Case: Tyco's Changing Corporate-Level Strategies

Tyco has experienced success and failure as its multibusiness model has changed over time. In the 1990s, Tyco's success was attributed to the way its top managers used a multibusiness model to pursue unrelated diversification that was based on several consistent strategies. First, Tyco used acquisitions to become the dominant competitor in the industries it entered. For example, Tyco became one of the largest providers of security systems, basic medical supplies, and electronic components in the United States. In essence, through its acquisitions Tyco was able to consolidate fragmented industries and attain economies of scale that give it a cost-based advantage over smaller rivals.36 Second, Tyco sought out companies that made basic, low-tech products that commanded a large market share but had been underperforming their competitors, something that indicated there was a good opportunity to improve their performance. Once Tyco identified a potential target, it approached the company's top managers to see if they supported the idea of being acquired. If, after its auditors had carefully examined the target's books and decided the company had potential, Tyco made a formal bid. When the acquisition was completed, Tyco's top managers then worked to find ways to strengthen its business model and improve the performance of the acquired unit. Corporate overhead and the company's workforce were typically slashed, and the old top management team was retired and replaced by Tyco's managers. Also, unprofitable product lines were sold off or closed down, and manufacturing plants and sales forces were merged with Tyco's existing operations to reduce costs and obtain scale economies.

For example, within months of acquiring AMP for $12 billion, the world's largest manufacturer of electronic components, Tyco had identified $1 billion in cost savings that could be obtained by closing unprofitable plants and reducing its workforce by 8,000. Once the new management team costs had reduced the cost structure, Tyco's corporate managers then established challenging performance goals to achieve, and strong financial incentives were used to motivate them to boost profitability. Throughout the 1990s, this business model worked well, and Tyco's stock soared, but by 2000 the situation had changed. Tyco's most recent acquisitions had not contributed much to the company's total profitability; the company was growing, but its performance was deteriorating. Then industry analysts began to criticize the company's top managers for using inappropriate accounting methods to disguise the fact Tyco's business model was failing. Critics argued that Tyco's then CEO Dennis Kozlowski and its CFO Mark Swartz had illegally altered its financial reports to artificially increase the profitability of its business units and disguise its poor performance. They were forced to resign in 2003, and in 2005, these accusations were borne out when both men were sentenced to prison for grand larceny, securities fraud, falsifying business records, and conspiring to defraud Tyco of hundreds of millions of dollars to fund lavish lifestyles. Tyco was a ship adrift in the mid-2000s. It seemed that there was no longer a rationale for keeping its empire together. Its business model was a failure, and its stock price plummeted. The company's stock traded with a "diversification discount" because investors found it impossible to evaluate the profitability of its individual business units. Thus, its new CEO, Edward Breen, decided that the best way to increase value to shareholders was to reverse the business model developed by Kozlowski.

In 2006, Breen announced that he had decided to pursue a new "no diversified" business model, and the different businesses Tyco owns will be able to create more value if they were split into three separate companies, each of which would be managed by its own top management team. Breen believed that each of the new companies would then be better positioned in their respective industries to maintain and grow market share and improve their profit margins. Essentially, Breen decided to abandon Tyco's strategy of unrelated diversification and "de-diversify" to increase the profitability of each company and thus returns to shareholders. Tyco's electronics and health care units would be spun off in tax-free transactions, and Breen would continue to run its remaining operations, including its well-known ADT home-alarm systems and equipment security, fi re-protection, and its pump and valve businesses. Breen believed that the managers of each independent company would be better positioned to develop the most successful business model for their industries. He also believed that the returns they will eventually generate will exceed those provided by Tyco's old multibusiness model that had resulted in growth without increased profitability. The spinoff of these companies took place in 2007, and today Tyco International, Tyco Electronics, and Covidien, its old healthcare unit, operate as independent companies.38 By 2009, it seemed that all three companies had developed the strong business models needed to boost their profitability in the way Breen had foreseen. However, the recession that began in 2008 is hurting the performance of all three companies, so the jury is still out.

Case Discussion Questions

1. In what ways has Tyco's multibusiness model changed over time? Why did its top managers make these changes?

2. Collect some recent information on the current performance of the three new companies that were created in 2007. What corporate strategies does each pursue? How well are they currently performing?