Alex Molinaroli, the CEO of Johnson Controls, is merging the company with Tyco despite facing controversies in his personal and professional life. Molinaroli had an extramarital affair and provided financial support to a Ponzi scheme artist, though investigations found no legal or ethical violations. Still, Johnson Controls awarded Molinaroli a pay raise. The $28.8 billion merger will create a large building systems company and allow both companies to lower their tax burden by relocating to Ireland. Critics say the deal is an example of corporate tax inversion that allows companies to avoid U.S. taxes.

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Johnson Controls' CEO Brings His Own Scandal to Tyco
David Welch
Jennifer Surane jennysurane
January 26, 2016 — 4:41 AM PST Updated on January 26, 2016
— 7:34 AM PST
· Alex Molinaroli survives scandals to take control after merger
· Johnson Controls transformed from car seats to building tech
First came the affair. Then the Ponzi scheme. Now -- a $28.8
billion transaction involving two storied American corporations.
It’s been a remarkable -- and remarkably unusual -- run for Alex
Molinaroli, CEO of Johnson Controls Inc., which yesterday
confirmed a deal to join forces with Tyco International Plc, a
company that has known controversy on an even grander scale.
Alex Molinaroli
Photographer: Jason Alden/Bloomberg
After spending 33 mostly quiet years at the Milwaukee-based
conglomerate, Molinaroli’s two years at the helm have been
marked both by the transformation of Johnson Controls and one
lurid headline after another, often in ways few might have ever
thought possible. Or possible to survive.
Twice the 56-year-old executive was investigated by his board
of directors and once was found in violation of the company’s

2. ethics policy. Even though his company’s stock price has badly
lagged the Standard & Poor’s 500 Index, he ended up receiving
a big raise and now will run a combined industrial powerhouse
that immediately becomes the 14th largest industrial in the U.S.
by market capitalization.
“In an era when investors and the public expect earnings
performance to be accompanied by ethical conduct, it’s a
surprise he’s running JCI let alone the combined company,” said
Erik Gordon, a business law professor at the University of
Michigan’s Ross School of Business.
No Legal Wrongdoing
Molinaroli’s personal missteps fell short of legal wrongdoing
but nonetheless prompted scrutiny by Johnson Controls. In
2014, 11 months after ascending to the top job, the board cut his
bonus by about 20 percent because he failed to disclose an
extramarital affair with the principal of a consulting firm that
worked with Johnson Controls. Although an external
investigation determined that corporate assets weren’t misused,
the relationship was deemed to violate the company’s ethics
policy.
It also led to divorce proceedings.
Molinaroli found himself touched by controversy again in 2015
when it came to light that he was both the victim of Ponzi
scheme artist Joseph Zada and provided financial support after
the fraudster was charged. Other marks included retired hockey
star Sergei Fedorov and a gaggle of Florida firefighters and
doctors.
After Zada’s conviction in September, the federal prosecutor
disclosed that Molinaroli had purchased the swindler’s home in
Grosse Pointe Shores, Michigan, and allowed him to continue to
live there rent-free, covered Zada’s legal bills and offered to
provide millions of dollars in restitution for victims, according
to a court transcript.
In an October interview with the Milwaukee Sentinel-Journal,
Molinaroli said he didn’t know why he allowed Zada to

3. continue to live in the mansion, which he said he’d purchased as
an investment. “I think we all make mistakes in our life,” he
told the paper. He also denied offering restitution.
The board hired outside counsel to examine the unusual
relationship with a con artist and found the “association was
personal in nature, did not involve misuse of corporate assets or
a violation of company policies, and did not appear to involve a
violation of law,” Jeffrey Joerres, who became lead director
Jan. 1, told Bloomberg in a Dec. 14 e-mailed statement. Johnson
Controls took the matter “extremely seriously,” Joerres said,
adding Molinaroli enjoys the board’s support.
Pay For Performance
Indeed, the board awarded him an 18 percent raise in 2015. Of
his $19.4 million package, a quarter was in bonuses and a third
in stock. His base salary rose 13 percent to $1.58 million. In its
proxy statement, the company said it increased his
compensation “in recognition of his performance and
contributions, and to better align with the median level.”
Fraser Engerman, a company spokesman, declined to comment
on Molinaroli’s personal issues, and the CEO declined to be
interviewed. As for his performance running the company, he
said the deals Molinaroli has made show that he’s a “change
agent” who has transformed Johnson Controls.
JCI shares have under-performed the Standard & Poor’s 500 by
29 percent since Molinaroli became CEO.
The company also increased spending on Molinaroli’s personal
security 10-fold to $151,019 from $14,662 in 2014, more than
any of its 19-member peer group other than defense-oriented
Northrop Grumman Corp. and Honeywell International Inc.,
according to data compiled by Bloomberg.
The JCI CEO “travels a lot and we want to make sure his
security is consistent with his personal needs and with the threat
assessments that the security team does on a regular basis,” said
Engerman.
Company Transformation
Amid all the controversy, Molinaroli has accomplished his goal

