Tyco to Split into Three Business Units

The January announcement by Tyco International Ltd. (Pembroke, Bermuda) that it plans to split into three publicly traded companies has raised concerns among members of the investment community. In particular, analysts have expressed unease over the $40 billion conglomerate's postsplit performance, particularly in regard to reduced earnings and the estimated $1 billion cost associated with the transaction, which is expected to close a year from now.

Of perhaps even greater concern is how Tyco's debt will be allocated across the new companies. It's also uncertain how the dividing company will allocate responsibility for the hundreds of pending lawsuits from stockholders who lost billions when Tyco's stock collapsed in 2002. The collapse followed disclosures of accounting fraud and looting of the corporate treasury by former CEO Dennis Kozlowski, former CFO Mark Swartz, and other past senior executives.

Under the terms of the proposed split, Tyco would break up into three separate and independent companies focusing on core businesses in fire and security, electronics, and healthcare. The fire and security company would also include Tyco's fourth major business segment of engineered products and services.

Tyco Healthcare, one of the three independent businesses to be formed by the split, has often been referred to as the crown jewel of the conglomerate. Like the other spin-offs, the new company will have its own board and maintain its corporate headquarters in Bermuda.

According to many industry analysts, Tyco Healthcare is the spin-off that stands to benefit most by freeing itself from an unwieldy conglomerate structure that proved problematic even before the corporate scandals and liquidity crisis hit. Yet some analysts note that the firestorm of controversy regarding shareholder lawsuits and corporate debt could plague the new company for some time.

Many investors see the Tyco breakup as an attempt to shield assets. A group of institutional shareholders representing trade union and public pension funds has asked a U.S. District Court judge in New Hampshire to block the split until the company assures the plaintiffs that company assets will be available to settle claims. Additional similar suits are expected.