Tyco’s Tangle of Worries, and Global Crossing’s World View

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Tyco International (TYC)

Jim: Every time I hear this outfit’s name, I think of toy trains.

Mike: So do I. But instead Tyco is in a lot of other fields, and when people on Wall Street hear its name these days, what comes to mind is Cendant Corp.

Jim: In other words, not toy trains but a train wreck.

Mike: Exactly. Cendant, of course, is a company we discussed a while back that had terrible accounting problems after it made an acquisition, which sent its stock into a nose dive. Now Tyco has run into the same mess.

Jim: First, let’s go over Tyco’s operations. This is today’s version of Teledyne and LTV of days gone by--that is, it’s built itself into a conglomerate of decidedly unsexy businesses by going on a spree of acquisitions. It’s in disposable medical supplies, fire alarms, pipes, adhesive products, electronic parts. You get the idea. And altogether they generate about $22 billion in annual sales.

Mike: Right. But though all those lines look unsexy on the surface, once you stripped off the bikini, it used to be Tyco looked pretty good as an investment. From ’95 through ‘98, Tyco’s stock rose nearly sevenfold, which of course far outpaced the rise of the general stock market.

Jim: Then the wheels came off, to mix our metaphors even more.

Mike: Right. In the second half of ‘99, the short-sellers--those icy-nerved people who bet on stocks’ going down in price--swooped in and started saying bad things about Tyco’s accounting.

Jim: Imagine--short-sellers bad-mouthing a stock.

Mike: Well, it was enough to knock the stuffing out of the stock. And a month or two later, it got even worse after the Securities and Exchange Commission said it, too, was taking an informal look at Tyco’s accounting.

Jim: So now what we have is a stock that’s tumbled more than 30% since early October, to the mid-$30s, which is only 17 times Tyco’s expected earnings per share for its fiscal year ending this September.

Mike: In the meantime, this SEC inquiry isn’t expected to be finished until April at the earliest.

Jim: And we won’t hear about its decision from the agency itself; Tyco probably will announce what, if anything, the SEC found out.

Mike: True. But we should note that Tyco itself voluntarily announced the SEC’s inquiry, and investors took that as a sign that the company has nothing to hide.

Jim: Yeah, I know. And those same bulls are saying that now is the time to buy Tyco, because its beaten-down stock is selling for such a cheap price.

Mike: And sure enough, the stock has bounced up a bit in recent weeks. So would you buy it?

Jim: I’d like to, because Tyco remains a profitable, robust enterprise. It generates lots of free cash flow, is not terribly debt-heavy and the price is cheap.

Mike: But . . . .

Jim: But I’m sorry, this accounting cloud bothers me a lot. We’ve seen it too many times where a cloud like this just never seems to dissipate, and so I’m afraid Tyco’s stock will remain under pressure until it does. So I’d avoid the stock. And as Exhibit A of my case, I offer Cendant.

Mike: Fair enough. And I’d agree with everything you just said, Jim, except for the “but.”

Jim: What? You’d buy this stock?

Mike: I agree this accounting cloud will hang around for another quarter at least. But in time I see it going away and that the SEC at worst will ask Tyco to restate its earnings going back a year or whatever.

Jim: Which could whack the stock some more.

Mike: Not really. It will be a nominal setback, and I think investors don’t see Tyco as another Cendant by a long shot. Come on: At Cendant there were serious irregularities, and I don’t think that’s the case here.

Jim: But we don’t know that yet.

Mike: Remember, the accounting fiasco at Cendant came from a company Cendant inherited through a merger. The problems showed that Cendant’s management wasn’t on the ball in terms of knowing what it was buying. At Tyco, we’re talking about whether current management has done some things that were riding too close to the line. I don’t believe they crossed it.

Jim: I get the distinction, but so what? Too many times I’ve seen these accounting snags crop up and, despite the company’s protestations of innocence, another shoe eventually drops.

Mike: Well, six months from now, the day of reckoning will probably be behind us.

Jim: Fine, and six months from now I’ll be happy to revisit whether Tyco is a buy.

Mike: But by then it might be too late, because the big profit will have passed you by.

Jim: Like a freight train in the night?

Global Crossing (GBLX)

Jim: Up next is a company called Global Crossing. Would you care to tell us, Mike, what this company does?

Mike: Sure. But let me preface my remarks by just asking, “Do you believe?”

Jim: In what?

Mike: In the new world, in the thing, the big stuff.

Jim: You’re talking about the brave new wired world. Yeah, I do. I’m a believer.

Mike: In the global.

Jim: Yeah. Sure. Global Crossing is one of those companies that is almost a cliche or parody of every tech-telecom-Internet stock you ever heard of.

Mike: All rolled into one. And also let’s not forget that if you want to visit its “headquarters” . . . .

Jim: You have to go to Bermuda, wink, wink.

Mike: Who’s opposed to a nice cruise?

Jim: Global Crossing was started only a couple of years ago by an L.A. venture capitalist by the name of Gary Winnick, and it has grown incredibly fast.

Mike: It provides long-distance calling, Internet services and other data-transmission services via a fiber-optic network that it’s created.

Jim: Right. The network involves both undersea cables and above-ground gear. Until recently, Global Crossing had sold its services mainly wholesale to big telecom carriers and the like. But recently it closed a deal whereby it paid an ungodly $10 billion for an outfit called Frontier Corp., which is a big North American provider of local and long-distance calling services. So in effect what we’ve got here now is Global Crossing stepping into the retail world of telecom.

Mike: That’s right, competing with the likes of AT&T; and MCI WorldCom.

Jim: So Global Crossing has crossed the line into its own customers’ markets by purchasing Frontier.

Mike: Look, it’s a credible competitor in a market that’s doubling every year--data services. Global Crossing also has good management. But it’s bitten off enough to chew so that, sure, there are legitimate questions about whether it can pull this off. So the question is: How much do you pay for that risk?

Jim: Agreed. We should also point out that Global Crossing has two major joint ventures for providing cable and telecom networks in Asia. So clearly it’s not kidding with its name--it really does want to be a global provider of all this stuff.

Mike: And, by the way, these are joint ventures with Microsoft and Softbank, which is one of the leading information services companies in Asia and has considerable involvement in the U.S. too.

Jim: So obviously they add a lot of credence to what Global Crossing is trying to do.

Mike: Right. Now, with the caveat that this is a speculative buy, I would say it might be a good place for a flier.

Jim: Actually I’m with you on this one. The stock was a standout in ’98 but dropped sharply in mid-’99 because investors fretted about the Frontier acquisition, among other things. It recovered nicely in the second half of last year. And even as tech stocks have gotten hammered in recent days, Global Crossing held its chin up pretty well. And after a nice gain Monday, it now trades in the high $40s.

Mike: Of course, telecom companies--many of which resemble Global Crossing--have been the flavor of the month on Wall Street in recent weeks. So a lot of the big run-up in tech in December was this ravenous appetite for telecommunications companies.

Jim: Correct.

Mike: And Global Crossing had benefited from that and will continue to do so once the techs bounce back.

Jim: I agree, even though most analysts expect Global Crossing to be in the red both this year and next year. Morgan Stanley, for instance, sees this company losing about 93 cents a share this calendar year.

Mike: But that’s the red badge of honor in this business, right?

Jim: And to me, the drop in tech-stock prices recently--including Global Crossing--makes an excellent point to buy in.

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Global Crossing

Monday: $49.13

Tyco

Monday: $36.75