At first glance, there is little in common between CIT Group, a massive commercial finance company, and Associates First Capital, a subprime consumer lending operation now owned by Citigroup Inc.
But Tyco International Ltd.s deal to buy CIT Group, announced just six months after Citigroup said it had agreed to buy Associates, has refocused attention on the future of stand-alone finance companies, a vanishing breed.
On Tuesday, Tyco, a Bermuda-based manufacturing conglomerate, said it would buy CIT, of New York, for about $9.2 billion and make it an in-house financing arm for the companys extensive electronic, cable, and water purification products and services. The deal is scheduled to close in the third quarter.
While Tycos move was prompted by a desire to create a financing operation along the lines of General Electrics GE Capital arm, analysts said it also points to a broader trend among specialty finance companies.
The public shareholder model for finance companies may disappear with these entities becoming part of larger, more diverse enterprises, Ann Maysek, a bond analyst at Bear, Stearns & Co., wrote in a research note Tuesday.
One sign of the markets renewed expectation of more unions between these specialty lenders and bigger, broader companies is the performance of Heller Financial, a Chicago commercial and asset-based lender whose business model closely resembles that of CIT.
Hellers stock rose 4.2% Tuesday to close at $34.40 a share. That was close to a repeat performance of Hellers 12% rise on Sept. 6, the day Citigroup announced its deal for Associates.
In some ways, the recent business boom for commercial specialty finance companies like CIT and Heller offer a mirror image of trends elsewhere in the financial sector.
In fact, the pullback in lending by their commercial bank competitors during the slowing economic environment has enabled companies like Heller and CIT to maintain decent earnings.
In a move unrelated to the acquisition announcement, Robertson Stephens analyst Jordan Hymowitz upgraded CITs stock early Tuesday morning to a buy rating from market perform. Mr. Hymowitz wrote that the stock was undervalued.
The company had been trading at the lowest multiple to book value and the second lowest multiple to earnings of the 50 financial companies, with the exception of insurance companies, in the S&P 500.
Historically, CITs profitability has improved in periods of a slowing economy as it benefited from rising yields, Mr. Hymowitz wrote in his research note.
The company has also begun to shed some of the taint left by its November 1999 acquisition of the Canadian lender Newcourt Credit Group, which reported lower-than-expected earnings before the transactions close.
In a conference call to analysts and investors Tuesday, L. Dennis Kozlowski, Tycos chairman and chief executive officer, said the company has been hearing from its managers about the need for an in-house financing arm for years.
The company started talking with CIT in November, after we recognized that our shareholders would be better served by an immediately accretive deal rather than us trying to build this, Mr. Kozlowski said. Tyco, which expects to post $37 billion of fiscal 2001 sales, has administrative headquarters in Exeter, N.H.
Robert Napoli, an analyst at ABN Amro in Chicago, said this is a strategic move for Tyco, and that the company is copying the successful GE Capital model.
They look at General Electric, see the valuation they get and the consistency of earnings out of GE Capital, and want to do something similar, he said.
The Japanese banking company Dai-Ichi Kangyo Bank Ltd., CITs largest shareholder, had been looking to step back from CIT for some time and had reduced its stake over the last several years.
Tyco would pay $35.02 per share in cash for the 71 million shares, or 27% stake, owned by Dai-Ichi Kangyo, a subsidiary of Mizuho Holdings. (Another Mizuho unit, Fuji Bank Ltd., owns a stake in Heller Financial.)
