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Deals from Hell by Arthur Levitt Jr., Robert F. Bruner

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14
January 2002: Acquisition Program of Tyco International

TYCO’S SURPRISING NEWS

For years, Tyco International had delivered steadily growing earnings per share (EPS) and a buoyant share price.1 A steady diet of acquisitions substantially shaped this record. Figure 14.1 shows the pattern of Tyco’s M&A activity by number and volume of deals. On January 22, 2002, Dennis Kozlowski, CEO of Tyco International, Ltd., announced a radical restructuring plan for the firm that would break Tyco into four segments. The transaction would entail three spin-offs. Kozlowski argued that the firm would be worth 50 percent more after the restructuring: “Acquisitions have become far less important. The model for the future is far more for organic growth.”2 Securities analysts were mystified by the announcement. Tyco had been the target of SEC accounting investigations—so far, these had turned up nothing. But a new spate of rumors had dogged the firm since late fall 2001. An analyst was quoted as saying:
To me, it smells a little bit fishy. If you are a public company and people are pointing the finger at you, I wouldn’t think your first reaction would be to split up and make things confusing for investors. Here is a clear effort to break up one company and make it a more complicated company. . . . Their goal is to show revenue and earnings momentum....The first quarter had a questionable earnings outlook going forward. They use it [stock] as a currency to make acquisitions, so the timing [of ...

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