Medical Device Link.

Originally Published MX March/April 2006

BUSINESS NEWS

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.

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.

In announcing its intention to split into three companies, Tyco stated, "Any existing or potential liabilities that cannot be associated with a particular entity will be allocated appropriately to each of the businesses, and a sharing arrangement among the three companies will be established." The company referred to an additional "backstop" that would hold the three companies jointly liable.

Financial analysts estimate that Tyco's liability in settlement suits could approach $3.5 billion.

In addition to facing the prospect of hundreds of lawsuits, Tyco is also carrying a current debt load of about $12 billion—most of which is held at the top level of the conglomerate and is not associated with any particular entity. The high-level allocation of the debt is raising concerns about how it will be distributed among the newly formed companies.

Tyco Healthcare is currently one of the top five medtech companies worldwide, with 40,000 employees and annual sales of $9.54 billion. About 80% of revenues, or $7.55 billion, are generated by medical products, equipment, and supplies. Current Tyco Healthcare president Rich Meelia will assume the CEO position in the new company.

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