» Johnson Controls:
Chairman and CEO stepped down early as company is in process of merger with Tyco
Alex Molinaroli had the shortest stint of any of the top executives in Johnson Controls’ history, but had a disproportionate effect on the company and its future.
In less than three years, Alex Molinaroli transformed Johnson Controls Inc., setting off a burst of deal-making that culminated in the 132-year-old company being bought by Tyco International and its official headquarters being moved to Cork, Ireland.
Molinaroli stepped down as chairman and chief executive of the combined companies on Friday, six months earlier than planned under the merger agreement with Tyco. He also resigned from the company’s board, although he had been slated to remain chairman until March.
He had the shortest stint of any of the top executives in Johnson Controls’ history, spending three years running the company, followed by one year at the helm of its successor, Johnson Controls International plc.
But his brief tenure had a disproportionate effect on the company and its future.
Molinaroli, who became CEO on Oct. 1, 2013, moved quickly to lessen Johnson Controls’ reliance on the cyclical automotive industry, a change that was cheered by Wall Street analysts and that eventually cleared the way for the Tyco merger.
His tenure brought other changes as well to the state’s largest company, based on sales.
Johnson Controls shed an estimated 11,200 jobs, including about 500 in West Allis and Glendale, under Molinaroli’s tenure. At the same time, it spent $3.1 billion buying back its own shares to prop up its stock price, a sum that almost equaled what it invested in its businesses.
Molinaroli also will be remembered at least partly for a pay package that, by the company’s estimate, which could be conservative, will pay him $63 million to walk away.
Along the way, there were controversial episodes in Molinaroli’s personal life, involving investments in a Ponzi scheme and an extramarital affair with an employee of a consulting firm, that generated headlines and raised questions about his judgment.
Molinaroli was replaced by George Oliver, the president and chief operating officer of Johnson Controls International and the former CEO of Tyco.
Oliver, who spent 20 years at General Electric Co., will have the challenge of making the merger work.
So far, investors have been unimpressed with the union.
Johnson Controls’ stock closed Friday at $39.90 a share, down 8.8% from its close of $43.74 on Oct. 17, 2016, when Adient plc, its automotive seating business, was spun off to stockholders. By comparison, the S&P 500 Index is up about 14% in that time period.
“It’s not going to come to-
gether overnight,” said Brian Bernard, an analyst with Morningstar Research Services LLC. “The performance since the acquisition has been bumpy. But you have to expect this.”
Bernard, who recommends the stock, believes the merger was a wise move.
So, too, does Timothy Wojs, an analyst with Milwaukee-based Robert W. Baird & Co. Inc.
The focus now, Wojs said, is on execution.
The company, which has its operating headquarters in Glendale, is projected to have sales of $30 billion in the fiscal year ending Sept. 30 and employs 120,000 people worldwide, including 2,800 in the Milwaukee area.
It sells heating, cooling, fire protection and security products and services, as well as automotive batteries.
The company projects that the merger will result in more than $1 billion in cost savings and eventually generate additional revenue from cross-selling products and services to its customers.
Molinaroli’s legacy will be determined by whether that proves true.
An electrical engineer who went to work for Johnson Controls in 1983, he set out as CEO to remake the company.
It formed a joint venture with Yanfeng Automotive Trim Systems for its automotive interiors business — the joint venture now is part of Adient — in its 2015 fiscal year. It also sold off its global facilities management business and formed a global joint venture with Hitachi. And it announced plans to spin off its automotive seating business.
Johnson Controls, which grew partly by a string of acquisitions through the decades, was not averse to deal-making.
And CEOs should always be evaluating their businesses, said Brad Chandler, the director of the Nicholas Center for Corporate Finance and Investment Banking at the University of Wisconsin-Madison.
“They should understand whether their portfolio makes sense today and for the future,” said Chandler, a former investment banker at Morgan Stanley.
The deal-making pace, though, quickened under Molinaroli.
His goal was to focus on products and services that held the promise of producing stronger and more consistent profits in coming years.
Many of the moves were welcomed by Wall Street analysts and investors who viewed the automotive business as a lowmargin, cyclical business.
Yet, paradoxically, Adient’s stock is up about 46% since it began trading on Oct. 17, while Johnson Controls’ stock is down.
And despite the flurry of deals and other steps taken by Molinaroli, Johnson Controls’ stock lagged the broader market before its merger with Tyco.
The company’s stock closed at $41.46 a share on Oct. 1, 2013, Molinaroli’s first day as CEO. On Sept. 2, 2016, the last day of trading under his helm, it closed at $45.45.
The 9.6% gain was far short of the roughly 28% increase in the S&P 500 Index during that time.
Johnson Controls’ stock also lagged the market, despite the company’s spending $3.1 billion to buy back its shares in the 2014-2016 fiscal years.
To put that in perspective, Johnson Controls spent a total of $2.3 billion on capital expenditures, such as equipment for its factories, compared with a total of $2.6 billion to buy back its shares in its 2014 and 2015 fiscal years.
This is for a company that did not approve a plan to buy back stock until the 2011 fiscal year, and spent only $102 million that year on stock repurchases.
Critics contend that the money companies spend buying back their own shares could be better spent elsewhere, from building new factories to raising workers wages.
“What it does do is boost executive pay,” said William Lazonick, a professor at the University of Massachusetts Lowell, who has written extensively about stock buybacks.
Lazonick and other critics contend that stock repurchases — which companies were banned from doing until 1982 — are an easy way to boost a company’s earnings per share and manipulate its stock price.
“And most of a chief executive’s pay is tied to a company’s stock price,” Lazonick said.
However, Chandler said that though companies generally can generate a higher return by investing in their businesses, there is a limit to how much they can invest at any given point.
He would rather see a company buy back its shares than make bad investments.
The lackluster performance of the company’s stock price raised the prospect of it becoming a target for activist investors.
That probably was a
concern for Molinaroli throughout his tenure as chief executive.
There also were the controversies regarding his personal life.
Those were followed by the merger with Tyco and the move of the company’s headquarters to Ireland, which has a lower tax rate.
And, finally, there was the controversy over Molinaroli’s pay package once he left the company.
The pay package — again, conservatively estimated at $63 million, in addition to the millions that Molinaroli made as CEO — was considered extravagant even by current norms. But Bernard, while acknowledging that it is a big number, noted that a $1 increase in Johnson Controls’ stock price adds $950 million to its market value.
The controversies during Molinaroli’s tenure often overshadowed the changes at the company.
Bernard believes the company formed by the merger of Johnson Controls and Tyco has more than a few strengths and opportunities, particularly in the developing world.
The company is in transition as it works to integrate its operations.
“We are going to get past that this year,” he said.
Other analysts, such as Richard Kwas at Wells Fargo Securities, also see the next calendar year as the test.
There also is the question whether Oliver, the new CEO, will keep the battery business. Another is whether Johnson Controls will keep its operating headquarters in the Milwaukee area.
The merger agreement required Oliver to move to the Milwaukee area within a year and maintain his office in the area once he became CEO. But that can be changed with a simple vote by the company’s board.
Adient, which initially was to keep its headquarters in downtown Milwaukee, announced within weeks as an independent company that it would move its headquarters to the Detroit area.
Any immediate move, though, is unlikely, given the disruption that comes with integrating two large companies.
Those decisions also will affect Molinaroli’s legacy.
His brief time as chief executive was tumultuous. But without question, he left his imprint on a company founded in 1885. Now, the question is how the decisions he made as CEO play out.
“Johnson Controls is better positioned than it was in the past,” Bernard said. “Without Alex in that role, would they have gone done this path? Probably not.”