Greed: Dennis Kozlowski & Tyco

Tyco International is a security systems and fire protection behemoth which, during its merger, acquisition and expansion heyday, accumulated arguably over one thousand companies during the period from 1991 and 2001. Dennis Kozlowski started at Tyco in 1975, and worked his way up, to become CEO in 1992 ("Dennis Kozlowski"). During his early years, Kozlowski lived in Newark, New Jersey, and attended Seton Hall University. After graduation, he became an auditor at conglomerate SCM Corporation. Kozlowski’s rise in the company was sure-footed, he was considered a skilled and adroit manager. He became president of one of Tyco’s most successful departments, Grinnell Fire Protection Systems Company (Hamilton and Micklethwait). He engaged in a staff reduction program cutting employees from 200 to 30 and revising the compensation structure. Afterward, he set his sights on a buying spree with the goal of buying his competitors. Kozlowski was the corporate deal executioner, making sure that the purchases added value to the company. He bought many and he acquired fast. In 1987, he was appointed to the Tyco board of directors, and in two years became president and COO. The 1991 recession did not cause Tyco to fare well. One of its recent acquisitions, Wormald International, which had been purchased for $360 the year before, was failing (Reuters). John Fort, Chairman and CEO, demanded the postponement of ongoing acquisitions. Kozlowski, however, disagreed stating that the occurrence was just a temporary setback. The dispute continued and Kozlowski structured a boardroom takeover, becoming CEO in 1992, and Chairman in 1993. Forte’s strategy was to focus on businesses that were tied into the construction industry. Kozlowski, on the other hand, wanted to diversify. Kendall International was the next purchase, and not a glamorous choice, but Kozlowski convinced the board and stakeholders that he could revamp Kendall. Kozlowski was right, he was able to turn Kendall into a shining star at the center of the company's new healthcare division. In time, the healthcare component became the second largest medical device producer in the United States (Levin).

Kozlowski met Mark Swartz during his Kendall dealings (Hamilton and Micklethwait). In a sense, Swartz reminded Kozlowski of himself. Both originated from humble beginnings, both had sharp accounting backgrounds, both were hungry, neither had Ivy League degrees, and Swartz was even more polished than Kozlowski, so he was impressed. He named Swartz CFO in 1994 after the Kendall deal, and had him deal with the Wall Streeters. The relationship developed between the pair and soon Swartz became the second most powerful Tyco executive. Kozlowski recommended that the board relocate the corporate suite from their modest head office to a swankier location in Manhattan. A basic relocation program existed and was often supplemented based on who the executive was, but in this instance the level of the extensive “generosity” was never made known, or approved by the compensation committee. At first, things were reasonable, but as time progressed, the level of spending related to the corporate suite increased astronomically. Once Tyco bought ADT, spending went out of control (Hamilton and Micklethwait).

In a move to save ADT from a hostile takeover, Tyco made a white knight offer of $5.4 billion and completed a reverse merger (Bagli). A reverse merger is a method of taking a private company public without having to go through the extensive, costly, risky, time consuming and regulatory restrictive requirements of an IPO, or an initial public offering ("Reverse Takeover - RTO"). Reverse mergers are simpler to execute. The private company gains a controlling number of shares in a company that is already public. The company also gains control of the public company’s board of directors. The private shareholders transfer shares into the public company’s shares. The control shift and share transfer turns the private company public. ADT was registered in Bermuda, and had tremendous tax advantages that Kozlowski immediately availed himself of, slashing Tyco’s taxes from 36% to 23% over time (Bagli). Kozlowski then started taking advantage of share options, a compensation scheme he had originally blasphemed. Yet soon Tyco took on ADT’s share option scheme, and when he started to enjoy the benefits the program bestowed, the modest restrictive plan originally in place was no longer extolled (Hamilton and Micklethwait).

Share options avoided one disadvantage of the restricted share scheme which was to trigger a personal tax liability when the shares vested, forcing employees to sell shares to pay the tax. To encourage employees to keep their shares under the restricted share scheme, Tyco had set up the Key Employee Loan Program (KELP) which allowed employees to borrow from Tyco to cover the tax due. This was too good an opportunity for Kozlowski to miss. He used the programme as a private bank, borrowing $245 million between 1997 and 2002 for spending on items far removed from tax, such as Impressionist paintings and a racing yacht (Hamilton and Micklethwait). 

Before ADT, Kozlowski’s compensation was $9 million annually. After ADT his compensation, with stock grants and realized options went up to $66 million, and in 1999 went up to $170 million. All this was within a three year period. This, not including the executive retirement compensation plan that Kozlowski and Swartz received from 1998, which in the end assured them of over $4 million once they retired (Hamilton and Micklethwait).

A new executive relocation program was initiated for Boca Raton, Florida, quite similar to the Manhattan program ("Tyco Files Suit Against”). Kozlowski stated that the program had board approval. Kozlowski took out a $29 million loan to build property in Boca, as did other executives, but the loans were not disclosed in Tyco filings, despite the auditors recommendations, and Price Waterhouse failed to disclose the findings to the company audit committee. While in Boca, the executives were able to order breakfast on china plates and masseurs to relieve stress, but Kozlowski continued to front their humble Exeter office as the company’s headquarters, stating that it was an example of Tyco remaining a thrifty company (Hamilton and Micklethwait).

