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Non-Tech : Tyco International Limited (TYC) -- Ignore unavailable to you. Want to Upgrade?

To: Y. Samuel Arai who wrote (546)	11/3/1999 4:57:00 AM
From: Dale Stempson	Read Replies (1) \| Respond to of 3770

I don't believe this latest WSJ article will help alleviate investor concerns regarding Tyco's accounting practices. While the whole issue is completely overblown IMO, I'm worried how folks will react (I'll focus solely on the negative for purposes of illustration): >>> Tyco International Ltd., in a change of acquisition strategy, is no longer considering the kind of all-stock deals that have been at the center of investor concern about its accounting practices in recent weeks, its chairman said. <<< The article opens with the above. My initial reaction is that investors might perceive this to mean that future growth may be limited. >>> L. Dennis Kozlowski, who is also chief executive of the acquisitive conglomerate, said "it's not worth doing" all-stock deals that use so-called pooling accounting, given the company's current depressed share price and the general controversy about pooling transactions, which have been under fire from regulators and may be banned next year. <<< Here, it almost sounds like Tyco (instead of the general controversy) has been under fire from regulators. >>> In an interview before Tyco's annual meeting here Wednesday, Mr. Kozlowski said the company instead will pay for acquisitions mostly with cash, and may supplement its war chest by selling a couple of smaller units for between $1 billion and $1.4 billion. <<< Selling units is normally not considered a positive sign. >>> The strategy shift means Tyco is less likely to do the kind of megadeals that have been its hallmark in recent years, including the $11.9 billion purchase of electronic-parts maker AMP Inc. this year. <<< This sounds like Tyco can't continue doing the great things that got them here. >>> In three instances, companies that had agreed to be acquired by Tyco slowed their revenue growth or wrote off significant assets in the final quarter before being swallowed by the conglomerate. In turn, this enabled Tyco to show greater earnings growth in later periods than it would have otherwise. No such effects occur when companies are acquired using purchase accounting. Tyco executives have acknowledged the pooling accounting practice improved comparative results, but said that was not the intent. <<< I can already hear some folks saying: "Yeah, right, I believe there was no intent, and I've got a bridge to sell..." >>> In steps intended to soothe worried investors, Mr. Kozlowski said the company plans to provide much more detail than usual about its accounting practices in its annual report, due to be published before year end, and is considering hiring a well-known academic accounting expert to advise Tyco on whether its accounting and disclosure practices are adequate. <<< Here it seems like Koz is acknowledging fault and is trying to make it up to investors by saying we'll try harder next time. >>> Although the Tyco chief said the company believed it disclosed everything in the past, he said the company "will go to even greater lengths. <<< Once again it sounds like Tyco is taking the blame for its disclosure practices. >>> "We're going to do what we need to do, even if it's to hit someone over the head so they see exactly what we have buried in there," Mr. Swartz added. <<< So there was something buried in previous reports that I missed? >>> Mr. Kozlowski agreed the recent tumble in Tyco's stock has made all-stock deals less attractive to the company, but he said Tyco has been telling investors for months it was clear pooling transactions would soon be outlawed and it would shift to mostly cash deals. <<< The word "outlawed" gives the impression that Tyco was doing something that was on the edge of being illegal. >>> As for an inability to do deals the size of AMP, Mr. Kozlowski said "the number of $12 billion deals that would work for Tyco is very limited anyway." <<< But still, this seems like a limitation. >>> Mr. Kozlowski said Tyco already has started drawing up a list of prominent academic accounting experts who could consult on ways to improve its disclosure practices. He said the company wouldn't seek to ask this expert to give a stamp of approval, but to tell Tyco executives "maybe there's another step you could take here or there." <<< Well, I guess the bottom line here is that the article generally comes across as though Tyco is acknowledging the accounting issues that were previously denied. Regards - Dale

To: Y. Samuel Arai who wrote (546)	11/3/1999 10:23:00 AM
From: Tatnic	Read Replies (1) \| Respond to of 3770

That letter from the company is a good step in my opinion.

To: Y. Samuel Arai who wrote (546)	11/3/1999 1:42:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 3770

Y, Some general comments: Some of the recent criticism of Tyco's accounting stems from pooling-of-interest acquisitions. In three instances, companies that had agreed to be acquired by Tyco slowed their revenue growth or wrote off significant assets in the final quarter before being swallowed by the conglomerate. In turn, this enabled Tyco to show greater earnings growth in later periods than it would have otherwise. No such effects occur when companies are acquired using purchase accounting. Tyco executives have acknowledged the pooling accounting practice improved comparative results, but said that was not the intent. Accounting for mergers and acquisitions is laden with problems regardless of whether pooling or purchase accounting is used. The general problem with pooling is that the cost of the merger is swept under the rug because of the accounting fiction that the companies were always merged. While that fairy-tale evaporates under purchase accounting since the difference between the value of the assets and the purchase price is capitalized as goodwill and written off over a number of years, the accounting rules allow for additional fairy tales like being able to write-down in-process R&D as a one-time cost. As a result, virtually every acquisition made by any company, regardless of the accounting convention, results in significant distortions. These issues are not new. Every acquisitive company uses these gimmicks and singling out Tyco is odd in my opinion. I think that the SEC needs to take a hard-nosed look at these problems. I have been a TYC shareholder for about 12 years (my basis is about $3 because it's in my IRA account), and I continue to believe in the company. My response to these issues is to look at cash flow rather than earnings. That way you can cut through much of the mythology created by accounting conventions. What does concern me, though, is an ethics issue with David Tice. Is it ethical if, as a money manager, you first establish a short position in a stock and then start to leak questionable criticisms to the media? TTFN, CTC