<<<<<<<Several Wall Street analysts said the report was off the mark. "Tyco has the cleanest accounting of any company I cover," said Jack Blackstock at Donaldson, Lufkin & Jenrette Securities Corp. Jack Kelly, analyst at Goldman Sachs & Co., said his firm concluded "there was nothing to it.">>>>>>>
Angry Tyco Head Blasts Rumors Of Accounting Problems; Shares Fall
Thursday, October 14, 1999 04:36 PM
NEW YORK -(Dow Jones)- Shares of Tyco International Inc. fell again Thursday even though the conglomerate strongly denied rumors regarding its accounting treatment of acquisitions.
After falling 6.2% in heavy trading Wednesday on the rumors, shares of Tyco (TYC) were off $9, or 9.3%, at $88 at the close of trading Thursday. In morning dealings, the stock had fallen to as low as $83.
The rumors were sparked by a report critical of the company's accounting practices authored by a Dallas money manager who frequently shorts stocks. Tyco called much of the report "inaccurate and off-base" and the company held a conference call with analysts Thursday morning to discuss the report in detail. The company also said it expects to report better-than-expected results for its fiscal fourth quarter, ended Sept. 30.
The critical report was included in "Behind the Numbers," a newsletter published by David W. Tice, who also manages the Prudent Bear Fund. Tice said his fund hadn't taken a short position on Tyco. Tice's report focused on Tyco's practice of taking large acquisition-related charges, which he said obscures the company's actual results. He said he found at least two instances in which Tyco may have over-reserved for costs associated with severance pay and facilities closures, which raises the issue of whether management could later use those excess reserves to pump up profits.
Tice said he didn't uncover any "smoking-gun" accounting issues. Instead, he said the report is really as much about Wall Street's perception problem as about Tyco's accounting. By ignoring the huge one-time charges taken by companies such as Tyco, Tice said, Wall Street overestimates a company's real earnings power and encourages other companies to take similar charges.
Several Wall Street analysts said the report was off the mark. "Tyco has the cleanest accounting of any company I cover," said Jack Blackstock at Donaldson, Lufkin & Jenrette Securities Corp. Jack Kelly, analyst at Goldman Sachs & Co., said his firm concluded "there was nothing to it."
But it is clear the report hit a nerve among nervous Tyco investors. The highflying stock has more than doubled in the past year, and traded at about 33 times expected earnings for the year ended Sept. 30.
Some investors have found it difficult to follow the company's results through its rapid-fire dealmaking. This year alone, Tyco has done more than $14 billion worth of deals, and it often employs the so-called pooling accounting method, which merges the two companies' financial statements, requiring all past results to be restated. Pooling recently has come under fire from accounting regulators as potentially misleading. Further adding to the confusion, Tyco, which is based in Bermuda but managed from Exeter, N.H., changed its fiscal year end last year, giving it a truncated fiscal 1998 of nine months.
Tyco officials, who have demanded a Securities and Exchange Commission investigation, blasted the report as inaccurate. "I'm particularly outraged that one individual with no contact with the company can write false and misleading statements about Tyco," said Chairman and Chief Executive L. Dennis Kozlowski.
He said "there's nothing going on at Tyco to spark" the recent weakness in the stock and "there are no restatements coming from Tyco." "We have never been accused with any accounting wrongdoing by auditors or SEC," he said, noting that the company follows conservative accounting practices.
"There's no risk that some day investors will wake up and find something wrong," Kozlowski said. He also said he remains a large Tyco shareholder with with 5.1 million shares.
"Our free cash flow is totally reconcilable with earnings," he said. Tyco expects free cash flow of $2.3 billion for the year ended Sept. 30, with cash flow for the fiscal fourth quarter, typically the company's strongest, beating the $790 million the company reported in the third quarter. Free cash flow for next year should be $3.3 billion, the company said.
Chief Financial Officer Mark Swartz said free cash flow excludes spending related to acquisitions. The company sees about $800 million of spending related to acquisitions for the year recently ended and $300 million next year.
Tyco has been attempting to bolster its stronghold in the electronics-parts business and last month agreed to acquire the electromechanical components unit of Siemens AG for $1.1 billion. The deal followed two Tyco acquisitions earlier this year of the industry's No. 1 and No. 2 companies - AMP Inc. and Raychem Corp. - for a combined $14.2 billion in cash and stock. The Siemens acquisition would make electronics the largest of Tyco's four main businesses. Tyco also makes disposable medical supplies and industrial goods such as fluid-control systems and fire-detection and security devices.
Separately, the company's Tyco Submarine Systems Ltd. unit announced it has received a five-year, $100 million contract to provide maintenance for the transatlantic underseas fiber-optic network of Worldwide Fiber Inc. Tyco said the contract can be extended at the end of the initial five-year period. Tyco and other investors last month purchased a 20% stake in Worldwide Fiber for about $345 million.
Analysts said Tyco officials did a good job of addressing the issues on the conference call. "They addressed many of the issues forthrightly and completely," said Kelly, the Goldman Sachs analysts. "I don't think they left any room for ambiguity."
John Inch, an analyst at Bear Stearns & Co., suggested that companies with recent acquisition problems have left many investors in a cynical mood toward aggressive acquirers like Tyco. In addition, he said, "it's getting toward the end of the year, and investors are hedging their bets." Tyco's willingness to address the rumors on a conference call "implies that there's nothing wrong" at the company, Inch said.
Goldman and Bear Stearns were among several brokerages that reiterated their "buy" investment ratings on Tyco Thursday.
When questioned whether Tyco is making acquisitions too quickly, Kozlowski said "we are under control." He also said the company has a very experienced management team - "folks who know the rules and know how to integrate companies."
Kozlowski added. also denied he benefitted, as alleged, from the company's move to Bermuda, said Kozlowski. In fact, it cost him $10 million in capital gains tax.
Kozlowski said Tyco attorneys are looking into the possibility that a fund manager or other entity might be benefiting from the rumors. The company will consider legal action if that proves to be the case. Tyco has also asked the Securities and Exchange Commission and the New York Stock Exchange to investigate, he said.
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