Past books crisis, Tyco faces uncertainty

Tricks belied true style - inconsistent, slow growth


Tyco International's chief executive, Edward D. Breen, acknowledged yesterday that without accounting manipulation, the company would not appear to be the fast-growth, high-margin conglomerate that L. Dennis Kozlowski, the former chief executive, loved to compare with General Electric.

Still, Breen proclaimed in a conference call with investors, "We're going to grow this business back for the future," now that Tyco has completed its internal investigation, which uncovered a pattern of accounting manipulation that prompted a $382 million restatement in earnings.

Tyco, though still viable, is what some skeptics always thought is was: a hodgepodge of consistently profitable but unconnected, slow-growth businesses that produced everything from electrical connectors to security systems. Breen's reiterated forecast for 2003 of $1.50 to $1.75 a share acknowledged as much.

Without a steady stream of acquisitions - and the artificially inflated earnings boost that Tyco engineered for the first couple of quarters after each deal was completed - the consistent growth that made Tyco a high-flying stock in the last couple of years is over. And there is likely to be a bumpy road ahead.

The company has forecast a cash shortage of $3.6 billion at the end of this year - more than double previous estimates - if it cannot secure new bank loans or sell assets.

Tyco's problems are more immediate if it cannot refinance nearly $6 billion in debt that is due in February, though Breen and David J. Fitzpatrick, the chief financial officer, assured investors that a deal would be reached for an unsecured credit line.

Tyco has $6.2 billion in cash it could use as a last resort, and Breen said that he hoped to raise cash by selling two or three units he termed "ancillary."

Despite worries about Tyco's debt problems, investors and analysts appeared relieved the company's internal investigation had not turned up more damaging information than what was disclosed.

"We believe that the overall results of the investigation will be viewed by the market as bullish," a Merrill Lynch analyst, John Inch, wrote in a note to clients.

Shares of Tyco rose $1.73 yesterday, or 11.3 percent, to $17.08, as investors decided that even if the business was not what it used to be, it was still trading at a significant discount.

Still, some analysts said investing in Tyco's stock was a risky bet.

"For the financial risk profile of the company to get managed back to more reasonable levels, the liability structure of this company is now in need of some intensive, expedited action that goes beyond" its most immediate debt issues, CreditSights wrote in a note to clients yesterday.

While Tyco's past accounting problems should not affect future earnings - "they have, for the most part, run their course," said David Boies, who led the internal investigation - its accounting, tax and executive pay practices continue to be investigated by the Securities and Exchange Commission, the Manhattan district attorney's office, U.S. attorneys in New Hampshire and the Internal Revenue Service.

Tyco said it still faces large penalties as a result of the investigations.

Specifically, the SEC is examining why Tyco did not turn over a volume of documents that had been requested as part of an earlier investigation in 1999. Boies said the SEC was unlikely to find new problems in those documents. But the SEC has been criticized for not uncovering any of Tyco's problems during its earlier investigation and may now seek to exact a high fine from the company, some analysts have speculated.

Of course, Tyco could receive a helpful cash infusion if it is ever able to collect the hundreds of millions of dollars that it contends in lawsuits that Kozlowski and Mark H. Swartz, its former chief financial officer, looted from the company.

At the moment, Tyco does not count its claim against the men as a receivable on its books.

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