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 (JCI) 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 (TYC) 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 (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.
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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 Johnson Control’s 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 on Monday, inversions are a self-reinforcing phenomenon.
One story, three important trends. This one is worth following.
