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Stock Strategist

Tax Inversion Proposal Shouldn't Scuttle Johnson Controls-Tyco Merger

The deal makes strategic sense, and we're maintaining our fair value estimates.

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On April 4, the U.S. Department of Treasury proposed a new framework designed to block tax inversion deals. This brings into question the merger between  Johnson Controls (JCI) and  Tyco International (TYC) announced in January. In a Tyco S-4 filing on April 5, the companies said they are reviewing the Treasury Department's proposal but will not make any statements regarding its possible impact until the review is completed. We think the merger will still take place, with JCI owning about 56% of the combined company. We are not changing our fair value estimate for either company.

The two key proposals from the government center on serial inverters and earnings stripping. We think neither applies to the JCI-Tyco deal. The rule says that stock issued in the past three years by Tyco to make U.S. acquisitions will not be counted by the government for staying below the 60% ownership inversion threshold. This proposal is designed to prevent a company such as Pfizer from owning less than 60% of a combined Pfizer-Allergan since Allergan made numerous large deals after inverting. (On April 6, Pfizer and Allergan terminated their planned merger.) However, our review of Tyco's press releases and 10-K filings show no indication of stock issuance to make acquisitions during the past three years; the only large deals were for a few hundred million dollars and paid all in cash.

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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.