4. to transform the company, which began life in 1885 with an
electric-thermostat patent and is one of the largest makers of
automotive seating in the world. In an era when diversified
industrials have been selling off assets to focus on one core line
of business, Molinaroli has shed automotive assets while using
JCI’s more profitable energy efficiency and battery and energy-
storage businesses to recast it as a building technology
company.
A spin out of the remaining automotive business is scheduled
for the fourth quarter of calendar 2016, the company said
Monday.
Now comes the merger with Tyco, the onetime conglomerate
that divided into multiple companies after former CEO Dennis
Kozlowski was forced out in 2002 and later went to prison.
Molinaroli will run the combined company for 18 months as
CEO and serve as executive chairman for a year after that. The
company will also take up Tyco’s tax domicile in Ireland, where
the corporate tax rate is 12.5 percent compared with the U.S.
rate of 35 percent -- the latest in a series of contentious so-
called tax inversions.
Charmed Executive
Given all the controversy, Molinaroli is living a charmed
corporate life. While the company’s shares fell 3.9 percent
Monday -- before rebounding on Tuesday -- and he missed out
on the $39 million cash severance that would have come his
way if he’s been the odd man out in the deal, things seem to
have a way of working out for him.
His 425,320 shares in JCI can be exchanged for a share each in
the new company or be cashed out at $34.88 apiece. That’s
worth $14.8 million -- not counting unvested equity awards
worth at least $10 million and a pension valued at $13.6 million
from which he can start collecting once he retires.
Not bad for surviving such a wild ride.Johnson Controls Merges
With Tyco in Tax-Lowering Maneuver
Jennifer Surane jennysurane
January 25, 2016 — 4:07 AM PST Updated on January 25, 2016

5. — 2:19 PM PST
· Another inversion moves U.S. company's tax address to
Ireland
· JCI will continue with spinoff of automotive-seating unit
Johnson Controls Inc., already exiting the auto-industry’s
supply chain after decades as a key player, is now seeking to
shed its U.S. corporate citizenship in a multibillion-dollar tie-up
with Tyco International Plc.
The deal, announced early Monday, marks the latest attempt by
a historic U.S. company to reduce its tax bill through a so-
called inversion, a maneuver that allows U.S. corporations to
acquire foreign-domiciled companies and shift their legal
address to reduce their tax rates.
The move would also bring an end to Tyco as a stand-alone
company after it transformed from a diversified holding
company into an operating one focused on fire and security
products that complement Johnson Controls’ buildings-
efficiency business. Tyco itself got a foreign tax address in the
late 1990s through an inversion, as part of a takeover of the
security company ADT, which was incorporated in Bermuda.
Inversions have become more frequent since 2012 and have
emerged as an issue in the U.S. presidential race, with Donald
Trump and Hillary Clinton among those calling for an end to the
practice.
Clinton on Monday called inversions “outrageous” and said a
proposed “exit tax” would help block deals such as the one
between Johnson Controls and Tyco. U.S. Senator Bernie
Sanders, a Vermont Democrat also seeking the party’s
presidential nomination, said the merger “would be a disaster
for American taxpayers.”
“If you want the advantages of being an American company
then you can’t run away from America to avoid paying taxes,”
Sanders said in an e-mailed statement.
The corporate tax rate in Ireland, where the new Johnson
Controls Plc will be based, is 12.5 percent, among the world’s

