By William C. Symonds
For most of his time at the helm of Tyco International (TYC), CEO Dennis Kozlowski seemed to be an investor's dream come true. Over the past decade, Kozlowski appeared to transform an obscure industrial conglomerate into a powerhouse that by last December enjoyed a higher market capitalization than Ford Motor (F), General Motors (GM), and DaimlerChrysler (DCX) combined. And that success had plenty of rewards for Kozlowski, a passionate sailor. Since 2000, Tyco has sponsored a high-tech yacht to compete in the around-the-globe Volvo Ocean Race.
Now, however, Captain Kozlowski appears to have lost his bearings. As questions swirl around the company's accounting practices and the prices it paid to do deals, Kozlowski has spent the past four months wildly zigzagging in an effort to quiet the controversy and shore up Tyco's sliding stock, which is off 66% since Jan. 1. All told, some $80 billion in market value has been washed away. With his credibility gone and no clear direction in sight, it's time for Kozlowski to give up the helm.
The problem for Kozlowski and Tyco is that two successive 180-degree turns on strategy have left investors convinced that the company is rudderless. In January, he announced he would abandon the company's long-standing strategy of growth through acquisition, vowing to break up the company into four pieces. Then, on Apr. 25, after struggling for weeks to find buyers for its units, Kozlowski tacked again. Now he says he'll hold the company together after all, with the exception of a planned initial public offering for commercial-finance giant CIT Group Inc. "There have been too many reversals," says investor David Dreman, chairman of Dreman Value Management, which owns several million shares.
Moreover, Kozlowski will never be able to clear up the questions over aggressive accounting practices that have made Tyco such a lightning rod for critics. The fears that the company has used accounting sleight-of-hand to pump earnings have been accentuated by its recent failure to produce audited financial statements for its plastics division, which Kozlowski just took off the block. Without audited numbers, no buyer was willing to seal a deal. Now the skepticism is so great that only an outsider may be able to convince investors that Tyco's books are clean.
Nor is Kozlowski the guy to lead Tyco through a period of rebuilding. The acquisition-driven machine he created needs to be junked in favor of a "growth model that is internally driven," says Bear, Stearns & Co. analyst John G. Inch. Kozlowski has shown little record in doing that.
Yet rebuilding is what will be needed. Tyco's biggest challenge is sorting out the aftermath of its disastrous acquisition of CIT. That deal was a miscalculation that Tyco Chief Financial Officer Mark Swartz concedes will force Tyco to take a write-off of $4.6 billion, even in the unlikely event it manages to get the full $6.5 billion it expects from an IPO.
The upshot is that Tyco, with over $10 billion in debt coming due in the next 18 months, is now perched "on a high wire that is 1,000 feet off the ground," says analyst Nicholas P. Heymann of Prudential Securities. Even critics of Tyco's accounting, however, say a successful sale of CIT, along with its $4 billion in cash on hand, would buy Tyco enough time to make its upcoming debt payments. That's all the more reason to bring in someone new who would have investor backing to revive a smaller, more sustainable company.
All of which means that if ever there were a situation for a CEO to step down, this is it. "Tyco desperately needs a new CEO," argues Jeffrey A. Sonnenfeld, associate dean of the Yale School of Management. Adds a large institutional investor: "Bringing in an outsider with a strong reputation for integrity would be a home run." Unfortunately, Kozlowski isn't likely to feel pressure from his board. Tyco's directors are an assemblage of Kozlowski associates and insiders, led by ex-CEO John Fort.
A year ago, Kozlowski was hoping to be another Warren E. Buffett or Jack Welch. Today, he would do better to emulate Bernie Ebbers, late of WorldCom Inc. Otherwise, he may take the ship down with him. Boston bureau chief Symonds has covered the rise and fall of Tyco.