Troubled Giant

TERENCE SMITH:

During his ten years as chief executive at Tyco international, Dennis Kozlowski was nicknamed "Deal a Month Dennis" for his aggressive acquisition strategy. He turned the manufacturing company into a huge conglomerate that produced everything from security systems to medical equipment to coat hangers. With over a quarter of a million employees, Tyco's earnings soared in the 1990s, making it a favorite on Wall Street.

But today, the SEC is investigating Tyco's accounting practices and the company's stock has lost nearly three-quarters of its value. Investors have lost $85 billion so far. Kozlowski's resignation yesterday was followed by his indictment today.

For more on the company and its troubles, we are joined by Jeffrey Sonnenfeld, associate dean of the Yale School of Management. Mr. Sonnenfeld, welcome to the broadcast. Tell us a little bit about Tyco, what it does, what its businesses are.

JEFFREY SONNENFELDt:

Well, it is an extraordinarily vast array of businesses, Terence, and as you've indicated, everything from fire alarms and security to Melonkraut, ranging over to financial services, a well known company in the leasing business, quite a large one, CIT, which has turned out to be a bad purchase for them — as well as bandages, there is an old health care unit called Kendall they bought. They've got electrical appliances and telecom equipment, it is a vast array of businesses and technologies and really distinct markets.

TERENCE SMITH:

Of course this was a great darling of Wall Street, the stock soared. What has gone wrong? Why has it sagged so badly?

JEFFREY SONNENFELD:

It seemed that Wall Street was quite captured with almost the swashbuckling charisma of Dennis Kozlowski, or "Deal a Month" as you referred to him in your opening. He was quite proud of reviewing a thousand acquisitions a year and purchasing perhaps 200 or more. That's roughly, you know, a company a day. That's a staggering record. It's hard to keep on top of the emerging technologies and the changing business needs and the HR, the staffing requirements of these businesses, let alone their financing needs. Wall Street's, I think scrutiny, in this post Enron era has led people to start to ask questions they hadn't asked before about some of the opaqueness and some of these acquisitions. Where did some of the accumulated cash go that was pooled up beforehand? And exactly how are these deals being done and how are these businesses fitting together.

In hindsight, it seems obvious that six or eight months ago we weren't asking, Terence. And now as analysts are asking, they're not happy with the quality of the answers that they're getting. On top of this, we've had four or five pretty dramatic governance concerns beyond the accounting practices that were scary enough. There was about half a billion dollars of unreported stocks sold back by Mr. Kozlowski and his chief financial officer. Usually it has to be reported, and it's not required; however, if it was in the way of loans from the company. So that was a lot of stock to be dumping at a time when he said he had great confidence and was supporting the company. In fact like Ken Lay at Enron, he was saying one thing and doing something different.

TERENCE SMITH:

Given the charisma that you talked about before that Dennis Kozlowski had, how important is his departure to the from the company to its current troubles?

JEFFREY SONNENFELD:

I think tremendously important. I think part of the problem that the board didn't replace him earlier, because I don't believe in American history we have seen a company of this size so strategically confused. Since January, virtually every public statement from the chairman and the company about its strategic future has been reversed. Reversed in the course of a few weeks or in the case of a recent divestiture that failed, reversed in the course of a day. And a board must be pretty confused along with the rest of us, but with no ready apparent internal successor, it seems they felt they needed to keep Dennis Kozlowski in place.

I think his charisma was the glue since these businesses are completely unrelated. Terence, we saw things like this back about 15 years ago. If you remember Jerry Cy and American Can, moving beyond the canning business to retail and insurance and they bought Smith Barney and others– securities and other businesses way outside of canning. We saw companies like Harold Janine's ITT get into baking businesses and real estate and things far outside of the telephone business. And almost to a company those models of great diversification were colossal failures. And now we see again it's hard for a small team of senior managers to stay on top of these businesses. They have to believe that either the charisma and the wisdom of the C.E.O. Somehow can do a better job than the external financial markets in allocating resources across all those very different businesses.

TERENCE SMITH:

Right. Is this then another contributing factor, Tyco's problems, to the sort of crisis of investor confidence on Wall Street?

JEFFREY SONNENFELD:

It just couldn't come at a worse time. We start to add up the notch of, on the belt, of CEO's that have disappeared just in the month of May, it's roughly 80 of them. On top of Bernie Ebers of WorldCom, on top of John Riegas of Adelphia, this one where there was so much Wall Street enthusiasm, it was a crushing blow. There was a study that just came out recently by UBS and Gallup — a survey of investor confidence and it shows there is not much confidence. Almost three quarters feel that shady financial practices are widespread and they're very discouraged as investors. It's stunning because over the weekend and last week, you couldn't ask for a better set of government statistics in terms of labor efficiency, production, even the auto industry has got wonderful news for us. And yet the market is so depressed because of the lack of trust.

TERENCE SMITH:

What's the future hold in your view for Tyco? I mean it still has major assets. You mentioned CIT, which is a huge financial services company. They want to sell that in order to relieve some of their debt.

JEFFREY SONNENFELD:

CIT is a very modular big chunk to sell. They bought it not long ago for $9.5 billion and promised to sell it for $6.5 billion. Most experts figure if they got four to $5 billion, that would be spectacular right now. But sheer staring down the frightening view of $27 billion in debt in the face and a pretty significant payment that has to be made next February. These pieces have not sold easily. They suggested, Terence, that CIT would have been sold by now or would have been divested through an IPO, initial public offering. It hasn't happening. We see the plastics business was going to be modular and sold off. People are still unsure what is in there. This is still a very conflicted board, very insider oriented.

TERENCE SMITH:

I appreciate it. We have to go. We'll stay tuned because obviously there is more to come. Thank you very much.