Like most companies, Tyco International suddenly quit thinking about acquisitions on the morning of Tuesday, September 11. Unlike most, it was back pursuing its aggressive M&A stance in less than a week.
Not that Tyco—a conglomerate with headquarters in Exeter, New Hampshire, and Pembroke, Bermuda—wasn’t as stunned as any company by the terrorist attacks. Indeed, CEO Dennis Kozlowski and CFO Mark Swartz were at the Essex House, in midtown Manhattan, at the time, talking to 400 investors and analysts, with Tyco’s acquisitions the main topic. “We were under way for about 20 minutes when we heard about a fire at the Trade Center,” says Swartz, adding that the meeting of shaken New Yorkers, understandably, never resumed.
But within a month, Tyco, one of the most acquisitive companies of the past 10 years, had nearly closed the $2.3 billion Sensormatic deal; gotten back on track toward a December close for a second acquisition, of medical-equipment maker C.R. Bard; and begun positioning itself for changes it figured the terrorist attacks might provoke in the deal-making environment. Among the trends Tyco expects: smaller acquisition targets and a tendency to pay cash rather than stock.
As a whole, Corporate America hasn’t yet returned to the business of M&A. Tallies of announced deals, both big and small, slowed to a crawl in September—a falloff that came on the heels of already sharply lower activity. Indeed, the September downturn dragged third-quarter mergers to their lowest volume in five years. “We’re holding hands and trying to maintain relationships with our clients,” says Gary Finger of Houlihan Lokey Howard & Zukin, an investment bank that targets mainly middle-market clients.
Moreover, notes Thomas Lys, a professor at the Merger Week program at Northwestern University’s Kellogg Graduate School of Management, CFOs have to readjust their thinking about acquisition targets to reflect new economic realities, especially in situations where overcapacity makes M&A unattractive. “They will either adapt,” he says, “or they will be teaching.”
Those companies that choose to reenter this puzzling M&A environment may learn a lot from Tyco’s experience in the weeks after September 11.
For the first few days, the company was “trying to figure out where we stood in the world,” says Swartz. “We weren’t focusing on M&A; we were thinking about getting respirators to firemen in New York and Washington, along with health-care supplies,” he explains. (In all, 400 portable respirators and 30 cases of wound-care packages were among the Tyco products provided for rescue work in the first days after the attacks.) And the aid efforts “ended up being very therapeutic” for Tyco’s employees, according to the CFO.
Tyco executives needed a little therapy of their own when trading resumed the following week. The company’s stock price fell 18 percent (from $47.71 to a low of $38.24) in the first 10 days after the attacks, while its target closest to being acquired, Sensormatic, suffered a 17 percent loss (from $22.96 to $18.70) in the widespread sell-off. But almost as quickly, that acquisition began to garner unusual interest. Sensormatic, based in Boca Raton, Florida, makes video surveillance equipment of the kind airports and other facilities are now buying to beef up security, and it fits neatly into the fire and security services division of Tyco. Share prices for Tyco and Sensormatic began creeping back during the measurement period—starting two days after trading resumed on September 17–that established the exchange rate for the Tyco shares that Sensormatic holders would receive. Tyco shares returned to their preattack level in early October, while Sensormatic has exceeded its September 10 trading price.