Tyco splits up - for a second time

They say that breaking up is hard to do. But for Tyco International Ltd. , the act has become so appealing that it's splitting up – again.

The Swiss-headquartered security and fire protection company announced plans Monday to divide itself into three separate, publicly traded companies – the ADT North America home alarm business, the Flow Control industrial pipes and valves business, and the Commercial Fire and Security business.

It's the second time in four years that Tyco has split into three pieces. In 2007, the conglomerate hived off its Covidien PLC medical products operation and its Tyco Electronics Ltd. electronic components arm into separate publicly traded companies.

"The new standalone companies will have greater flexibility to pursue their own focused strategies for growth – both organic and through acquisitions – than they would under Tyco's current corporate structure. This will allow all three companies to create significant value for shareholders," said Tyco chairman and chief executive officer Ed Breen, who also oversaw the 2007 split-up.

Tyco's compulsion to perform the big breakup is an extreme example of what has become a high-profile trend. Since the summer began, food and beverage giant Kraft Foods Inc. , publisher McGraw-Hill Cos. Inc. and energy heavyweight ConocoPhillips Co. have all unveiled plans to split. ITT Corp. announced a three-part split earlier this year, while Marathon Oil Corp. broke itself in two. Canadian energy giant Encana Corp. – itself created in part by the breakup of conglomerate Canadian Pacific Ltd. a decade ago – split into two publicly traded companies in late 2009. Other prominent recent splits include Sara Lee Corp. , Motorola Inc. and Fortune Brands Inc.

Consulting firm PriceWaterhouseCoopers, which collects data on Canadian merger and acquisition activity, reports that spinoffs and significant divestments by Canadian public companies have swelled over the past two years. The number of deals recorded so far in 2011 is nearly 50 per cent higher than before the financial crisis of 2008, and more than double the pace of five years ago.

Experts said the weaker market conditions of the past few years have been a substantial contributor to this trend, as companies with struggling business segments have looked to narrow their focus, attract skeptical investors and tidy up their balance sheets.

Investors, too, have a tendency to prefer more narrowly focused companies in uncertain times. As Tyco's Mr. Breen's rationale suggests, there's a desire from investors for more pure investment plays that aren't bogged down by weaker business segments or the "holding company discount" that the market has increasingly applied to big, diversified companies.

"These things go in cycles," said Ian Macdonell, managing director at merger and acquisition advisory firm Crosbie & Co. "Markets are happy with conglomerates when all the parts are working. But when things aren't going so well and one part of the company is holding back the rest, companies come under pressure from investors."

Veteran portfolio manager and strategist Don Coxe, head of Chicago-based Coxe Advisors LLC, said pure-play companies offer clearer, less complicated analysis and investment decisions – something that's attractive to investors in complicated, risky times.

"I try to buy and own uncomplicated companies who do something really well – and don't try to do something else," he said.

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* Year to Sept. 19. Source: Capital IQ, PricewaterhouseCoopers