On a summery afternoon in early May, Tyco International (TYC
) chief executive L. Dennis Kozlowski strode into the New Jersey board room of his latest prey, CIT Group Inc. (CIT
), the nation's largest independent commercial finance company. Technically, CIT was not yet in Kozlowski's grip: Tyco's $9.2 billion offer wouldn't come up for a shareholder vote for another three weeks, and the deal wasn't expected to close until June 1. But as he huddled with CIT CEO Albert R. Gamper Jr., Kozlowski made clear he was already impatient for Gamper to get with the Tyco program. "It is crucial that we push growth coming out of the box," Kozlowski said, pressing for dramatic action that CIT could take as soon as the deal closed. "I want people to say, `Wow, this is a real step up."'
Kozlowski stunned investors and executives with his bid for CIT--an outfit that, ironically, once rejected him for a low-level auditing job. Skeptics question what an industrial conglomerate specializing in such mundane products as valves and garbage bags can possibly bring to the competitive world of commercial finance. It's a field that has proven to be a veritable graveyard for expansion-minded CEOs. "Kozlowski is putting his toe [into an area] that ostensibly he doesn't know anything about," says former AlliedSignal CEO Larry Bossidy. And he's doing it at a time when even Gamper warns that a softening economy is producing "a credit world that is tougher today than a year ago." But Kozlowski is undaunted. He predicts that under Tyco, CIT will double in size within a few years and achieve earnings growth of 15% a year. Says Kozlowski: "I think CIT will be one of the best deals we've ever done."
Coming from most CEOs, such talk would be dismissed as hubris or worse. But Kozlowski has made a career of confounding the critics. Since taking the reigns at Tyco in mid-1992, the son of a Newark detective has become one of the most aggressive CEOs in the land--spending some $53 billion on 120 major acquisitions, most of which have been folded seamlessly into Tyco's hyperefficient operations. That plus a willingness to test the limits of acceptable accounting and tax strategies have transformed the $3 billion also-ran outfit he inherited into a colossus that will ring up $38.5 billion in sales in the fiscal year ending Sept. 30, including a quarter of CIT's sales. With earnings rising even faster, Tyco recently vaulted to the top of the BusinessWeek 50 ranking of top-performing companies.
Kozlowski, who relaxes by piloting his 130-foot J-class sloop, Endeavour, in international regattas, so far has managed to sail smoothly through the economic slowdown. In the first quarter, the worst in a decade for U.S. corporate profits, Tyco's earnings soared 33% on a 26% jump in sales. As a result, Tyco, with its decidedly unglamorous product lineup, is now worth roughly $93 billion, more than Ford Motor Co. and General Motors Corp. combined. And the scary thing is, at 54, Kozlowski seems to be just getting started. "Dennis has more fire in his belly today than the day he became CEO," says Joshua M. Berman, Tyco's former outside counsel and a board member since 1967.
Kozlowski's ambitions stretch far beyond his audacious five-year plan of adding another $50 billion of acquisitions and reaching $100 billion in sales while maintaining 25%-plus annual earnings growth. He aspires to nothing less than guru status, the sort of peer recognition that would once and for all put behind him an army of short-sellers and other critics. He isn't modest in stating his goals. "Hopefully, we can become the next General Electric," Kozlowski muses in his Exeter (N.H.) office as his helicopter waits outside to whisk him to yet another dealmaking session. He wants to be remembered as "some combination of what Jack Welch put together at GE...and Warren Buffett's very practical ideas on how you go about creating return for shareholders."
THE SIZE BARRIER. To attain that summit, Kozlowski must surmount some formidable challenges. First is his business model, which anticipates ever more acquisitions. "To keep up this tremendous growth, they'll have to do bigger and bigger deals that entail bigger and bigger risks," warns Harvard Business School Professor Robert Kennedy, who has written a case study of the unusual home-grown culture behind Tyco's success. Looming over Kozlowski's strategy is the simple fact that sooner or later, virtually every U.S. conglomerate that's aspired to these heights has imploded. "ITT and AT&T are great exemplars of companies who've been forced to break up," cautions Michael Useem, professor of management at Wharton. "GE is the exception to the rule that conglomerates in the American market have not worked well."
