Tyco Deal that Cemented A Corporate Takeover. Prosecutors are exploring whether two of the highest-paid CEOs of the 1990s secretly struck a multimillion-dollar employment deal that cemented a 1998 corporate takeover, according to people close to the review.
Manhattan District Attorney Robert Morgenthau’s office is examining whether Tyco International CEO Dennis Kozlowski guaranteed a $14 million retention package to Leon Hirsch, CEO of U.S. Surgical, in exchange for his blessing of a takeover, the sources said.
In 1991, Hirsch ranked as the highest-paid U.S. CEO, with $123 million in pay including the value of stock options. Kozlowski in 1999 earned at least $30.6 million, plus $140 million from stock options.
The inquiry stems from an investigation of Kozlowski and former Tyco CFO Mark Swartz, indicted last month on corruption and grand larceny charges.
Tyco bought U.S. Surgical, a medical equipment and surgical stapler firm, in a $3.17 billion stock-for-stock transaction in October 1998. When the deal closed, Hirsch was named non-executive chairman of Tyco Healthcare Products Group, which absorbed his company.
Tyco paid Hirsch about $14 million through a $340,000-a-month retainer, a person close to the review said. A Securities and Exchange Commission filing shows that Hirsch was scheduled to join Tyco’s board. That didn’t happen. Tyco did not respond to questions about Hirsch Wednesday.
Analysts asked whether the transaction undervalued U.S. Surgical at $42.50 a share, below the $50 price estimated by some.
William Patterson, director of the AFL-CIO’s office of investment, raised the issue in a June 1998 letter to U.S. Surgical’s board. He cited ”allegations that Mr. Hirsch’s interest in his own job security may have inappropriately affected the board’s deliberations.” He also referred to a news report that questioned whether any other suitor would have retained Hirsch. Patterson urged U.S. Surgical’s outside board members to seek higher bids. ”They basically blew off the demand,” he said Wednesday.
Morgenthau’s office is exploring whether Hirsch facilitated the deal ”because he knew what he was going to get,” said a person familiar with the issue. Prosecutors are early in the review and have not decided whether to seek charges.
Hirsch did not respond to a message left at CryoGen, a medical equipment firm on whose board he serves. Kozlowski’s attorney did not return a message. At the time of the deal, Tyco and U.S. Surgical said there was no quid pro quo.
Morgenthau’s widening investigation also includes a secret $40 million payment Tyco made to settle a lawsuit over the takeover. Prosecutors and the SEC are examining whether Tyco settled the case to hide possible evidence of accounting irregularities used to depress the financial results of U.S. Surgical before the takeover.
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