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Did Tyco Deep-Six Tycom Investors?


What would you call me if I sold you something for $32 and later took it back for $15--even as I suggested it will be worth much more soon? Once you stopped cursing, you might call me opportunistic, sly, or just plain smart.

All those adjectives fit Dennis Kozlowski, CEO of Tyco International (TYC). Deal by deal, Kozlowski has built Tyco into a $36 billion conglomerate that proved itself swift, profitable, and rewarding enough to shareholders to take first place in this year's BusinessWeek 50, our annual ranking of corporate performance. Yet look at what Kozlowski is up to with TyCom (TCM), Tyco's unit that builds and services undersea telecom cables. If you're an investor in TyCom, you'll want to throw in the curse words, too.

Here's what I mean. In July, 2000, Tyco raised $2.1 billion by selling 14% of TyCom in an initial public offering led by Goldman Sachs. The telecom biz had not yet begun sinking to its current suboceanic depths, so the stock sold well. From an IPO price of $32, it topped $46 in a few weeks (chart) on hope for sales of bandwidth on the global fiber-optic network TyCom is building.

SUSPICIOUS. That was as good as it got for TyCom's minority shareholders. By March, with telecom shares tanking, the stock dipped below $10. After the terrorist attacks, TyCom nearly hit $7. That's when Kozlowski struck. On Oct. 4, Tyco bid to buy out TyCom's public shareholders for $14 in Tyco stock. Two weeks later, after haggling for a bit more stock, TyCom's three independent directors agreed to the deal, now valued at $15.42 per share.

What's wrong here? First, it's impossible to ignore the suspicious price and volume action in TyCom shares before the bid was announced (chart). On Oct. 3, the day before Tyco made its bid, TyCom shares jumped 22% on higher volume, even as the broad market rose just 2%. The New York Stock Exchange's surveillance unit would not say whether it suspects illegal insider trading. A Tyco spokeswoman told me the company will cooperate in any investigation.

Dismaying as that fishy trading may be, the buyout smells bad on its own terms. TyCom in the June quarter repurchased one in five of its publicly held shares for $218 million--an average of $14.22 a share. That was in cash, not stock, at prices it deemed a bargain. And TyCom's independent directors, who are supposed to look out for public investors' interests, negotiated just two weeks to get TyCom shareholders 4.5% more Tyco shares. That still makes the deal worth less than half the $32 a share Tyco took at TyCom's IPO just 15 months ago. TyCom directors did not respond to my calls for comment.

Given today's mess in telecom, isn't that enough? Not if you heard how Kozlowski described TyCom in a conference call with analysts the very day the independent directors signed off on the buyout. About telecom's woes, Kozlowski said: "We see all of these issues as temporary and expect the TyCom Global Network to generate excellent returns over time." He added: "We remain very optimistic about its future.We are the last man standing."

He will likely prove right. One TyCom rival, 360networks (TSIXQ), is now in bankruptcy, and another, Global Crossing (GX), is weighed down by $6 billion in debt and is profitless. TyCom's debt comes to $653 million, nearly all of it owed to Tyco and not due before 2010. TyCom contributed a profit of $415 million on revenue of $1.9 billion to Tyco in the fiscal year ended Sept. 30. Tyco expects a similar performance in the current fiscal year.

Naturally, some shareholders are suing to kill the deal, set to close in early 2002. Among other wrongs, they charge Tyco with cutting them out "to capture for itself TyCom's future potential without paying an adequate or fair price to the company's public shareholders." A spokeswoman told me Tyco never comments on pending litigation. How it will turn out, I don't know, but do me a favor: If you ever catch me negotiating opposite Dennis Kozlowski, call me dumb. By Robert Barker


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