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Sometimes a single event illustrates several important trends that business leaders are confronting. Today’s example is the Tyco-Johnson Controls merger.
Trend No. 1: deconglomerating. This one is embodied in the deal’s history; both companies are products of vigorous deconglomeration in recent years. Johnson Controls CEO Alex Molinaroli has been pruning the company for months, divesting its businesses in automotive seating, automotive interiors, real estate management, and more – that’s over half the company in the past two years. The goal has been to focus the company on heating, cooling, and other equipment and controls for buildings (though it still isn’t completely rationalized; it also makes car batteries). Tyco is similarly the result of corporate focus. Back when the company was assembled by Dennis Kozlowski – before he went to prison for looting nearly $100 million from Tyco – his strategy was to build a conglomerate, “another General Electric,” as he said After it all came crashing down, the company was broken up into more coherent pieces, one of which is the present Tyco International, which is a major force in fire suppression and security equipment.
The larger phenomenon is that conglomerates are disappearing because they’re less competitive than more focused companies. Even Kozlowski’s model, GE, is deconglomerating, with CEO Jeff Immelt announcing last year that it would divest most of GE Capital, once the source of most of its profits.
Trend No. 2: bulking up in the chosen industry. The point of the Tyco-Johnson Controls merger is obvious – to become a colossus in building controls and equipment. But being focused isn’t enough. In an increasingly global economy, the advantages of size grow more valuable. We see the same pattern in other companies. For example, as GE exits GE Capital and its appliance business (to be sold to Haier), it also made the largest acquisition in its history last year, buying France’s Alstom in order to gain size in its area of focus, industrial equipment.
Trend No. 3: cutting costs in every way, including unpopular tax inversions. Tyco was a pioneer on this one, having been domiciled since 1997 in Bermuda, then Switzerland, and now Ireland. Johnson Controls will take over the Irish address, thus lowering its taxes, and never mind the wrath of politicians. “A disaster for American taxpayers” said Bernie Sanders, and many others, including Donald Trump and Hillary Clinton, have excoriated inversions and the CEOs who lead them. But the fact is they’re legal, and most non-U.S. companies operate under tax regimes far friendlier than ours to businesses that compete globally. The No. 1 location for new buildings is China, home to half the new buildings going up in the world and “a great opportunity,” says Molinaroli. His company will need every cost advantage it can get. America’s international corporate tax system is a dinosaur by world standards, and until it’s fixed, we should expect more inversions. In fact, as the WSJ explained yesterday, inversions are a self-reinforcing phenomenon.
One story, three important trends. This one is worth following.
After Monday’s note on Michael Bloomberg’s potential run for the presidency, I conducted a Twitter poll asking “Is Mike Bloomberg who voters want?” The results aren’t great for him:
No – 49%
Yes – 30%
Maybe – 21%
But remember that the vast majority of non-New Yorkers know virtually nothing about him. Since he’s reportedly willing to spend $1 billion of his own money on a campaign, he could change a lot of minds.
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What We’re Reading Today
Apple expects first ever iPhone sales decline
CEO Tim Cook has warned investors that the company expects iPhone sales to drop in the March quarter. Total company sales would also fall from $58 billion in last year’s second quarter to $50-to-$53 billion. Cook blamed the strong U.S. dollar and a softening of China’s economy. Issues with the product, like the size of the iPhone screen and few advancements in the technology, may also have contributed to the slowdown. Mac Rumors
Lyft settles class-action lawsuit in California
It will pay $12.3 million to settle the case, which argued that drivers were misclassified as contract workers instead of employees. The company will continue to label workers as contractors. It’s a significant victory for Lyft and CEO Logan Green, lifting concerns about paying workers benefits that would be required for full-time employee. Travis Kalanick‘s Uber faces a similar lawsuit in California. Fortune
AIG shuns Icahn’s call for a breakup
Instead CEO Peter Hancock will reorganize the company’s commercial and consumer divisions into nine operations, will sell its financial advisory business, and will spin off part of its mortgage insurance company. The plan is meant to cut $1.6 billion of operating costs. Activist investor Carl Icahn stepped up calls to break up AIG in November. NYT
One of China’s top bankers commits suicide
Yang Zezhu jumped from his 12th floor apartment. He was chairman of Changjiang Securities until early January, when reports surfaced that the Central Commission for Discipline Inspection was investigating his personal life. President Xi Jinping has stepped up corruption investigations, focusing on banks and hedge fund leaders. Yang is the second executive to commit suicide during the probes. Quartz
Building a Better Leader
Senators returned to work yesterday
At least the female senators did. CNN
The best company to work for in technology…
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Want the secret to career success?
Aetna CEO Mark Bertolini says there isn’t one. But showing selflessness is a good start. Knowledge@Wharton
Trump will skip GOP debate
Donald Trump wants Fox News anchor Megyn Kelly pulled from the debate broadcast on Thursday. Fox refused, so Trump says he’ll skip the event. The decision comes less than a week before the Iowa caucuses and opens him to criticism over ducking confrontations on his policy proposals. Washington Post
Authorities end standoff with Oregon militia
The FBI and Oregon State Police raided the federal wildlife refuge held by Ammon Bundy and his followers for three weeks. Bundy and six others were arrested. Group member Robert “LaVoy” Finicum was shot and killed. The group took the federal wildlife refuge in protest over the use of public land. USA Today
Takata declares another recall
After attributing an 11th death to defective airbags, Takata has recalled 5.1 million additional vehicles. The company added that it’s still investigating newer vehicles, which “could be subject to recall at a later date.” The number of vehicles recalled by Shigehisa Takada‘s company has now reached 24 million. Reuters
Up or Out
Former VP of product at Twitter Kevin Weil will join Instagram as head of product. Re/code
Twitter named Leslie Berland chief marketing officer. CNBC
Fortune Reads and Videos
Wells Fargo’s John Stumpf named CEO of the Year
Morningstar named him last year’s best CEO despite Wells Fargo’s stock falling 1%. Fortune
Google will look a lot like Twitter…
…during the GOP debate on Thursday in an effort to add real-time features for live events. Fortune
AECOM will build a 1-mile hyperloop test track…
…for Elon Musk next to Space X headquarters. Fortune
Whole Foods recalls 70,000 pounds of pizza…
…because of pepperoni. Fortune
Supreme Court Chief Justice John Roberts turns 61 today. Biography
Steve Wynn, casino resort owner and developer, turns 74. Biography
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