Tyco International Ltd.'s decision to buy connector giant AMP Inc. marks the end of a bitter takeover war and the beginning of what some analysts say could be a renaissance for AMP and the connector industry.
Early last week, AMP agreed to merge with Tyco's Electrical and Electronic Components unit, currently the conglomerate's smallest line of business.
Harrisburg, Pa.-based AMP's "white knight" stepped in with an $11.3 billion offer, nearly $1.5 billion more than the hostile takeover bid AlliedSignal launched in August. AlliedSignal, claiming AMP isn't worth that much, said it won't beat Tyco's price.
Although Tyco does not currently have a strong presence in the components market, some analysts said AMP will likely do better under the guidance of a friendly buyer than it would have had AlliedSignal prevailed.
But that doesn't mean AMP won't see sweeping changes. Tyco, which has a reputation for running a lean operation, is likely to make some deep cuts in the connector maker's organization, analysts said.
The merger will make AMP just one of more than 80 companies Tyco has taken into its fold over the past several years. Through an aggressive strategy of acquisitions and internal expansion, Tyco has grown from $2 billion in revenue in 1992 to $12.3 billion in the fiscal year ended Sept. 30.
During that period, Tyco's senior management team, led by chairman and chief executive L. Dennis Kozlowski, has demonstrated noteworthy skill at successfully integrating acquired businesses, according to analysts who track the company.
"I haven't seen Tyco's management make very many mistakes," said Lee Allen of Allen Financial Advisors Inc., Boston. "It's a very well-trained management team, very well disciplined."
Even though Tyco is not currently in the connector business, Allen said he is confident of the company's ability to assimilate AMP's operations.
Tyco's electronics division, which accounted for about 12% of its 1997
sales, makes electrical-conduit products, printed-circuit boards, and undersea fiber-optic cable. Both Tyco and AMP make backplanes and printed-circuit boards, and Tyco executives said there are some areas where AMP's connectors can be consolidated into the manufacture of some of Tyco's products.
"It's a fairly typical Tyco acquisition," Allen said. "It fits into one of their four areas of concentration, and they feel it will be accretive to their earnings and that they'll make a success out of AMP."
And making AMP a success is what Robert Ripp, who recently became its chairman and chief executive, said he expects to be able to accomplish much more quickly under the Tyco umbrella, now that the war against AlliedSignal appears to have ended.
Ripp, who assumed his post in September, shortly after AlliedSignal launched its takeover assault, has steadfastly refused to relinquish control of the company, despite extreme pressure from AMP's shareholders. Characterizing AlliedSignal's bid as opportunistic, considering the recent difficulties brought on by deterioration of the Asian economy, Ripp refused to negotiate a friendly deal.
Instead, Ripp vowed to restore AMP to profitability. Promising to reduce costs by $320 million by 2000 through layoffs and plant consolidations, AMP accelerated its profit-improvement plan, which Ripp said will result in operating margins of 11% in this year's fourth quarter, 13.5% in 1999, and 16.5% in 2000. The company has promised earnings per share of at least $2.30 next year, and more than $3 in 2000.
Teaming up with Tyco will put AMP in a much better position to meet those goals, said Ripp, who will continue to be president of AMP and gained a seat on Tyco's board.
"We expect the positive results of AMP's profit-improvement plan to be accelerated further by this strategic combination," Ripp said. "Tyco is well recognized for management strength and willingness to invest in businesses for growth and manufacturing productivity."
But the partnership's benefits could spread well beyond AMP's own operations, according to Jerry Labowitz, an analyst who tracks the connector industry for Merrill Lynch & Co. Inc., New York.
"Overall, we view this announcement as a positive development for the connector industry, because we think Tyco's management could reduce the inconsistent behavior in the marketplace that we have seen from AMP in recent years," Labowitz commented shortly after the companies announced the merger agreement last week.
Labowitz also noted that, in recent months, his firm-which is acting as Tyco's financial adviser on the merger deal-has "become somewhat concerned about AMP's pricing strategies in certain served markets and its effect on the entire connector industry."
Some connector-industry analysts and insiders have said recently that AMP has been aggressively undercutting its competitors' prices in an effort to retain market share and improve earnings.
AMP has denied those charges, saying that if there is an impression in the market that AMP has been undercutting prices, it likely stems from a misperception of its price-restructuring efforts. Over the past several months, AMP has been revamping its pricing structure to eliminate the sometimes broad variations between the book and street prices of its products.
Analysts said they expect that AMP's sales organization-which one industry insider recently described as having fallen into a "state of disarray" over the past several years-will reap the benefit of Tyco's macromanagement expertise.
And AMP's shareholders, who still must approve the merger, would be picking up a substantial amount of value on their investments, analysts noted.
The stock-for-stock transaction is valued at $51 per share to AMP shareholders, based on Tyco's Nov. 20 closing price of $65 per share. Based on that price, AMP shareholders would receive 0.7839 shares of Tyco stock for each share of AMP. Based on the price of Tyco stock, AMP's shareholders may receive up to $55.95 per share, Tyco said.
When evaluating the deal by looking at AMP's earnings before interest, taxes, depreciation, and amortizations (EBITDA) so far this year, analysts noted that Tyco's offer is about 11.3 times EBITDA, compared with AlliedSignal's offer of nine times EBITDA.
"No public deal announced has been at this high [an EBITDA] ratio," said analyst Ken Fleck of Fleck Research, Santa Ana, Calif. In last year's acquisition of Amphenol Corp. by Kohlberg Kravis Roberts & Co., the EBITDA multiple was about nine, and the multiple in Framatome Connectors International's recent acquisition of Berg Electronics Corp. was about the same, Fleck said. "This, however, is a stock deal, which involves a different set of issues than cash."
From a tax standpoint, the benefits are twofold, other analysts said. First, unless investors choose to sell their stock after the transaction, they won't have to pay a capital-gains tax on the added value, since they'll be receiving stock instead of cash. Second, since Tyco is domiciled in Bermuda, it has a lower tax structure, which will reduce AMP's tax rate by as much as 5% as soon as the deal is closed.
Among the shareholders who would benefit from a transaction is AlliedSignal. The Morristown, N.J.-based company purchased 20 million shares of AMP stock at $44.40 per share in October, making it the largest single shareholder.
"We believe our gain on the AMP shares we own will substantially exceed our costs incurred in pursuing AMP," AlliedSignal chairman and chief executive Lawrence Bossidy said last week. Indeed, AlliedSignal stands to realize a gain of more than $140 million.
The rest of AMP's shareholders, who tendered as many as 72% of AMP's shares to AlliedSignal under its $44.50 offer, are largely expected to approve the transaction, which the two companies said should be completed during the first calendar quarter of 1999.