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Tyco Breaks Out of Its Mold


In recent weeks, Dennis Kozlowski, the most aggressive acquirer in Corporate America, has been on the prowl. Apparently he's after a new kind of game. On Mar. 13, the CEO of industrial conglomerate Tyco International Ltd. (TYC) announced his riskiest deal yet. Seeking to emulate the highly successful relationship General Electric Co. (GE) has with GE Capital Services Inc., he plans to buy the commercial lender CIT Group Inc. (CIT) in a mostly stock deal initially valued at $9.2 billion.

Until now, Kozlowski's dealmaking has been confined to industrial businesses ranging from electronics to medical supplies to valves. With CIT, he is venturing into commercial finance--at the outset of what could be a prolonged slump. What's more, he's offering a 54% premium for a company that has performed poorly since going public in 1998. So it's little wonder that investors trimmed $5--11%--off Tyco's shares after the deal was announced.

Kozlowski dismisses the skeptics. "You have to look beyond this week to see this deal makes a lot of sense," he says. There's no denying his reputation for savvy acquisitions. Since taking the reins in 1992, dealmaking has helped build Tyco's market cap from $2 billion to nearly $80 billion.

With CIT, he argues that Tyco--like GE--will now be able to offer customers the financing they need to buy everything from waste-water treatment plants to home-security systems. He figures Tyco can provide $4 billion to $6 billion in financing to its customers and that those deals will soon help drive Tyco to $50 billion-plus in annual revenues, a 32% jump from the $38 billion analysts expect in 2001.

But the deal carries as many potential dangers as benefits. Tyco has no in-house expertise in commercial finance, so it will have to lean on CIT to provide the necessary management discipline. Kozlowski has already gotten CIT's veteran CEO, Albert R. Gamper Jr., to agree to stay on for three years. Gamper says the rest of his team will remain.

Judging from past performance, however, that may be cold comfort to investors. CIT has struggled since its own last big acquisition, the purchase of lender Newcourt Credit Group Inc. in 1999. "They missed their [earnings] numbers, and we became concerned that credit quality would go downhill," says James McKelvey, an analyst at John Hancock Financial Services Inc., which sold its CIT stake last year. Moreover, in December, CIT warned that earnings growth would slow to 8% this year, short of the 10% to 12% Wall Street expected. Concedes Gamper: "It has been tough because the environment for financial companies has been difficult."

UNDER PRESSURE. Indeed, the slowing economy raises questions about the timing of Tyco's move. "Finance companies that have been stretching for growth are going to be under pressure from growing competition," warns Lisa J. Archinow, a credit analyst at Standard & Poor's Corp. Debt analyst Carol A. Levenson of the corporate-bond research firm Gimme Credit thinks Tyco could have accomplished the same thing by affiliating with a finance company rather than buying one.

Kozlowski is counting on big synergies to make the deal pay off. Will they materialize? Despite comparisons with the relationship between GE's industrial units and GE Capital, the latter finances just 2% of GE projects. And having a financing arm carries risks. David B. Sochol, an analyst at Legg Mason Inc., says there's a temptation "to reduce underwriting standards just to close the deal with clients." Take a look at Lucent Technologies (LU), Intel (INTC), or Newcourt--all have been burned by customer lending. In the past, such problems have led companies from AT&T to Westinghouse Electric to dump finance units.

What about Kozlowski's quest to replicate the success of GE Capital? That company has a huge competitive advantage because of its parent's stellar AAA credit rating. Tyco rates in the single A's. S&P has it on watch for an upgrade, but Moody's Investors Service has CIT on review for a possible downgrade. So will the deal succeed? "It could happen, but it's not a slam dunk," cautions one CIT analyst. One thing is sure: CIT will be Dennis Kozlowski's biggest test yet. By William C. Symonds in Boston, with Pamela L. Moore and Heather Timmons in New York


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