Acquisition upon Acquisition

The acquisition of AMP in 1998, for $11.3 billion was noted in the news, but many of the other companies were so small that they did not raise concerns ("Tyco Completes Acquisition”). After AMP, Kozlowski continued to acquire new companies, and from 1999 to 2001 had acquired over 700 companies, spending $8 billion. Once a company was acquired, overhead was cut, any lines that were not profitable were discarded, and new efficiencies were prescribed. Tyco was rewarded with increasing share prices. But questions were beginning to be raised. It was not clear whether the acquisitions themselves were what was keeping Tyco afloat or whether the company’s operations were what was giving the company strength, but it was becoming clearer to some that Tyco was starting to walk a slippery slope (Hamilton and Micklethwait).

In 2000, Tyco entered the telecom industry with its subsidiary TyCom, which installed undersea cables ("Tyco Reaches Definitive”). However, no one was paying attention to the impending telecom bust to come, and failed to notice the overcapacity experienced by undersea networks. The company also wanted to become part of the finance industry as well. Kozlowski thought that becoming the next GE with its GE Capital division would be a really great idea. So he aggressively pursued and acquired CIT Group ("Tyco buying CIT for $9.2B").

The House Built with Cards on Sand

In 2001, TyCom’s shares nose dived, consistent with the experience other telecommunication companies were experiencing ("Did Tyco Deep-Six Tycom Investors?"). Many telecoms had already gone bankrupt, but Kozlowski was certain that Tyco would ride the blip. After six months, the CEO realized that it was not a blip, but a slump, and was forced to write-off TyCom for $2.2 billion. Kozlowski had been blinded by the success that other telecom companies had been experiencing prior to the glut. Rumors emerged that the U. S. Securities and Exchange Commission (SEC) was getting ready to conduct an investigation into Tyco and its accounting. Tyco stock tumbled in a market already devastated by the Enron debacle. Kozlowski was probably feeling some butterflies in his stomach because his shares in 2001 dropped him from $125 million in 2000 to about $40 million (Hamilton and Micklethwait). At year end, Kozlowski decided that it would be best to divide Tyco into four businesses, stating that the breakup would increase shareholder value by fifty percent. But investors balked at this shocking turn of events. It was a clear shift from his original strategy (Maremont, Hechinger and Damato). 

Investors became suspicious of Kozlowski’s intentions and were concerned that the real reason for the breakup was related to his creative accounting practices, Tyco’s share price fell even further (Maremont, Hechinger and Damato). Shares dived even more when Tyco’s projected profit forecast had dimmed for 2002 second quarter. Tyco was essentially in a free fall, and the very thing that the company feared most was that Standard & Poor’s a debt ratings agency, lowered its long-term debt rating from A to BBB, just one notch above a junk rating ("Tyco Stock Sinks Further"). Tyco’s short-term debt was also lowered from A1 to A3. The same was true for CIT (Hamilton and Micklethwait). This was the worst outcome, because Tyco was now blocked from borrowing money from the low cost market, thus substantially reducing its profits. Share prices continued to dive, having lost its value close to 50 percent since December. In April, Kozlowski decided not to breakup the company into four parts per his previous plans, but decided to continue with plans for the CIT IPO. The company posted losses and lowered its forecasts, while Kozlowski apologized for failing the shareholders. The bleeding still would not stop, and the share price dropped by another twenty percent.

Yet, the shareholders were in for one more surprise. On June 2, Kozlowski resigned his post as CEO and Chairman of the board (Maremont and Cohen). Kozlowski was indicted on allegations that he failed to pay New York sales taxes of $1 million, on the $13 million in paintings he had purchased. Having received a subpoena earlier, he decided not to tell the board, referred to by Tyco, as “a pattern of concealment” by Kozlowski (Hamilton and Micklethwait). Swartz resigned in August and then:

Kozlowski and Swartz were indicted on charges of grand larceny, fraud and enterprise corruption, a term more commonly heard in Mafia prosecutions. The SEC filed charges of looting and reporting violations against Kozlowski, Swartz and Belnick [Tyco General Counsel]. Then Tyco filed civil charges against Kozlowski, Swartz and Belnick to recover over $600 million (Hamilton and Micklethwait).

Kozlowski was convicted of embezzling over $400 million of Tyco funds (Hamilton and Micklethwait). He served his sentence at Mid-State Correctional Facility in Marcy, New York. He was released in 2012 to a work release program and after two years was then placed on parole. The state parole board sent him a letter telling him that he had completed his penal supervision and he was a free man, after almost ten years.

Works Cited

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Hamilton, Stewart. and Micklethwait, Alicia. Greed and Corporate Failure: The Lessons from Recent Disasters. New York: Springer, 2006 Print.

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