Ingersoll-Rand (NYSE:IR) announced it will be separating its security business from the rest of its operations in a strategic move to enhance shareholder value. The move includes combining its commercial and residential security businesses, a 31% hike in the company’s quarterly dividend and a $2 billion share repurchase plan. The company generated $14.8 billion in sales in 2011.
A Big, Global Company
Ingersoll-Rand’s security business includes such well-known brands as Schlage, Kryptonite and many others. The Company’s other businesses include major brands including Ingersoll Rand industrial equipment, Club Car golf carts, Trane heating and air conditioning, and Thermo King refrigerated transport products. The company employs 60,000 people worldwide and has 47 manufacturing and assembly plants in the United States. Although the Ingersoll-Rand global headquarters is in Ireland, its North American Headquarters is in Davidson, North Carolina just outside of Charlotte.
Maximizing Shareholder Value is the Name of the Game
The move to split up Ingersoll’s businesses comes after the company’s recent ‘strategic review’, which was prompted by Trian Fund Management LP. Trian Fund, which is controlled by billionaire investor Nelson Peltz, took a 7% equity interest in the company in May. Peltz is also the Non-Executive Chairman of the Board of The Wendy’s Company hamburger chain as well a board member of H.J. Heinz and the investment management firm Legg Mason. Peltz has been involved in many corporate roll ups and split ups. As far back as 1997 Peltz was a major shareholder in Triarc Companies which bought Snapple from Quaker Oats, combined it with other beverage companies and eventually sold it off to Cadbury Schweppes in 2000. That turnaround and sell-off got so much attention it wound up becoming a case study at Harvard Business School.
Synergy in Reverse
Peltz is not alone in his view that splitting the security business apart from the other businesses is a smart strategic move. Many Wall Street analysts believe Ingersoll has been ripe for a split up because, “…the stock prices of many conglomerates have languished,” and, ” these stocks trade at a discount to the sum of their parts.” The idea of creating synergies by combining operations makes lots of sense in some businesses, but former Fidelity Magellan Fund manager and world-renowned investment expert Peter Lynch went so far as to coin the phrase “diworsification” to describe companies that expand outside their core competencies.
The New Business
The new company will be comprised of Ingersoll’s current commercial and residential security businesses. The newly formed security business will have pro-forma revenue of about $2 billion, while the rest of Ingersoll’s businesses will have a combined pro-forma revenue of approximately $12 billion.
Summarizing the views of the directors on Ingersoll-Rand’s board, the company’s Chairman and CEO, Michael Lamach said this strategic move, “…will enable investors to value our different businesses separately, creating value for both companies and their shareholders.” When all is said and done, that is what the CEO and board of director’s are there for and you can bet Nelson Peltz and Trian Fund won’t be the only ones watching to see how this all pans out.
