Ever since concerns over accounting irregularities turned Bermuda-based Tyco International into what one shareholder described as “a corporate piñata,” chairman Dennis Kozlowski has been holding weekly conference calls with shareholders, allowing them to ask questions about whatever was on their minds. Not surprisingly, most of the questions concerned Tyco’s declining share-price, its earnings prospects, its accounting practices, and plans for a possible break-up.
But last week, one of the questions was about a very different subject. And Kozlowski was forced to admit that neglecting public relations had cost the company dearly. “It just was nothing we felt we ever needed,” Kozlowski told analysts and investors. “We’re taking a hard look at what we are doing on public relations. We think we need to have Tyco fairly presented in the market place and fairly presented in the media. We definitely think that a far better job can be done there.”
Kozlowski’s remarks came in response to a question from investor David Simon of Twin Capital Management, who insisted Tyco was losing the PR battle with short sellers and other critics.
Some short sellers have suggested Tyco might be “spring-loading” its results, by having acquired companies take steps to depress their profits just before the deals closed. Such steps could include delaying shipments of products and taking large reserves for customers failing to pay bills. Then, when products are shipped after the takeover, earnings would receive a considerable boost. For example, commercial finance company CIT Group, acquired in March, reported $252 million in net income in its first four months under Tyco management—more than three times the amount the company generated in its last five months as an independent entity.
Tyco’s response to its critics’ accusations has been increased—perhaps even unprecedented—transparency. In addition to holding weekly conference calls, Tyco says it will put more information than it normally does in its regulatory filings such as 10-Qs, and issue more press releases regarding acquisitions. “If people want a press release a day, we will put that out,” says Kozlowski. “It would be a lot of clutter, but if that’s what they want, we will do it.”
If Tyco is telling the truth, the crisis it is facing is an unusual one—a crisis driven almost entirely by perception rather than reality. And it may be the first of many such crises in the post-Enron era, an era when the public’s faith in boards, accountants, and regulators—all of whom have given Tyco a clean bill of health—has been shattered, and companies that have historically relied on those parties for credibility find they suddenly have none.
Tyco experienced a similar kind of crisis in 1999, when short-sellers took a run at the stock at a time when there had been several high profile corporate failures, including Cendant, Sunbeam and Waste Management. “It had a dramatically negative effect on the stock,” recalls Brad McGee, Tyco’s executive vice president and chief administrative officer, and former head of corporate communications and investor relations. “There was an SEC inquiry and we got a ‘no action’ letter.”
But a clean bill of health from the Securities & Exchange Commission might not be enough to help the company this time around. “It’s sell first and ask questions later on anything that doesn’t look clean,” says Steve Galbraith, chief investment officer at Morgan Stanley, summing up the market’s current skeptical mood.
As a result, Tyco stock is down 53 percent from its peak of $63.21 just over a year ago, with heavy selling wiping out about $58 billion in shareholder value at a company only recently hailed as one of the best managed in America. (Earlier this year, Kozlowski was selected as one of Business Week’s top 25 managers). At that price, Tyco is trading at just eight times the average profit forecast by analysts for its current fiscal year—a reflection of concerns about the quality of those profits.
It’s clear from Kozlowski’s comments that the company recognizes the need to communicate more convincingly with the market.
“It’s not 100 percent perception,” says Brad McGee, “There have been some things we have done to fuel some of the fire. But it’s primarily a perception issue. The problem we have is we are a diversified company and we are an acquisitive company. That makes for a very complex financial statement. And that makes it easy for someone to paint us with the same brush as Enron.”
Short sellers—long critical of Tyco and its accounting practices—have a vested interest in creating as bleak a picture as possible. And reporters, many of whom were embarrassed by failing to spot the Enron debacle before it was too late, are considerably more skeptical than they were a year ago, even though most of them don’t understand the accounting issues they are questioning.
“Sometimes you listen to an interview and you can tell the guy asking the question doesn’t even understand the question, so you know he’s not going to understand the answer,” says one public relations expert close to the situation. “The people who write these stories have no accounting background, and a lot of them are just hoping to get lucky and unearth the next Enron.”
