Tyco's Acquisition Spree in FY 2011

Given the stiff competition in its served markets, Tyco International (TYC - Analyst Report) has resorted to a number of acquisitions. The company’s focus has been on its expansion into emerging markets, the broadening of its technology portfolio and the ultimate strengthening of its competitive position.

Some Important Acquisitions

In April, Tyco acquired Signature Security for AU$ 171 million in cash. Signature expanded the company’s sales, installation and service capabilities to residential and small business customers in Australia and New Zealand and strengthened its market position in that region.

Signature Security was the leading provider of electronic security services to small businesses and residential markets in Australia and New Zealand. The business will be incorporated into the existing security business.

Tyco also added Chemguard, a leading provider of fire suppression products, services and specialty chemicals with the intention of augmenting its fire protection business. The acquisition broadened Tyco’s global fire suppression product portfolio and increased its R&D capabilities in foam firefighting applications. It also augments the company’s presence in high growth areas, such as the Middle East and Latin America.

Tyco’s Flow control division acquired a majority ownership stake in Dubai-based KEF Holdings at the beginning of the fourth quarter of 2011. The acquisition was made with the intention of expanding its valve and flow control business in the Middle East. KEF’s products complement Tyco’s current valve offerings and provide it with one of the world’s leading steel casting facilities, while enhancing its local footprint and management team.

Given the company’s position in the Middle East, the acquisition of KEF Holdings is expected to increase cross-selling opportunities, thereby generating additional revenue for Tyco. As a result, the acquisition is expected to be accretive to earnings in the near term.

Summary

While these acquisitions are comparatively smaller than Tyco in terms of revenue, they are important for the expansion ofits product and service offerings and the advancing of its overall growth strategy.

Tyco International performed well during fiscal 2011, both operationally and strategically. Moving ahead, we expect the positive sentiment of fiscal 2011 to continue to fiscal 2012 driven by its continued growth in our large and stable base of service and recurring revenue, momentum in the late cycle businesses and the sustained benefits of productivity and restructuring initiatives.

Although the company is very positive about the increase in order activity in the flow control division, the current market uncertainties increase the possibility of cancellations or push outs, which make us cautious about it. Further, the Fire control division also faces some challenges due to the softness in the non-residential commercial market. We maintain a Neutral rating on Tyco with a Zacks #3 Rank (short-term Hold recommendation).

Honeywell International (HON - Analyst Report) which is one of the primary competitors, on the other hand is seeing good momentum in its commercial aerospace spares and residential and commercial retrofit businesses. A strong retrofit business is a big positive in uncertain market conditions, since it is likely to hold up better than new product sales. We are therefore slightly more positive about Honeywell, as indicated by the Zacks #2 Rank allotted to the shares.

Read the full analyst report on TYC

Read the full analyst report on HON