Deals from Hell

14

January 2002: Acquisition Program of Tyco International

TYCO’S SURPRISING NEWS

For years, Tyco International had delivered steadily growing earnings per share (EPS) and a buoyant share price.¹ A steady diet of acquisitions substantially shaped this record. Figure 14.1 shows the pattern of Tyco’s M&A activity by number and volume of deals. On January 22, 2002, Dennis Kozlowski, CEO of Tyco International, Ltd., announced a radical restructuring plan for the firm that would break Tyco into four segments. The transaction would entail three spin-offs. Kozlowski argued that the firm would be worth 50 percent more after the restructuring: “Acquisitions have become far less important. The model for the future is far more for organic growth.”² Securities analysts were mystified by the announcement. Tyco had been the target of SEC accounting investigations—so far, these had turned up nothing. But a new spate of rumors had dogged the firm since late fall 2001. An analyst was quoted as saying:

To me, it smells a little bit fishy. If you are a public company and people are pointing the finger at you, I wouldn’t think your first reaction would be to split up and make things confusing for investors. Here is a clear effort to break up one company and make it a more complicated company. . . . Their goal is to show revenue and earnings momentum....The first quarter had a questionable earnings outlook going forward. They use it [stock] as a currency to make acquisitions, so the timing [of ...