Breakup of Tyco is scrapped as a mistake

Profit outlook is slashed

shares hit 52-week low, close at $20.75, off $5.15

April 26, 2002|By BLOOMBERG NEWS

EXETER, N.H. - Tyco International Ltd. chief executive Dennis Kozlowski canceled the breakup of the conglomerate yesterday, saying his idea was a mistake after shareholders lost $41 billion since the plan was announced.

The shares fell nearly 20 percent as the company also slashed its full-year profit forecast and wrote down the value of its Tycom undersea-telecommunications network. The largest provider of security systems and undersea fiber-optic cable will eliminate 7,100 jobs and close 24 facilities. It has recorded fiscal second-quarter costs of $3.3 billion to pay for those actions.

"They said the sum of the pieces would be worth about 50 percent more than the whole," said James Bitter, an analyst with Wilmington Trust Corp., which holds nearly 2 million Tyco shares. "The market believed that for about five hours."

Kozlowski surprised shareholders in January with the plan to break into four companies. Now he has decided to keep the plastics unit he had hoped would fetch about $3 billion in a sale and plans to sell the finance arm, CIT Group, to the public.

He proposed the four-way split, he has said, because he thought the company's value wasn't fully reflected in the stock price. The strategy was announced amid upheaval in stock markets stung by Enron Corp.'s collapse, and it exacerbated questions surrounding the clarity and validity of Tyco's acquisition accounting, investors said.

"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.

Tyco bought CIT Group in June for about $9.5 billion. Yesterday, it filed to sell all of CIT Group in a public stock sale expected to recoup $6.5 billion, though it said it's still in talks with potential buyers.

Kozlowski said the plan misjudged the "extraordinarily fragile market psychology."

"I take full responsibility and am aware that Tyco's management has let you down," Kozlowski said in a letter sent to shareholders that was included in a statement.

On a conference call with analysts, Kozlowski said the breakup is "off the table for the rest of my tenure, and I hope that to be a considerable period of time. We made the mistake once. We're not going to make it again."

Most of the jobs to be eliminated will come from the electronics division, Kozlowski said. The division was built around the company's biggest acquisition, the $11 billion, 1999 purchase of Harrisburg, Pa.-based Amp Inc.

Kozlowski agreed in January to stay with the company until he turns 62 in November 2008. As part of that agreement, Tyco granted him 800,000 restricted shares, with 100,000 shares vesting in each year until retirement.

On the New York Stock Exchange yesterday, Tyco shares traded at a 52-week low of $20.50 before closing at $20.75, down $5.15, or 19.9 percent.

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