6. lowest, compared with 35 percent in the U.S., the highest in the
developed world.
Certain corporate tax laws mean an independent U.S. company
could end up paying more taxes than an identical U.S. company
owned by a foreign parent. Since 1982, more than 50 American
companies have reincorporated in low-tax countries.
Tyco, which is based in Ireland and run from Princeton, New
Jersey, is now a maker of commercial fire and security systems
with a stock-market value of $13 billion as of Friday.
The combined company will have its primary operational
headquarters in North America in Milwaukee.
Tax Savings
The companies project at least $650 million in savings, which
the companies said would be achieved over three years,
including $150 million in annual tax savings. The merged
company will start to see some tax benefits immediately,
meaning the estimated synergies aren’t “back-end loaded,”
Johnson Controls’ Chairman and CEO Alex Molinaroli said in a
conference call with analysts. The cost of executing the cost-
savings will be about the same $650 million.
“We see from day one being able to leverage the combined
distributions, the combined customer base that we serve,” said
Tyco CEO George Oliver. “More importantly, leveraging a lot
of our innovation will enable us to put all of our capabilities
together to be able to capitalize on the trend in smart
buildings.”
Shareholders of Johnson Controls will own about 56 percent of
the combined company and receive aggregate cash consideration
of about $3.9 billion, the companies said in a statement
Monday. The companies expect the deal to close by the end of
September. Johnson Controls shareholders may choose one
share of the combined company or $34.88 a share in cash.
Seating Spin
Johnson Controls is continuing with its plan to spin off its
automotive-seating operations, slated by year-end. A
consummated deal would complete the transition of Johnson

7. Controls from a diversified manufacturer of auto parts, batteries
and building controls into two more focused companies. A
merger also would end of one of the last vestiges of Tyco, the
onetime conglomerate that divided into multiple companies
after former Chief Executive Officer Dennis Kozlowski was
forced out in 2002 and later went to prison.
Milwaukee-based Johnson Controls has been trying to reduce its
reliance on the auto-parts industry, which accounted for about
54 percent of its fiscal 2015 sales. Molinaroli will remain
chairman and CEO of the combined company for 18 months
after the closing, while Oliver serves as president and chief
operating officer, as well as director. Then Oliver will become
CEO while Molinaroli serves as executive chairman for a year,
until Oliver takes both roles.
“Johnson Controls has been on a multiyear trajectory to
transform into a true industrial growth company. I think this
acquisition fits well in that strategy,” said Noah Kaye, an
analyst at Oppenheimer & Co. “Fundamentally, we see this as a
company with advanced energy storage and advanced building
controls capabilities and the Tyco products should integrate
well.”
Early Earnings
Johnson Controls also said that it earned an adjusted profit of
82 cents a share in its fiscal first quarter, while Tyco said it
earned 42 cents. Both figures were within or better than the
companies’ forecasts. Johnson Controls will report full earnings
Jan. 28 and Tyco on Jan. 29.
Tyco shares jumped 12 percent to $34.15 at the close in New
York, the biggest daily gain since February 2009. Johnson
Controls slipped 3.9 percent to $34.21, its lowest closing price
since April 2013.
Johnson Controls is falling because executives didn’t clearly
explain the benefits the deal would bring for shareholders, said
Sachin Shah, a special situations and merger arbitrage strategist
at Albert Fried & Co. Shah also said Oliver estimated Tyco

8. shareholders would receive at least a 30 percent premium for
their shares in the proposed deal. The company never explained
the math behind that premium, which left him with little
confidence in the transparency of the deal, Shah said.
“This in theory -- and strategically as well -- could be a good
deal,” Shah said. “But the terms seems inadequate. The
communication -- there’s a dislocation between what they’re
saying and what the terms are.”
Oliver said on a conference call that the 30 percent is based on
potential gains such as “at least $650 million in synergies over
the next few years.” The premium is 13 percent based on the 30-
day volume-weighted average share price, he said.
Centerview Partners and Barclays Plc provided financial advice
to Johnson Controls. For Tyco, Lazard is lead adviser, Citigroup
Inc. is providing financing and Goldman Sachs Group Inc. also
provided financial advice.
Wachtell, Lipton, Rosen & Katz and A&L Goodbody are legal
advisers to Johnson Controls; Simpson Thacher & Bartlett and
Arthur Cox are Tyco’s legal advisers.
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Case Analysis
Background
Situation (SWOT) Analysis
Strengths
·
·

9. · .
Weaknesses
Opportunities
Threats
Five Forces Analysis
Supplier power
Buyer power
Competitive Rivalry
Threat of substitution
Strategic Analysis
Strategic Evaluation

10. Strategic Recommendations
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