Strategy & Competition February 11, 2010, 5:00PM EST

Ed Breen Sets a New Course for Tyco

With a $2 billion acquisition, it's looking to do some deals again. Will that be enough to make a "wartime general" stick around?

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Last fall, Edward D. Breen, the chief executive of Tyco International (TYC), played the corporate chieftain version of Deal or No Deal. General Electric (GE) was selling its security division, and Tyco was among the likely bidders. The acquisition would have been Tyco's first big one since 2002, when the company nearly collapsed amid charges of executive fraud. Some investors worried that GE's eclectic mix of equipment-oriented assets wouldn't be a great fit for Tyco's service-focused business. "It would have been a stretch," says Deane M. Dray, an analyst at FBR Capital Markets (FBCM). Breen, 54, opted for no deal. When United Technologies (UTX) announced on Nov. 12 that it would buy GE Security for $1.8 billion, investors sent Tyco's stock up 3%.

Breen, however, was itching to buy a company. On Jan. 18, Tyco announced it was acquiring Brink's Home Security (CFL) (now operating as Broadview Security (CFL)) for $2 billion. One might have expected investors to flee on the news; instead, they cheered. Here Tyco was buying a debt-free company that could be plugged neatly into its business. Whereas the stocks of most acquiring companies fall after a merger announcement, Tyco's rose 2%. The lesson: Breen could buy, but he had to buy smart.

Eight years into one of the biggest corporate cleanup efforts in history, investors are still scrutinizing Tyco's every move. Breen has replaced the board, paid down debt, settled a huge shareholder suit, and broken the $41 billion-a-year conglomerate into three pieces. But for all of his turnaround cred, he doesn't yet enjoy the latitude given to other CEOs to pursue deals. "Tyco's history means it will always face a higher bar on acquisitions," says analyst Steven E. Winoker of Sanford C. Bernstein (AB).

That may complicate things for Breen, who is beginning to view dealmaking as essential to Tyco's long-term growth strategy. "We're now at the point where we can supplement our growth with acquisitions," he says. "We're in three global businesses, and we're the world leader, but not by a lot. We have an opportunity to become a much larger player."

To get there, Breen has worked to rid Tyco of the taint of the Dennis Kozlowski era. Under Kozlowski, Tyco became a symbol of runaway corporate excess, from the $2.1 million birthday party for his wife in Sardinia—complete with an ice sculpture of Michelangelo's David urinating vodka—to Kozlowski's practically deal-a-day buying binge that created a $36 billion conglomerate with close to $30 billion in debt. Years later, Tyco can't seem to erase those memories. "There are still portfolio managers in some places who will not invest in Tyco because of the hurting they took," says Edward C. Arditte, Tyco's senior vice-president for strategy and investor relations. That's a big reason why Tyco still trades at a discount to rivals: Its stock fetches 13.5 times estimated 2010 earnings, compared with 16.8 for its peers, according to Bloomberg data.

Yet Breen and Kozlowski couldn't be more different. There's nothing inside Tyco's new Princeton (N.J.) operational headquarters to suggest that its CEO is celebrating his success. Breen can be seen eating in the corporate cafeteria or pouring himself coffee in a small pantry where someone has taped a sheet promoting an employee weight-loss challenge. He doesn't even have a parking space; often he has to walk across the lot. "The thing that offends me most is arrogance," says director R.