That's one reason Tyco is such a fat target for skeptics. But Kozlowski also faces more pointed questions about Tyco's financial credibility. As 1999 ended, he was on the ropes over accusations that he had used accounting tricks to pump up Tyco's results. The charges, first leveled by short-seller and accounting analyst David W. Tice of David W. Tice & Associates, cut Tyco's stock in half and prompted a Securities & Exchange Commission inquiry. The SEC ended its investigation last July without taking any action, but the lingering taint is one reason Tyco's stock garners such a low price-earnings multiple. At $53 a share, it's selling at just 18 times this year's expected earnings. That compares with GE's p-e of 38, and is only 0.8 times Tyco's expected five-year growth rate--half the 1.7 ratio for the much slower-growing Standard & Poor's 500-stock index. "That is very unusual," says Charles L. Hill, director of research at First Call Corp., "and it raises the question of why?" Kozlowski's answer: "It will take more quarters of pounding out good earnings and cash flow" to convince investors to pay up for Tyco.
Tyco's obscurity doesn't help the stock price either. Despite its dramatic growth, it remains less well known than companies like Boeing, Hewlett-Packard, or Merrill Lynch, all of which have lower market capitalizations. Even Gamper concedes that while he had been expecting takeover overtures for CIT, "never in my wildest dreams had I thought of the name Tyco." Once Kozlowski approached him, Gamper asked KPMG and Credit Suisse First Boston to give Tyco a thorough review. Gamper says he came away impressed--and he isn't alone. "He's made dramatic progress in building a major industrial conglomerate," says Bossidy. That's high praise, coming from a man whose 1998 bid for AMP Inc., the world's leading maker of electronic components, was trumped by Kozlowski's $11.3 billion offer. "He is aggressive," Bossidy says. "But so what? I don't find that offensive."
Recently, Kozlowski also has sought to nurture an image as a leader among peers. He is chairman of the M&A Group, a recently formed club of about 60 CEOs that sees itself as a more useful alternative to such traditional CEO gatherings as the Business Roundtable. Says Robert Monks, an institutional-shareholder activist who served on the Tyco board: "I don't think there's a better CEO in America."
Kozlowski's signature contribution to management theory is his highly systematized method for identifying, assimilating, and wringing growth out of acquisition targets. He relies on a hand-picked team of six in-house M&A specialists that moves with blinding speed and uses outside investment banks sparingly. "Investment bankers will tell you it takes six months to do a deal; we often get them done in two weeks," says Irving Gutin, a senior vice-president who until recently headed the team. Tyco screens more than 1,000 potential targets a year, most of which filter up from its operations executives. It doesn't do hostile takeovers, since that would keep it from getting a thorough look inside. Once it has a confidentiality agreement with the target company's CEO, Tyco's team pores over the books and tours operations, looking closely at what--and who--is worth keeping. That almost always means lopping off the incumbent CEO. (Gamper would be an exception: He's been offered a three-year contract.) Only deals that add immediately to Tyco's bottom line go on to completion. Says Gutin: "Dennis doesn't want to buy dreams."
NOT A GAME. Typical is his 1994 purchase of Kendall, a maker of low-tech medical supplies. Kozlowski stunned the industry by offering $1 billion for the financially troubled company. "Everyone was asking, `Who is Tyco?"' recalls Richard J. Meelia, a Kendall executive who has since risen to president of Tyco Healthcare Group. "The first response was, the toy company"--that is, Tyco Toys, maker of Tickle Me Elmo.
No wonder. At the time, Tyco's minuscule medical business had perhaps $50 million in sales, vs. $600 million for Kendall. Kendall execs were even more aghast when Kozlowski said he wanted to build Kendall to $3 billion in three years. It was an insane target for an old-line company that had managed to buy only two companies with $50 million in sales in two years. But after gobbling up such medical-products giants as U.S. Surgical, Sherwood, and Mallinckrodt, Tyco Healthcare will ring up $7 billion in sales this year, predicts Merrill Lynch & Co. analyst Phua Young. It is now compared with the likes of Johnson & Johnson. "They've done a terrific job of consolidating certain segments of the medical market," says John Strong, CEO of Consorta Inc., a hospital purchasing cooperative.
At a time when at least half of all U.S. mergers founder, one reason Tyco so rarely stumbles is that it develops a detailed game plan for integrating each acquisition before the deal even closes. With AMP, that plan was hammered out in a secret meeting in Germany with Jürgen W. Gromer, then AMP's head of sales, whom Kozlowski had tapped to take charge. CEO Robert Ripp, who left AMP once the deal closed, wasn't invited. In the first two days after the contracts were signed in April, 1999, Gromer reorganized the struggling company, firing 60 of 66 vice-presidents and unveiling plans to cut $1 billion in costs in 18 months. Now highly profitable, AMP has been gobbling up weaker players such as Lucent Power Systems. "They've done quite a job turning around AMP," marvels Fred Krehbiel, co-chairman and co-CEO of Molex Inc., Tyco's largest competitor in connectors.
