Merger with Tyco to Affect Auto Business of Johnson Controls

Johnson Controls is the largest supplier of auto parts in the United States but the company’s merger with Tyco may mean that this will no longer be the case. After the merger, Johnson Controls is planning to spin off its auto business as a separate unit named Adient and focus on its fire systems and air conditioning business which will benefit from synergies gained after the merger. The merger is almost a certainty as both companies have gained the approval of their shareholders.

In the post merger scenario, Johnson Controls plans to save at least USD 1 billion in costs through operational improvements. Adient, the new car parts subsidiary will benefit from being domiciled in Ireland and the lower tax rate there. One minus will be that it will have debt to the tune of USD 3.5 billion of debt in order fund a USD 3 billion cash payout to Johnson Controls. This high level of debt will be a definite handicap and may hamper its competitiveness in the industry. It may have to forego several lucrative business opportunities due to the high level of debt.

Another worrying factor is the mixed outlook for the auto industry, especially in the United States, where car sales data in the month of July gave rise to doubts that growth in the country may be stagnating after a few years of steady growth. In the wake of weakening consumer demand, many manufacturers have begun to offer hefty discounts. Ford and General Motors, which have supply agreements with Adient have been greatly affected by Brexit and have said that Britain’s decision to leave the EU will end up costing them hundreds of millions. Europe and Africa accounted for 39 percent of Adient’s consolidated revenue in 2015.

Once the merger between Johnson Controls and Tyco is finalized on September 2, it remains to be seen how Adient will fare in the post merger scenario without the support of its parent company.