OT TYC
Is this your first time nibbling at TYC or are you adding to an existing position? Do you feel that their business model is sustainable without the ability to do any further acquisitions for a while? Does the revelation that a director was paid $10 million directly with another $10 million to his favorite charity as a payment for brokering the CIT deal concern you?
Tyco Discloses It Paid Director
For Advisement on CIT Merger
By MARK MAREMONT
Staff Reporter of THE WALL STREET JOURNAL
Tyco International Ltd. paid a total of $20 million to one of its outside directors and to a charity he controls, in return for his help in brokering a major acquisition last year.
The unusual move drew fire from corporate-governance experts who have advocated more director independence from top management.
According to Tyco's annual proxy statement filed Monday, director Frank E. Walsh Jr. received a $10 million cash fee because he was "instrumental in bringing about" Tyco's $9.5 billion acquisition of finance company CIT Group Inc. Tyco also made a $10 million contribution to a New Jersey charitable fund of which Mr. Walsh is trustee.
The deal that Mr. Walsh helped broker didn't last very long. CIT, now called Tyco Capital, is scheduled to be the first Tyco unit spun out of the giant conglomerate as part of a corporate breakup plan announced last week.
Charles Elson, director of the Center for Corporate Governance at the University of Delaware, said he had never heard of a payment of that size to an outside director, calling it "highly inappropriate." Mr. Elson says it is a conflict of interest for an outside director to also serve, in effect, as an investment banker on a particular transaction, because his personal interest in getting paid may not coincide with the interests of Tyco shareholders.
Mr. Elson said Mr. Walsh should have resigned from the board once any kind of fee arrangement was discussed, and at minimum should have recused himself from participating in discussions and board votes relating to the CIT deal.
Paul Lapides, a professor who studies corporate governance at Kennesaw State University in Georgia, concurred, saying "$20 million is a lot of money for a company to be paying a director for doing what may be his fiduciary duty" to help the company. While Mr. Walsh's role may have merited some payment, Mr. Lapides said, Tyco's board should have hired outside experts to determine a proper figure.
Tyco spokeswoman Maryanne Kane said Tyco's board decided, without any outside help, that the $20 million payment was "appropriate based on the amount of work" Mr. Walsh did, which she said included providing guidance, advice and facilitating meetings. Mr. Walsh also received Tyco's normal director fees, which are the equivalent of $75,000 in cash and options on 10,000 Tyco shares.
A spokesman for Mr. Walsh said the director "acted as a catalyst and accelerated the negotiations" between Tyco and CIT, in part due to the "implicit trust" that the chief executives of both companies had in him. The spokesman said Mr. Walsh voted on the deal, but said the vote was "unanimous, so it wouldn't have made any difference" had Mr. Walsh recused himself.
Mr. Walsh, 60 years old, isn't standing for re-election as a Tyco director at the annual meeting scheduled for Feb. 21. Mr. Walsh is a former chairman of Wesray Capital Corp., which had its heyday as a private-equity firm in the 1980s. During the time he helped broker the CIT deal, Mr. Walsh also served as a member of Tyco's corporate-governance committee and was listed in last year's proxy as its "lead director," meaning he was the chief representative of the board's independent directors.
Tyco employed Lehman Brothers as its main investment banker on the CIT deal. Tyco's Ms. Kane said Lehman was paid more than $20 million, but wouldn't specify a figure.
In addition, Tyco disclosed that it paid its auditor, PricewaterhouseCoopers, $37.9 million for consulting, advisory, tax and accounting services, in addition to $13.2 million in auditing fees. The payment by companies of consulting and other fees to their outside auditors has been the focus of attention in recent weeks because of the Enron Corp. blowup. But outside observers said Tyco's payments, principally for accounting and tax work, didn't seem out of line given its size and complexity.
Also in the proxy statement, Tyco said its chairman and chief executive, L. Dennis Kozlowski, was paid $1.65 million in salary and a $4 million bonus for the fiscal year ended Sept. 30, 2001. The total of $5.65 million was up about 36% from the prior year, when Mr. Kozlowski received $1.35 million in salary and a bonus of $2.8 million. In explaining the larger bonus, Tyco's board cited, among other things, the company's reported 39% rise in net income before nonrecurring items. Mr. Kozlowski also received restricted stock that Tyco valued at about $30.4 million, $4.5 million in other compensation and 1.4 million new options on Tyco shares.
In addition, Tyco said it signed a new employment agreement with Mr. Kozlowski that lasts to 2008. As part of the agreement, Mr. Kozlowski received 800,000 new restricted shares, which vest gradually between now and late 2008. At current market prices, the restricted shares would be worth $33.6 million. Under the breakup plan, Mr. Kozlowski would continue as chairman and CEO of a company about half of Tyco's current size, comprising Tyco's security and electronics businesses.
Tyco's stock, which has been under pressure since it announced its breakup plan, fell 6.7%, or $3, to $42 as of 4 p.m. Monday in New York Stock Exchange composite trading.
online.wsj.com
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