“We breathed a sigh of relief” when the share prices bottomed out early, notes Swartz. “No one knew where stock prices were headed. Had stock prices significantly fallen off, it would have raised major questions with the Sensormatic board” about whether the deal could be completed. Tyco’s $3.2 billion acquisition of C.R. Bard also seems to be progressing smoothly; like Sensormatic, Bard is noncyclical, and thus it is more attractive during the current recessionary mood that is punishing consumer- and travel-related industries most.
“I hate to use the word ‘positive,’” says Swartz of his company’s purchase of Sensormatic in an environment in which its products could see stronger demand. Tyco, of course, could not have forecast the source of that demand, but was drawn to Sensormatic’s strategic fit with its ADT security business. Going forward, though, worsening economic conditions have confirmed its resolve to pay more attention to noncyclical lines—at least until the end of the “severe-to-light recession” that Swartz expects. (The more cyclical of its five lines are telecommunications and electronics, and flow control. Tyco also has a financial services business.)
A Future For Cash
Because of recessionary concerns, Lys likes not only Tyco’s choice of noncyclical acquisitions but also its plan to reduce the use of stock for deals—something experts often say leads to overpaying for a company. “With stock prices down, the cheap currency is gone,” notes Lys, “so companies would have to use more cash” than they would have before September’s downturn. About 40 percent of deals in recent years have been all-cash transactions, with the remaining 60 percent divided fairly equally between all-stock and stock-and-cash deals, and deals without announced terms.
When Swartz says, “The predominant number of deals we do will be cash deals” for the foreseeable future, that’s a big change for Tyco. The company has opted to pay in Tyco shares for about half its acquisitions in recent years, including the Sensormatic and Bard deals. “Our stock is undervalued right now,” he says, “and we’re not going to put out much at these [price] levels.”
Merrill Lynch & Co. analyst Phua K. Young, who follows Tyco, thinks the commitment to pay cash for deals may have to be tempered, however, to reflect this year’s acquisition of finance subsidiary CIT. Tyco must “balance the use of cash or stock against the potential impact on CIT’s credit rating,” he says. And in early October, Tyco did make an offer to pay $796 million in company stock for the 11 percent minority stake it didn’t already own in TyCom Ltd., an undersea telecommunications cable company. Despite the overcapacity in that industry, analysts say, Tyco wants to eliminate the publicly held portion of TyCom to reduce the concerns of Tyco investors.
Young, who was one of the attendees at Tyco’s meeting that fateful morning, expects the company’s acquisitions to keep coming. “I would imagine that nothing has changed,” he says, and that it “will continue to be very opportunistic.”