of the General Electric Co.’s business model. Many observers expect Tyco to use CIT and its lending services as a way to win and hold industrial customers by helping them finance their purchases. The integration of CIT’s lending capacity and Tyco’s existing customer base will likely determine the success of the deal. And while the announcement surprised some analysts, others quickly embraced the Tyco/CIT blueprint. “The GE model is a great outline for Tyco to use. The CIT purchase makes sense for a lot of reasons, but one is that its business is fairly recession-proof,” says Joe Correnti, an analyst at Wayne Hummer Investments in Chicago. Correnti bases his analysis on the fact that as the economy slows and corporate borrowers begin to experience a “credit crunch,” lenders like CIT are likely to become one of the few remaining sources of capital. For asset-based lenders, business can become more brisk as the economy worsens. Correnti adds that the benefits of the deal should accrue to both companies. Not only does he see Tyco profiting from CIT’s financing muscle but he says that CIT will gain access to new customers, which the Tyco link will bring in but who will be likely to stick around to do other business with CIT. Correnti says that even if the CIT deal temporarily puts the brakes on Tyco’s stock price, he thinks it will be a story that Wall Street can understand and that the company will be given credit for. Yet, he expects that one challenge Tyco will face in integrating CIT will be keeping CIT’s senior management on board so that Tyco can learn to manage a business outside of its traditional areas of expertise.