Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Tatnic who wrote (669)	11/13/1999 2:55:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 3770

CCC, You points are legit but is this suppose to make bulls feel better about holding shares? I think you need to deepen your understanding of the financial mathematics of leverage. Within a broad range of leverage ratios the amount of leverage has no affect on the price of the stock because the added potential risk is exactly compensated for by the added potential return. The response by management was aimed at eliminating the criticisms inherent in pooling transactions. Moody's comments were concerned with the ratings of bonds in the future should TYC continue to expand using additional debt. The Moody's report downgraded nothing -- it simply warned bondholders that the quality of TYC's debt might well be downgraded if they use additional debt to fund expansion. Notice that they would be happy if TYC sold equity to fund acquisitions, and happier yet if TYC sold off assets and used its prodigious cash flow to reduce debt. Why? Because it strengthens the position of existing bondholders (by reducing leverage), which is all the report was concerned about. From the point of view of shareholders, debt financing is neutral to potentially superior to equity financing because it increases earnings per share provided that the WACC does not increase disproportionately. The math is relatively simple. Suppose you have a company that earns $100 MM per year, and has an equity base of $500 MM, so the return on equity is 20%. Now suppose that company buys back $250MM in equity using debt at 10%. Neglecting the tax shield effect, earnings would be reduced to $75MM ($100MM - 10%x $250MM), but the equity base is now $250MM. Because of the added leverage, ROE rises to 30%. The downside is the necessity of making interest payments of $25MM per annum. A bond rating agency's concern is focused on the $25MM reduction in cash flow, which is the source of funds for interest and principal repayment. The stockholders concern is the cash flow per share, which increases with added leverage. But since the added risk to stockholders is generally balanced by the increase in cash flow per share, the resultant change, all other things being equal, is neutral. But in the case of TYC, all other things are not equal. TYC has been accused of papering over acquisition costs using pooling accounting. By abandoning this tactic management is signaling to the street that its accounting practices are solid. Therefore, I expected the shares to rise. TTFN, CTC

To: Tatnic who wrote (669)	11/13/1999 4:55:00 PM
From: Y. Samuel Arai	Read Replies (1) \| Respond to of 3770

>...I think its time TYC realizes they are not a high-flying >tech company (that demands a multiple ala CSCO or BRCM)... TYC's P/E doesn't even come close to CSCO's. I'd be the first to get out ot TYC if it had the multiple that CSCO demands (current P/E of 111, and Y2K P/E of 85) If TYC had a P/E of 111, its share price would be at $170... or Y2K P/E of 85 would bring it to $190/sh. I'd be happy to sell today at that price, and even go short if it were that high. Currently, at $43/sh, its current P/E is about 27 (Y2K P/E of 20).