What: Shares of Ireland-based conglomerate Tyco International plc (Ireland) Ordinary Share (NYSE:TYC) are up 10.7% as of 3:15 p.m. EST on January 25, following an announcement that it would merge with U.S.-based Johnson Controls Inc (NYSE:JCI). Johnson Controls shares are actually trading down about 3% on the news.
So what: The newly combined company will be 57% owned by Johnson Controls shareholders, though the company will be headquartered in Cork, Ireland, where Tyco International is currently based. This makes the deal a so-called "inversion," where a larger company in the U.S. merges with or acquires a smaller international company and relocates the business overseas.
The idea behind relocating the business is almost always tied to corporate tax rates. In the case of Ireland, its corporate income tax rates are about half those of the United States, and since the combined company will generate the majority of its sales and income outside of the U.S., that was a driving factor in this deal.
Taxes weren't the only thing that made this deal happen, since the two companies compete and overlap across a broad range of HVAC, fire and security systems, and industrial product and service offerings. Furthermore, Johnson Controls is in the process of divesting other parts of its business, including its automotive parts & products business, meaning the combined Johnson Controls and Tyco will be more focused on core industrial and commercial businesses.
Now what: The interesting thing about this deal is that Johnson Controls shareholders -- in theory -- should be the bigger beneficiaries from the inversion, but the market clearly prefers the deal from Tyco's perspective.
It will take time before we know how this will play out. It's hard to say whether either the tax benefits, the potential for cutting costs by joining forces, or some combination of both will drive the combined company forward.
One would think that at the very least, this should allow for a higher dividend payment, since lower taxes would mean more income freed up for shareholders. Johnson Controls has regularly increased its dividend for decades, while Tyco's payout has fluctuated over the past 10 years.
Time will tell. For now, I'm staying on the sidelines.