With CIT, Kozlowski has once again climbed onto the high wire. If it turns out the operation doesn't smoothly fit into Tyco's industrial mix, Kozlowski's growth machine could sputter. Tyco is just the latest of a long line of industrial companies--from Westinghouse Electric to AT&T (T
), ITT (ITT
), and Textron (TXT
)--that have been lured into costly forays in financial services. "You just need to look back in history and see how all those other companies did," warns one senior financial-services industry executive. "Most have failed because they took on too much risk...and didn't understand the business."
Yet as Tyco's board mulled CIT, that sorry history was eclipsed by one stunning exception: General Electric Capital Services Inc. Kozlowski says the Tyco board had been looking to add a finance arm for nearly four years. "But there had always been a fatal flaw" with possible targets, he says. Then late last year, director Frank E. Walsh Jr. suggested that CIT's Gamper--whom he's long known--might be ready to deal. In December, Walsh arranged a private lunch to introduce the two CEOs.
DOWN, NOT OUT. Like many of Tyco's targets, CIT was a fundamentally solid company going through a rocky period. Under Gamper, who's been in charge since 1987, it built a reputation as a blue-chip lender financing everything from the rag trade to planes, trains, and the big earth-moving equipment known as yellow iron. With $54 billion in assets, it ranks behind only GE Capital and Citigroup Inc. in commercial finance. It's also the largest U.S. factor, or purchaser of receivables from textile and apparel makers, which means it is knee-deep in a slow-growth business. But in 1999, CIT busted out of its conservative mold by acquiring an aggressive Canadian upstart, Newcourt Credit Group of Toronto. Overnight, CIT doubled in size but was soon choking on unfamiliar businesses such as international lending and tech financing. CIT's shares fell to a low of $13 last fall, half the price at which it had gone public in 1997. Little wonder Gamper leapt at Tyco's offer of $35 a share.
Kozlowski has a three-pronged plan to Tyco-ize CIT. For starters, he's pressing Gamper to swiftly sell or liquidate more than $4 billion in underperforming loans. Meanwhile, CIT, sidelined since it bought Newcourt, will aggressively hunt for acquisitions in its still-fragmented industry. And he's appointed J. Brad McGee--a former Marine and one of his most trusted lieutenants--to help CIT finance Tyco's customers. After some two dozen meetings between CIT and Tyco business units, McGee argues CIT could finance everything from $75 million wastewater treatment plants built by Tyco to monthly lease plans for customers of its ADT home-security unit. In all, he figures such financing could boost Tyco's sales by $4 billion to $6 billion a year.
But in the conservative world of commercial lending, such a go-go approach could backfire. True, the auto industry has long financed its customers. But other captive finance companies have "often [been] a recipe for disaster," warns banking consultant Bert Ely of Ely & Co. in Alexandria, Va., especially if they become a lender of last resort. Loans to customers turbo-charged growth during boom times for Lucent Technologies Inc., for instance, but burned it when the slowdown hit. Ely notes that GE Capital finances just 2% of its parent's industrial sales: "GE Capital has done as well as it has because it's had a much higher degree of financial independence."
Kozlowski says he's well aware of the dangers and vows to maintain CIT's A+ rating from Standard & Poor's. "I give him the benefit of the doubt, based on his track record," says Keith DeVore, an analyst at American Express Financial Advisers Inc., one of Tyco's largest shareholders. But Kozlowski will have to tread carefully. "If they stick to their knitting and let Gamper run it, they'll be fine," says a senior finance executive who has competed with CIT for years. "But Kozlowski doesn't seem to be a very patient guy."
That's an understatement. The CIT gamble comes hot on the heels of Kozlowski's biggest crisis, the controversy over Tyco's liberal use of merger-related charges. In an October, 1999, report, analyst Tice suggested Tyco might be creating "cookie jar" reserves that could be used to inflate profits. Although Kozlowski vehemently denied any wrongdoing, proving that to investors was almost impossible because Tyco's financial statements are so devilishly complex. Says Harvard's Kennedy: "I think Tyco got an incredibly bad rap but then handled it about as well as they could." By the time the SEC showed up in December, 1999, Kozlowski knew that a regulatory review might be his best option. Tyco was clearly a top priority for then-SEC Chairman Arthur Levitt Jr., who was crusading against accounting abuses. But last July, after seven months of digging, the SEC dropped its investigation without taking any action beyond its earlier demand that Tyco change the timing of certain charges. SEC officials don't dispute Tyco's statement that the matter is closed.
