A wrinkle in the CIT story

 - 
07/27/2009
So, I got a nice email from reader Marty Mayo this morning alerting me to CIT's past connections with Tyco and the infamous Dennis Kozlowski. It was before my time, but in March of 2001, Tyco announced its intention to buy CIT for $9.2 billion, saying this:
"For years, our operating managers have advocated creating a financing capability within Tyco to support the growth of our businesses," said L. Dennis Kozlowski, Tyco's Chairman and Chief Executive Officer. "After evaluating several paths to this goal, including developing a financing capability in-house, we concluded that acquiring CIT gives us a faster, more efficient and more robust solution at lower risk than anything we might have done internally or through joint-venture or other approaches. Putting in place a fully established leader in the commercial finance industry is the ideal platform for us to fulfill this need.
I guess that made sense at the time. But it was apparently a move made at the height of Kozlowski's hubris. Just a year later, Tyco was getting permission to sell CIT to the public via IPO, hoping to get just $5 billion back. Nice return on that investment:
Tyco also said it would take a noncash loss of about $6 billion as part of the offering. It will take most of the loss by restating its earnings for the quarter ended March 31 down by $4.5 billion, and the remainder after the deal is finished. The loss represents the difference between the value of CIT on Tyco's books and the amount that outside investors are willing to pay for it. Tyco values CIT at $11.3 billion, so if the company sells CIT for $5 billion, for example, it will have a loss of $6.3 billion.
Looking into this also brings to mind how short our memories can be in general. Take a look at this article about CIT, post-Tyco. It's just seven years ago, but at the time here were the concerns:
The problem CIT faces is that it's still a difficult business environment and companies it lent money to are struggling to pay their bills. Even though delinquency rate on loans in CIT's portfolio fell to 3.74% from 4.09% at the end of March, the company's executives say it's too soon to declare an end to the corporate credit problems.
Corporate credit problems? 2002 didn't know corporate credit problems. In fact, can anyone remember the corporate credit problems of 2002 in the context of the past year's credit disaster? These things can clear up quicker than we think. To get back to Marty's email, does the Tyco-CIT connection have anything to do with the company current problems? Doubtful. Does it have anything to do with CIT's former work with the alarm industry? Not really - though maybe their association with Tyco turned them on to the recurring revenue nature of the alarm business and it was part of what made them look more closely at the industry four or five years ago. Regardless, it's always interesting to see the hands of Dennis Kozlowski still touching pieces of the business world.

Comments

I am not sure what the point of your article is? Because Dennis Kozlowski ran an company that once tried to buy CIT, he somehow ( doubtful, but maybe, not really) is responsible for the mess that CIT is in now? If that is your logic, then also give the Koz credit for Covidien, Tyco International, Tyco Electronics, etc.. But then what fun is the truth?

Jflick,
Thanks for your interest in the blog. Next time, try actually reading it. Tyco did not try to buy CIT. It did buy CIT. So there's that. But, to the rest of your questions, does this paragraph from above answer them?

"To get back to Marty’s email, does the Tyco-CIT connection have anything to do with the company current problems? Doubtful. Does it have anything to do with CIT’s former work with the alarm industry? Not really - though maybe their association with Tyco turned them on to the recurring revenue nature of the alarm business and it was part of what made them look more closely at the industry four or five years ago."

Where could you possibly infer from that that I was arguing Kozlowski is responsible for CIT's mess? Are you unfamiliar with the word "doubtful?"

I know the Internet is a fun place to accuse people of lying, but at least read what you're reacting to.