The Tyco Tragedy
Tue Jun 11, 3:55 PM ET
This article was originally published on SmartMoney Select on 6/04/02.
IT'S NOT EASY for me to be shocked after so many years as an investigative reporter, but the resignation and indictment on tax-fraud charges of Dennis Kozlowski, Tyco International's (NYSE: TYC - News) embattled chief executive, leaves me shocked.
It's not just that I've both recommended and own Tyco shares largely on the strength of Kozlowski's reputation, or that I've personally interviewed him and been impressed by his candor. It's that the alleged crime — evading sales tax on expensive art — is so tawdry, so petty, so demeaning and so disgraceful, taking as it does from the public weal. Not since hotel empress Leona Helmsley, the "Queen of Mean," have we seen such despicable tax allegations. (Helmsley, by the way, was represented by the same defense lawyer as Kozlowski, the esteemed Steve Kaufman.)
Kozlowski hasn't been convicted, of course, but the indications are that the Manhattan district attorney has amassed pretty damning evidence. If so, why would Kozlowski, one of the country's most highly paid chief executives, stoop to such behavior? If he really wanted to get into art, why didn't he just buy Sotheby's (NYSE: BID - News), the scandal-tainted auction house that appears to be on the block? That may be a question only a psychologist can answer.
At least Kozlowski had the decency to resign, sparing shareholders the contractual obligation to pay him severance. This, by the way, should be another area of Securities and Exchange Commission ( news - web sites) scrutiny: It's plain common sense that firing a CEO for cause — for a crime — should not obligate a company to pay hundreds of millions in severance. But whether he's guilty or not, Kozlowski's abrupt departure has left Tyco shareholders in the lurch. The stock plunged almost $6 Monday, to just over $16. It wasn't that long ago that Salomon Smith Barney (which yanked Tyco from its recommended list on Monday) calculated Tyco's breakup value at over $70 a share.
In some ways I find the implosion of Tyco more shocking than the far-more-publicized Enron (Other: ENRNQ - News) debacle. Enron had built its reputation on the fundamentally illusory proposition that in the New Economy, Internet-driven world of information, it would trade everything and reap huge profits as it did so. And as we all know by now, it generated phony revenue and earnings numbers to maintain the illusion. If there were crimes at Enron, they went to the heart of the business.
Tyco, by contrast, is an industrial conglomerate. It makes security systems, valves, telecommunications equipment and medical products, and owns CIT, a finance arm. Tyco may have been criticized for growing through acquisitions, and for accounting aggressively for them, but so far as I know, its accounting has withstood scrutiny, even in this post-Enron era of heightened suspicion and stricter standards.
Kozlowski's alleged crime appears to have had nothing to do with Tyco itself, however badly it reflects on the character of its former chief executive. On Monday the new interim CEO reiterated earnings and revenue forecasts, and said Tyco would proceed with the spinoff of CIT.
While anything coming from Tyco at this juncture must be taken with a large grain of salt, should anyone sell Tyco at $16?
The case for bailing out is obvious: Investor confidence has been badly shaken. Tyco's access to capital will no doubt be curtailed; it is having to sell assets at what surely will be fire-sale prices; and it has a heavy debt load that could force it into bankruptcy. If you have a large position in Tyco, or aren't willing to shoulder a high level of risk, then I would sell at least some of it.
I could never, in good conscience, recommend buying Tyco at this juncture. Yet I plan to hold my position for now, simply because I believe it's worth more than $16 a share, even at a fire sale. Tyco needs to move swiftly to restore some shred of investor confidence. It urgently needs new management with a reputation for integrity, and it needs to reduce its debt. It would be easy to walk away from Tyco now, as so many investment-bank research departments did this week. But it still owns valuable assets, which I hope will reward patient investors. Events of the next month will bear close scrutiny, and I will keep you posted.
Tyco reminds me that there's no certainty in investing. No one could have predicted the sad, bizarre downfall of someone once so admired. As investors, we are rewarded for taking risks. Sometimes the market moves against us. And Kozlowski's fate reminds me there are things worse than losing money. A reputation for integrity is truly priceless.
Time for GE?
Speaking of industrial conglomerates, I recently read a Salomon Smith Barney research report suggesting that upfront ad sales for NBC will be stronger than expected, which makes me all the more eager to buy shares in General Electric (NYSE: GE - News). You may recall that I've been recommending GE as a good way to participate in the rebounding economy, but I missed the last opportunity to buy pursuant to my system, which came a few weeks ago when the Nasdaq dipped briefly below 1600. Now I have another chance; GE has been dragged down by Tyco's woes and other concerns to just under $30 a share. I'd rather the market go up for a change, but I see this opportunity as something of a silver lining. My next buying threshold on the Nasdaq: 1400 |