Kozlowski's nonstop dealmaking has also raised questions about how dependent Tyco's growth is on acquisitions. But he maintains that internal growth alone is increasing earnings by better than 20% a year. The businesses may not be exciting, but they're nearly all in fragmented fields with solid growth. Revenues in the health care and electronics industries are growing around 8% annually; in security, it's 11% to 12%. And though Tyco ranks first or second in virtually all of its businesses, it still has enormous room to expand.
Tyco managers have become ruthless at stealing market share. Take plastic garbage bags. When Tyco acquired the maker of Ruffies in 1996, it was a lethargic No. 3 brand, earning minimal margins of about 5%. Tyco moved swiftly to cut costs, boost customer service, and introduce new products, such as a baking soda bag to limit odors. The result? Ruffies is now No. 1, having vaulted past Glad and Hefty Bags, and has tripled margins to 16%.
TAX MASTER. Kozlowski is just as aggressive in pursuing financial advantages. When Tyco snapped up Bermuda-based ADT, he structured the deal as a reverse merger, moving Tyco's headquarters to an island haven where the corporate tax rate is zero. The deal initially ignited a firestorm among shareholders, who had to pay capital-gains taxes on the transaction. But it has become a gold mine for the company. Because of its Bermuda base, Tyco no longer pays U.S. taxes on its growing overseas income. Tyco also has set up a Luxembourg-based subsidiary to finance most of Tyco's debt. In a process known as income-stripping, the Luxembourg subsidiary makes loans to Tyco units in the U.S. and elsewhere, which then deduct the interest payments from their taxable income. Together, these ploys sliced Tyco's effective tax rate to 25% last year, from 36% the year before the ADT deal. That saved $500 million-plus in taxes last year alone, or more than Whirlpool Corp. (WHR
) earned. "There is no question about the legality of this," says Louis Feldman, an expert on cross-border taxation at Credit Suisse First Boston, though he says Tyco is probably the largest outfit to go offshore.
Legal, it may be, but it doesn't look very good for a guy who aspires to the Jack Welch mantle. "Tyco is the equivalent of the Benedict Arnold billionaires who have moved offshore," fumes Bill Allison, senior editor at the Washington-based Center for Public Integrity. "They're turning their backs on the American people." Tyco says that it pays far more in U.S. taxes today than before its merger with ADT.
As Tyco's low p-e proves, many skeptics still doubt that Kozlowski, even with such gimmicks, can keep growing at a breakneck pace. "There will be a stumble, and it's coming soon," predicts analyst Tice. He and others are alarmed that Tyco's debt soared to $18.3 billion on Mar. 31, up from less than $1 billion in 1996, pushing its debt-to-total-capital ratio to 47%, from 25%. "What concerns me is the absolute levels of debt and the possibility there will be poor integration of a large acquisition," says George A. Meyers, an analyst at Moody's Investors Service. But he says that is offset by rising free cash flow, expected to top $4 billion this year. The mostly stock-financed purchase of CIT will actually reduce Tyco's leverage. As a result, both Moody's and Standard & Poor's have Tyco on credit watch for an upgrade.
Kozlowski has been in a hurry ever since growing up in a six-family apartment building in a blue-collar, ethnic neighborhood in Newark's inner city. Since his father, a police detective, couldn't afford to send him to college, Kozlowski lived at home and worked 30 hours a week to pay the tuition at Seton Hall University. His main source of income: playing guitar in a band whose gigs ranged from Polish weddings to stints on the Jersey Shore. While majoring in accounting, Kozlowski found time to take flying lessons and now logs 250 hours a year piloting Tyco's helicopter and his personal plane.
After graduating in 1968, Kozlowski headed to New York as an auditor in the M&A department of SCM Corp., a conglomerate snapping up everything in sight. Itching for more responsibility, he jumped to more senior finance jobs at chemicals company Cabot Corp. and office-products marketer Nashua Corp. Kozlowski came away convinced that he could do a far better job. He got his chance in 1975 when a recruiter lured the 28-year-old to a meeting with Joe Gaziano, CEO of Tyco, then a diversified manufacturer with just $15 million in sales. But Gaziano, a bear of a man who shaved his head daily, told Kozlowski he wanted to build it to $1 billion through purchases. Kozlowski's job: cleaning up Tyco's troubled acquisitions. That included Grinnell, a money-losing fire-protection company that Tyco bought from ITT. Grinnell epitomized ITT's bureaucratic culture. Field managers spent one week a month in meetings at headquarters. In his first week, Kozlowski scrapped the meetings and shrank the corporate staff to 30 from 200.
