Tyco International Ltd

Introduction:

Tyco International Ltd. is a diversified, global company that provides vital products and services to customers in more than 60 countries. With more than 100,000 employees worldwide, Tyco is a leading provider of electronic security products and services, fire protection and detection products and services, and valves and controls. It operates in five segments: ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products.

Background:

Tyco Laboratories was founded in 1960 to perform experimental research work for the US government. Tyco became public in 1964 and it quickly expanded mainly by acquisition to exploit the commercial applications of its work. By the end of 1970s, Tyco had a larger and more diverse corporation with sales topping $500 million and a net worth of nearly $140 million. Following an aggressive acquisition period through the 1970s, Tyco management focused the early 1980s on organizing its newly acquired subsidiaries. Tyco divided the company into three business segments (Fire Protection, Electronics, and Packaging), and implemented strategies to achieve significant market share in each of Tyco's product lines. With further acquisition on in the later part of the decade, Tyco again reorganized its subsidiaries into four segments: Electrical and Electronic Components, Healthcare and Specialty Products, Fire and Security Services and Flow Control.

During 1990s company carried on its aggressive nature of acquisition by acquiring (by some accounts) over 1000 other companies between 1991 and 2001. In 1992 Kozlowski became CEO of the company. Kozlowski joined Tyco in 1975 and was appointed to Tyco's board in 1987. From 1993 to 1996, Kozlowski acquired 65 companies for Tyco, and Tyco's stock rose 30 percent each year during that period. By 1992, its revenue reached almost $3.1 billion. Tyco was added to the Standard & Poor's S&P 500 Composite Index, which consists of the 500 publicly traded companies in the United States with the largest market capitalization.

Tyco's aggressive acquisition strategy continued into the early 2000s, with the purchases of General Surgical Innovations, Siemens Electrochemical Components, AFC Cable and Praegitzer. The additions gave Tyco an ending fiscal 2000 year revenue exceeding $28 billion, near $2 billion coming from the sale by a subsidiary of its common shares. On March 2001, Tyco announces $9.2 billion cash and stock deal to purchase the CIT Group, a commercial finance company. Tyco director Frank Walsh helps arrange the deal. In early 2002, Tyco shares drop sharply one day after the company filed a proxy report with the Securities and Exchange Commission disclosing that Walsh got a $10 million fee on the CIT Group deal, and that another $10 million went to a charity where he was a director.

Tyco's improper financial practices:

Tyco's Dennis Kozlowski, the former chief executive, and chief financial officer, Mark H. Swartz, were convicted of defrauded shareholders of more than $400 million. Between 1996 and 2002 Tyco violated the federal securities laws by using many improper accounting practices related to some of the many acquisitions that Tyco was engaged in during that time, and a scheme involving transactions with no economic substance to overstate its reported financial results by at least one billion dollars. Tyco's improper acquisition accounting included: undervaluing acquired assets, overvaluing acquired liabilities, misusing accounting rules concerning the establishment and utilization of purchase accounting reserves (Tully, 2004). For example, in 1997 Tyco merged with ADT based in Bermuda to escape paying taxes. Kozlowski structured the deal as a reverse takeover, with ADT acquiring Tyco. Tyco's head-quarters--and its overseas profits--moved to Bermuda, saving the company between $400 million and $800 million annually in U.S. income taxes. That same year Kozlowski established another lavish corporate headquarters in Boca Raton.

Next, in late 1999 rumors began circulating that Tyco had inflated its growth and overstated the earnings of some of its slow-growing businesses with unorthodox accounting. Its market value fell 17 percent. Kozlowski denied the charges, and an investigation by the U.S. Securities and Exchange Commission (SEC) cleared the company in 2000. However, Tyco's account books were filled with footnotes about thousands of offshore subsidiaries, scaring many shareholders. Tyco's stock lost half of its value. Although profits and sales remained high, the stock did not fully recover. In January 2002 New York State banking regulators notified the Manhattan district attorney of a suspicious wire transfer of nearly $4 million from a Tyco bank account to a New York art dealer, who then moved the money to an account in the Bahamas. Tyco also was under investigation by the U.S. Treasury Department for tax evasion and money laundering.

At a January 22, 2002, shareholders' meeting, Kozlowski announced that, to simplify accounting, he was going to divide Tyco into five pieces and sell off businesses, reducing the company's size by about one-half (Tyco International Ltd., 2010). In February 2002 Tyco filings revealed that Kozlowski and his chief financial officer, Mark Swartz, while publicly declaring that they almost never sold Tyco shares, had actually sold a combined total of more than $500 million in stock back to the company since 1999. They were accused of falsely inflating Tyco's stock before selling. Kozlowski alone made $280 million by selling 5.3 million shares of Tyco stock. Tyco also revealed that it had made about 700 acquisitions at a price of $8 billion over the past three years, without informing shareholders. In April 2002 Kozlowski announced that he would not break up Tyco, thereby destroying any remaining credibility. Between January and June 2002 Tyco's share price fell 80 percent. The rating on the company's $27 billion debt was downgraded. Kozlowski resigned from Tyco International in June 2002.

Next, Tyco improperly established and used various kinds of reserves to make adjustments at the end of reporting periods to enhance and smooth its publicly reported results and to meet earnings forecasts. In addition, during that time Tyco failed to disclose in its proxy statements and annual reports certain executive compensation, executive indebtedness, and related party transactions of its former senior management. Tyco also incorrectly accounted for certain executive bonuses it paid in its fiscal years 2000 and 2001, thereby excluding from its operating expenses the costs associated with those bonuses. Finally, Tyco violated the antibribery provisions of the Foreign Corrupt Practices