VideoPrologue:
On Jan. 22, senior management at Tyco International made a startling announcement. In a corporate press release, Tyco executives let it be known that they intend to dramatically alter the structure of the corporation. At the heart of that restructuring: breaking up the company's four operating units into separate businesses, then spinning those businesses off as standalone, publicly traded companies.
In explaining the plan, Tyco CEO L. Dennis Kozlowski seemed to trumpet the virtues of pure-play companies over conglomerates. "Over the past decade, Tyco's share price has increased ten-fold as we have used Tyco's size, access to capital and operating philosophy to build world-class businesses," he noted. "These businesses have now developed to a size and stage where they can thrive on their own and perhaps be even more agile than Tyco."
----------------------------------------------------------------
Kozlowski's explanation would have made sense, too, if Tyco hadn't spent the better part of the Nineties eagerly cobbling together an empire. In fact, it wasn't all that long ago that the Bermuda-based Tyco was being billed as the next General Electric. From 1993 to 2001, the company shelled out a jaw-dropping $64 billion on 200 acquisitions -- a buying spree not seen since the days of John D. Rockefeller, Commodore Vanderbilt, and other men with tall hats. Tyco's long string of purchases covered a wide spectrum of businesses -- from syringe makers to security systems specialists.
Not surprisingly, Tyco management's plan to dismantle the $36-billion-in-revenues conglomerate left many investors and analysts flummoxed. "This drastic change from Tyco is very strange," says Tom Burnett, president of Merger Insight, an affiliate of Wall Street Access. "Tyco management held an analyst meeting only a few months ago when it was extolling the virtues of the combined, diversified enterprise. Now it is completely trashing that concept."
In turn, some Tyco watchers are now trashing the company's explanation as to why it's breaking up its empire. These observers claim Tyco's seismic shift in strategy is more about bookkeeping than agility. They assert that rising investor concerns over financial reporting has made it tough for any acquisitive corporation to wring double-digit earnings growth from aggressive purchase accounting. Says Albert Meyer, a short seller at investment research firm Tice Associates: "Tyco management ran out of help from their accountants."
Swell Cookie Jars
They ran into some bad luck, that's for sure. The downturn in the U.S. economy -- and the cash crunch it triggered -- put a spanner into the works of many deal-making companies. The tightening of the commercial paper marker, for instance, has made it difficult for many corporations to raise short-term capital.
What's more, the unexpected demise of Enron Corp. late last year triggered a national outcry over corporate accounting practices. Many observers insist that aggressive corporate bookkeeping -- often rewarded by investors in the go-go days of the late Nineties -- no longer plays in the post-Enron era. "The days of pushing the envelope are over," says Meyer. "Tyco realized that it just wasn't going to be able to make its numbers without some massaging."
One Tyco watcher goes as far as to say that the company's auditor, PricewaterhouseCoopers, may have suggested the spin-off strategy to Tyco management. A Tyco spokesman denies the assertion. "That is 100 percent false," says Brian McGee, executive vice president at the company. "There was absolutely no pressure or even a suggestion of the sort from our auditors." CEO Kozlowski insists that the company's restructuring plan had been in the works six months before the Jan. 22 announcement. He says the break-up is necessary to unlock shareholder value by as much as 50 percent, help the company pay down more than $11 billion in debt, and allow for more transparent financial reporting.
But given heightened investor sensitivity to earnings guidance -- and revenue restatements, it's not inconceivable that an auditor would advise a client to take a more conservative tack in its bookkeeping (a spokesman at PricewaterhouseCoopers declined to comment for this article, citing client confidentiality). If Tyco senior executives have decided to take a less aggressive approach in their accounting, the move could make it harder for them to meet the company's ambitious revenue targets. Such a likelihood might explain the company's Jan. 22 announcement.
Indeed, Many Tyco critics have long argued that the company manages its earnings by stretching the limits of generally accepted principles of accounting (GAAP). For one thing, these critics maintain that Tyco's finance department uses so-called "purchase accounting liabilities" to keep acquisition-related expenses (severance payments, facility closures, administrative costs, and the like) off the company's income statement.
In accordance with FASB's Emerging Issues Task Force directives, Tyco accrues for purchase accounting liabilities at the time of acquisition, effectively increasing the purchase price and adding the same amount to goodwill. When it incurs these expenses, Tyco credits cash and debits the purchase accounting liabilities, thus keeping expenses off the company's income statement.
Reader Comments» Post a comment