It was the precursor to what today may qualify as the leanest operation in Corporate America. Kozlowski oversees his 205,000-employee empire with a corporate staff of just 140. He still operates out of the modest, two-story wooden building in Exeter, N.H., that Tyco built when it had $100 million in sales, even though the company is officially based in Bermuda. "If you build an elaborate headquarters, people are tempted to spend a lot of time there and it becomes really unproductive," Kozlowski reasons. And perks such as country-club memberships and executive dining rooms are taboo. Kozlowski himself keeps a low social profile. His primary residence remains a 3,500-square-foot house on the coast in Rye, N.H., that he bought 15 years ago, although he now keeps a summer home in Nantucket and a place in Boca Raton, Fla.
In Tyco's entrepreneurial culture, managers have enormous autonomy. Kozlowski relies on a computerized reporting system that gives him a detailed snapshot of how each business is performing. It's updated several times a week with information including sales, profit margins, and order backlog sliced by geography and product area. If he spots a problem, Kozlowski invariably uses the phone rather than e-mail. "If you're on forecast, there's no need to talk with me," he tells managers. "But if there is any bad news at all, find me wherever I am, so we can figure out what actions to take." He doesn't have a quick temper, but those who don't deliver don't last.
Kozlowski seeks out managers cast from the same mold as himself: someone who is "smart, poor, and wants to be rich." He keeps them motivated with a demanding compensation plan. Tyco executives don't receive bonuses unless they come close to meeting the aggressive earnings targets set by Kozlowski: typically about 15%. If they hit the target, they'll get a bonus at least equal to their salary. And if they blow past the target, the sky's the limit. Last year, Gromer received a base salary of $625,000. But after he nearly tripled Tyco Electronics' operating income on 62% higher sales, he pocketed a $13 million bonus. Kozlowski, with a $1.35 million salary, took home $125.3 million in total compensation--more than GE's Welch.
Kozlowski's adept handling of Tyco's toughest assignments made him the obvious replacement when CEO John F. Fort retired in 1992. With Tyco reeling from a downturn in spending on valves and other construction equipment, he set out to expand into recession-resistant businesses. That was the rationale behind the Kendall deal, and his $5.6 billion 1997 bid for ADT Ltd., which instantly made Tyco the world leader in home security.
CRUNCH TIME. Now, with the economy slowing again, that strategy is being put to its first real test. Tyco's largest business, the $13 billion electronics unit, is suffering a spectacular slowdown. Kozlowski says electronic sales will be flat on a sequential basis in the second and third quarters. But sales growth is holding up in Tyco's other units, he says. Jack L. Kelly, an analyst at Goldman, Sachs & Co., figures fiscal 2001 earnings will rise 26% on a per-share basis. That's an achievement these days, but down from last year's 42% rate. And not all of Kozlowski's bets are clear winners. Tyco entered the undersea cable business in 1997 when it bought an AT&T unit. TyCom Ltd. has since more than doubled sales, to $2.5 billion last year, but a $5 billion investment in its own global cable network could drag down future results. "There is a glut of undersea capacity," warns Qwest Communications International Inc. CEO Joseph P. Nacchio. TyCom's stock, sold publicly last year to help finance the network, is 64% off its high.
Even many of Kozlowski's fans concede people might feel more comfortable if he would just slow down so they could get a better handle on his fast-evolving empire. But after nearly a decade at the top, Kozlowski clearly relishes a pace that keeps him on the road 70% of the time. Kozlowski admits the pace helped trigger his divorce five years ago. But he still has energy to ski and fly on weekends and during the three weeks of vacation he takes each year. His favorite escape, though, is Endeavour. With more than 9,000 square feet of sail and a 63-foot boom, the vessel invariably draws attention as it pulls into ports from Nantucket to the Caribbean.
And there are always more deals on the horizon. Even as he was scrambling to map out his plan for CIT, he confided: "I've spent the last couple of days looking at three or four different opportunities in each of our business segments." There's no doubt he likes this market. "Things are a lot less expensive than they were a year ago," he says. So when Kozlowski is asked if it's time to slow down, he just laughs, and says: "I'm just starting to figure out this job."
Corrections and Clarifications
In "The most aggressive CEO" (Cover Story, May 28), J. Brad McGee, executive vice-president of Tyco International, was misidentified as a former U.S. Marine. He is a former U.S. Navy officer.
By William C. Symonds
With Pamela L. Moore in Greenwich, Conn.
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