BOSTON – Tyco International Inc. (TYC) on Thursday said it is dropping its plan to split into four companies, calling the strategy a mistake as close to $70 billion in shareholder value has been erased since it was presented in January.
Tyco, which makes everything from diapers to burglar alarms, has operational problems, too, reporting a $1.9 billion net loss in the March quarter as the company slashed its fiscal 2002 earnings forecast.
In an unanticipated move that could prove a crushing blow to management's credibility, Tyco said it was pushing forward as a conglomerate after announcing in January it would split into four independent publicly traded companies. The stock market reacted negatively in pre-market trade, where Tyco shares tumbled 14 percent.
"But we now know it was a mistake," Dennis Kozlowski, Tyco's chairman and chief executive wrote in a letter to investors. "... As your chief executive officer, I take full responsibility and am aware that Tyco's management has let you down," said Kozlowski.
Separately, Tyco's CIT Group said it filed for a $7.15 billion initial public offering with the U.S. Securities and Exchange Commission.
The rationale behind Tyco's break-up plan was that the market was no longer rewarding its earnings growth and was discounting its stock compared with its peers. Short sellers and others questioned Tyco's accounting practices, which weighed down the company's stock in the wake of the scandal and collapse of energy trader Enron Corp. . Tyco said at that time it believed the sum of its parts would be worth more than the conglomerate as a whole.
Tyco also said it lost $1.9 billion, or 96 cents per share, in its fiscal second quarter ended March 31, compared with earning $1.1 billion, or 62 cents a share, in the year ago quarter.
Tyco slashed its fiscal 2002 earnings outlook to $2.60 $2.70 per share, before charges. Before the announcement, the consensus estimate was $3.17 per share.
The second-quarter loss broke Tyco's 10-year string of quarterly earnings improvement, Kozlowski said. Second-quarter net revenue fell to $8.66 billion, down from $8.89 billion in the year-ago quarter.
Tyco said executives would not receive bonuses in fiscal 2002 because of the company's anticipated results.
The second-quarter results included $3.3 billion in charges, mostly from writing down the value of its TyCom Global Network, an undersea fiber optic cable operation. Tyco also announced it would cut 7,100 jobs, or about 3 percent of its total work force, and close 24 facilities.
Tyco outlined its renewed conglomerate strategy, which doesn't include finance arm CIT.
Instead, Tyco said it will sell 100 percent of CIT through an initial public offering. It also will not sell its plastics business as planned.
"As we reviewed the strategy, we concluded that the sale of CIT would reduce our vulnerability to the debt markets and make the company less complex," Kozlowski said. "By fully monetizing CIT, we can eliminate any lingering perceptions about the company's short-term financial position and create a strong foundation for the future."
The company will begin repurchasing shares after the CIT IPO.
Tyco's remaining businesses will remain united as the conglomerate moves to reduce its balance sheet debt.
"Right now, they're leaving themselves with no margin for error if there is another event," said Nicholas Heymann, analyst for Prudential Securities.
He said Tyco's current capital structure does not leave it room for error if the already troubled debt market were rattled further by an international incident or U.S. military action in Iraq.
"This stock doesn't have much room to go up until we can see the future," Heymann said. "This is not a great IPO market and CIT isn't really a diamond in the rough."
Heymann said that earnings per share for the year may even reach as low as $2.00 per share, because the company does not have enough extra cash to support new acquisitions that in the past it used to fuel growth.
In pre-market trade, Tyco shares fell $3.75 to $22.15. The stock is off 62 percent this year, erasing about $73 billion in shareholder value.