So working with longtime counsel at Kekst & Company, Tyco has come up with a strategy designed to put the company under the microscope and allow investors to decide for themselves whether its earnings are on the up-and-up. Says one observer, “If there really was anything wrong, the strategy they are pursuing now would be insane.”
A 10-Q quarterly financial report filed with regulators on Thursday contained extensive new disclosures about areas of the company’s accounting that have raised concerns, including information about  goodwill from acquisitions and further details about its unannounced acquisitions. “The more you know about our accounting, the more comfortable you will be,” chief financial officer Mark Swartz told investors on the conference call.
But there are others who think more communication may not be the answer. “One of the problems is that nobody understands the accounting,” says another expert. “It’s very easy for the shorts to confuse the issue, and every time the company puts more information out there, it gives them more material. The more disclosure there is, the more vulnerable they become.
“And every time they put out good news, it gives Tyco’s critics an opportunity to say, ‘This is too good to be true.’ And of course, it’s even worse because of the Enron situation, because they can no longer point to their accountants, or the SEC, and say, ‘Look, they’ve signed off on this.’”
Indeed, Tyco’s decision to hold weekly conference calls, allowing investors to ask any questions they like of management, soon backfired. On the first conference call, senior executives answered questions on a wide range of issues, providing unprecedented detail. But some management comments about second-quarter earnings and the company’s breakup plan apparently added to investor concerns, sending the stock sharply lower.
Kozlowski said earnings for the second quarter could be 65 cents to 68 cents a share, below the 76 cents analysts were expecting, and said management might retain the fire-protection and medical units, rather than spinning them out by the end of the year, if market conditions weren’t right. That prompted The Wall Street Journal to report that Kozlowski appeared to be backing away from his plan to divide the conglomerate into five parts.
Tyco unveiled the breakup plan last month as a way to unlock shareholder value, and predicted the plan would boost its stock by at least 50 percent over time. But the market reacted with skepticism, and this week Kozlowski said Tyco would stick to its plan to sell its plastics unit and spin off or sell CIT Group, while backing away from plans to dispose of the medical and fire-protection units in twin initial public offerings.
Nevertheless, investors have generally applauded the company’s new disclosure policy as a way to exert at least some control over the flow of information. “I like the idea [of the calls] given the question marks surrounding their accounting,” says Eric Teal, a money manager with Evergreen Investments, a Tyco shareholder. “It should lend itself to more transparency,” he told reporters.
The company remains committed to the weekly calls. “It accomplished the goal of being out in front of investors and providing information,” McGee told Dow Jones Newswires.
The company is looking at other ways to get its message out, recognizing that—flattering profiles of its chairman notwithstanding—the company has done an inadequate job of explaining what it does.
Says McGee, “I think one of the things we could have done better, one of things people don’t recognize about Tyco, is that we make real products that we sell to real people for real cash. But a lot of people don’t understand what we do. If we had been more proactive about having people understand our business, how we affect people’s lives, we might not have such a problem.”
That’s why Tyco is currently planning a corporate advertising campaign—under consideration before the current crisis, McGree says, but accelerated in recent weeks—created by Bozell Worldwide and modeled, to a certain extent, after the long-running ad campaign of another conglomerate.
“A lot of people don’t understand what GE does, but they know there’s something there,” says McGee, who declined to discuss the content of the campaign except to say, “If you look at our products and who uses our product, it includes firemen and doctors and people who touch your life every day. You can see our products out there.”
One possible situation is raising the profile of the individual business units, which have generally taken a back seat to the overall corporate reputation.
The company has also stepped up its internal communication, recognizing that employees were among the hardest hit when Enron went under, and understanding the importance of keeping employees informed—and focused on their jobs.
McGee concedes there has been some business disruption. “When your stock drops there’s a tendency to talk about what’s going on. But our employee communications activities have focused on getting our people to focus on the task at hand, providing our customers with the quality service they are used to. But our people have been through this before, and they got back to normal very quickly.”