Tyco abandons breakup plan

Its stock devalued, Tyco will lay off 7,100 employees
Saturday, June 1, 2002

PEMBROKE, Bermuda-Only a few months after stunning the market with its plans to split into four companies its well-oiled conglomerate, Tyco International an-nounced in late April that it was abandoning its strategy to breakup the company, including its plans to split apart its Fire & Security division, which encompasses ADT Security Services.

The termination of the plan follows months of slumping company stock prices, which fell from nearly $60 per share late last year to a five-year low of $15.25 following the company's announcement. Overall, Tyco's stock had fallen at least 44 percent since the break-up was announced in late January, a loss of about $64 billion in share-holder value. Shares closed at press time in mid-May at $19.42.

The attempted breakup, described by management as a "mistake," also caused the company to record a $3.3 billion charge in its first quarter financial results; a series of staff reductions and facility closures - about 7,100 employees and 24 locations - will cost the company about $331 million more. Company officials did not elaborate on what divisions would be affected by the downsizing.

Instead, Tyco officials said it planned to keep together the Fire & Security division, which along with healthcare and the company's capital divisions, were slated to be spun-off into separate companies through a series of public offerings.

"Our rationale for the break-up was based on a simple premise," Dennis Kozlowski, Tyco's chairman and chief executive officer, said in a letter to shareholders. Despite the company's "superior growth in earnings and cash flow," it was significantly undervalued when compared to other companies of its size and makeup, although he admitted that discounting was due to market unease with "highly complex companies that are in multiple business lines with few obvious synergies."

"By splitting up the company, we saw an opportunity to address these concerns and accelerate the creation of value for our shareholders," Kozlowski said in the letter. "But we know now it was a mistake, and it is time for us to return our focus to what we do best."

At least one analyst thinks the return of Tyco's mad acquisition sprees is doubtful though, as the company lies beaten by the flight of short-term investors and lays vulnerable to a cash crunch from the cost of changing course.

"The game played by Dennis Kozlowski is over," said Jack Mallon, a security industry analyst and publisher of Mallon's Security Investing. "I think the acquisitions have come to a halt and the key question is will there be divestitures?"

In the letter, Kozlowski admitted that the company's focus on the return to capital will have less of a emphasis on acquisitions as the company's focus on costs, organic growth through product development and geographic expansion.

"Acquisitions are expected to make up a lower proportion of this growth, although Tyco plans to continue to make strategic acquisitions where they add to the core strength of a division, and meet stringent financial criteria," he said. A "meaningful level" of management compensation, beginning this year, he said, will be tied to the company's return on capital, with the elimination of bonuses for the senior corporate management team this year.

Since being folded under the Tyco umbrella in 1997, ADT has increased its customer base 400 percent to about seven million customers, a good portion of which has been through a series of major and possibly hundreds of small security company acquisitions. Over the past year, those acquisitions have included Scana Security, Smith Alarm, Cambridge Protection Industries including SecurityLink and many more.

Tyco's Fire & Security also branched out into the manufacturing sector with its purchases of the former Sensormatic operations and Digital Security Controls and its distribution arm, Tri-ed.

"This is a company in transition," Mallon said. "I'm not saying they may not be able to hunk it down and survive the storm, but they'll be a different company."