After going through an extensive acquisition and diversification spree under the management of CEO Dennis Kozlowski, industrial conglomerate Tyco Industries (NYS: TYC) has been trying to simplify its business model. This is the second time in less than five years that Tyco is breaking up. In 2007, the company split itself into three parts, creating health care company Covidien (NYS: COV) and electronics manufacturing company TE Connectivity (NYS: TEL) . In fact, this conglomerate had also shed its financial unit in 2002, creating CIT (NYS: CIT) .
This time Tyco is splitting its business segments -- ADT residential security, flow control, and commercial and fire security -- into three different public companies. By fragmenting its segments, Tyco should be able to improve its operational efficiencies.
In an economy where many companies are splitting up, including Marathon Oil, ConocoPhillips (NYS: COP) , and Kraft Foods, this break-up doesn't come as a surprise. ConocoPhillips split into two publicly traded companies in July and plans to spin off its refining and marketing business by early 2012. Since Tyco's three units barely have any common customer and their end markets are different, I consider this split to be a positive move. It will help them serve their distinct customers better and provide individual scope for growth and acquisition.
What does the shareholder get?
Tyco shareholders will receive tax-free stock dividends of the ADT residential and flow control business, after which Tyco shareholders will own 100% of the equity in each of the three companies. The combined dividend will be paid in line with the company's current payout of $0.25 per quarter.
A simpler business structure enables greater flexibility and more gains for the shareholders. Moreover, the small business units with leading positions in their fields might attract companies to acquire them.
The split is expected to cost the company $700 million, which should be partially offset by lower interest expenses in the future and provide the company with operational benefits.
The Foolish bottom line
The break-up of Tyco will increase product focus and should improve the performance of the existing units. The company's financial position looks good, too. I think shareholders will benefit from this change. Fools should keep a track on this stock. Click here to add Tyco Industries to My Watchlist.
At the time thisarticle was published Navjot Kaur does not own shares in any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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