Tyco Cancels Plan to Split Into 4 Firms
Tyco International Ltd., a once-thriving conglomerate now fighting to right itself, Thursday abandoned its controversial plan to bust the company apart and instead will lay off 7,100 people and close 24 facilities, mainly in its electronics and telecommunications units.
Tyco said it does plan to unload one division, its big financial services arm CIT Group, through an initial public offering of CIT’s stock. But Tyco’s stock--whose sluggish performance was a key impetus behind the original breakup plan--plunged an additional 20%, or $5.15, to close at $20.75 on the New York Stock Exchange, as investors snubbed the revised strategy and Tyco also warned that its future earnings would trail expectations.
“It’s difficult for investors to have a lot of confidence in Tyco because they keep changing the plan,” said Andy Palmer, who holds Tyco bonds in the $2 billion of fixed-income assets he helps manage at ASB Capital Management Inc.
There were other announcements that underlined the turmoil at the Bermuda-based concern, which is managed from Exeter, N.H. Among them:
* Tyco posted a loss of $1.9 billion for its fiscal second quarter ended March 31 because of $3.3 billion in pretax charges. The biggest charge, $2.3 billion, reflected a write-down in the value of its undersea telecommunications network.
* Tyco also lowered its earnings forecast for the rest of its fiscal year, to $2.60 to $2.70 a diluted share, before various one-time charges. Analysts had expected $3.14 a share, according to Thomson Financial/First Call.
* In a blunt letter to stockholders, Tyco Chairman L. Dennis Kozlowski said that the breakup plan announced Jan. 22 was a “mistake” and that he is “aware that Tyco’s management has let you down.”
But he also decried “the wave of rumors and misleading press reports” of Tyco’s accounting practices and other problems, saying they damaged Tyco’s business.
* Tyco said it hopes to raise up to $7.2 billion from CIT’s public offering, which would rank among the largest U.S. IPOs. But that’s a 22% haircut from the $9.2billion Tyco paid to buy CIT just a year ago.
* Kozlowski said he and other senior managers will not receive bonuses this year. Over the last three years, Kozlowski received more than $330 million in total compensation, according to Standard & Poor’s Corp.
Three of the plants to be closed are in California, but Tyco spokesman Brad McGee declined to immediately identify them, saying the plants had yet to be notified by headquarters. The 7,100 jobs being cut represent 3% of Tyco’s 242,000 employees.
Tyco, with revenue of $36 billion in fiscal 2001, was built from a spree of acquisitions during the 1990s. Besides its interests in financial services, telecommunications and electronics, it’s a leading maker of fire alarms, security systems, medical products, valves and pipes, and plastics and adhesives.
Though hardly sexy, these lines made Tyco a hot company in the latter half of the 1990s, and its stock rose nearly sevenfold from ’95 through ’98 alone. Tyco also patterned itself after another hugely successful conglomerate, General Electric Co.
But Tyco’s luster started to tarnish in late 1999, when critics began questioning its accounting practices and its stock fell sharply. The questions grew as the Enron/Arthur Andersen debacle unfolded and, although Tyco and Kozlowski have steadfastly defended the company’s accounting, Tyco’s stock continued to lag.
Then Tyco stunned Wall Street in January with its plan to abandon the GE model and instead break into four public companies, along with plans to sell its plastics and adhesives group. The rationale: The quartet’s stock prices together would trade higher than Tyco’s stock alone, and the individual units would give Wall Street better “transparency” about their financial health and accounting.
But “we came up with the wrong solution,” Kozlowski said in his letter. “In retrospect, it is now clear that we took the market by surprise ... and failed adequately to take into account the extraordinarily fragile market psychology and hostile environment that has distracted and damaged our business in recent months.”
Even before its drop Thursday, Tyco’s stock had plunged 46% since the breakup plan was announced, and now more than $53billion of investors’ wealth has vanished since the strategy was unveiled.
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Bloomberg News was used in compiling this report.
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Tyco’s Tumble
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