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Tyco's Accounting Questioned

Feb 5, 2002 | Newsday

Almost from its start 42 years ago, Tyco International Ltd.'s growth has come through acquisitions, hundreds of them. Now, those acquisitions are at the center of a controversy over the giant holding company's accounting practices.

Yesterday, that controversy came to full boil with word that the Bermuda-based conglomerate, the world's largest supplier of electrical connnectors, made hundreds of unannounced acquisitions in recent years and investor concerns about its ability to borrow short-term.

Tyco's stock, which has been falling since late December, tumbled another $5.73 or 16 percent yesterday, closing at $29.90 on the New York Stock Exchange.

Tyco, which is run from Exeter, N.H., has been dogged for two years by investor concerns about its complex accounting. Those concerns relate in particular to the way it has booked the value of the acquisitions responsible for much of Tyco's growth, particularly during the 1990s.

It had $36 billion in revenue last year.

The issue was given by a Wall Street Journal story yesterday quoting Tyco chief financial executive Mark Swartz saying the company made 700 acquisitions worth $8 billion in its past three fiscal years that were never publicly reported except as a net amount paid each year for all of them.

Also yesterday, the company provided some of its own bad news: It announced that it will use a $5.9 billion line of credit from J.P. Morgan Chase & Co. and other banks to repay $4.5 billion in commercial paper, short-term financing commonly used by companies for day-to-day needs. Analysts consider that move a sign that the company is having difficulty obtaining short-term credit.

"It's not a good thing in terms of their balance sheet," said Joe Clinard, chief executive of North Shore Capital Management, an investment firm in Melville, noting that long-term financing such a line of credit carries higher interest rates than short term loans. "It seems like a desperate thing to do," he said.

Standard & Poor's also took it as a bad sign and downgraded Tyco's senior unsecured debt three levels from "A" to "BBB." The company's short-term credit rating was cut to "A-3" from "A-1."

Investors are well aware that Enron and Xerox Corp. took similar steps when they ran into financial problems.

Tyco's surprise plan announced two weeks ago to sell its plastics unit and spin off four others later this year via initial public offerings also was billed in part as a way to eliminate at least $11 billion of its $57 billion in debt.

Controversy is nothing new to Tyco.

An informal Securities and Exchange Commission investigation into its accounting of acquisitions begun in December 1999 ended in July 2000 with nothing more than some recommendations for changes in procedures.

But Enron has made investors extra sensitive on the issue of accounting practices, says Howard Nemiroff, a professor of finance at C.W. Post Campus of Long Island University. And companies like Tyco that grow through acquisitions and have complex structures are apt in any case to make investors nervous, he said. "It's difficult from an accounting perspective to keep track of everything," he said.

Although the company has insisted that its accounting is sound, investors have been raising questions about it again in recent weeks and its stock fell to its 52-week low of $27.48 on Jan. 30.

Last month, the company, which employs 240,000 worldwide and also makes health care products, fire protection and security equipment and undersea telecommunications systems, said its fiscal second quarter earnings would be less than expected because of a slowing demand for electronics. Earnings for its first quarter, ended Dec. 31, had increased by 17 percent from a year earlier, to $1.5 billion or 74 cents a share.

Tyco's spokeswoman did not return a call for comment.

In an interview with the Journal, Swartz defended not announcing the acquisitions, saying they weren't "material" compared with the company's total assets.

Tyco was formed in Massachusetts in 1960 as an investment and holding company.

Its current chairman and chief executive, a native of New Jersey and Seton Hall College accounting graduate L. Dennis Kozlowski, joined it in 1975. He became president in 1983 and chairman and chief executive in 1993.

Tyco moved its headquarters to Bermuda in 1997 after acquiring ADT Ltd., a large maker of security alarms that was based there.

"There's more favorable tax treatment there," said analyst Rob Plaza of Morningstar Inc., an investment research company in Chicago.


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