Tyco CEO Admits to Errors Over Deal, Fee

BOSTON – After telling its investors the company had no cash crunch or debts linked directly to its fallen share price, Tyco International Ltd. Chief Executive Dennis Kozlowski fessed up to making mistakes by buying finance firm CIT Group Inc. for about $10 billion last year and for paying an independent director a huge fee.

The embattled head of the Bermuda-based conglomerate, whose stock has lost 60 percent of its value since December amid mounting accounting worries, switched tack from reassuring investors about Tyco's finances to expressing regret.

"Would I have gone through the agony of doing that, knowing what I do now?" Kozlowski, who is also Tyco chairman, said when asked about the CIT deal in an interview on the cable television station CNBC. "No. No sane person would have."

"CIT was not something I would have done had we known a year ago what we're doing now," Kozlowski replied to a question from former General Electric Co. chairman Jack Welch, a guest interviewer on GE-controlled CNBC. Tyco said that Welch had encouraged his friend Kozlowski to appear.

Kozlowski said he would not have bought CIT last year in light of Tyco's plans to split into four companies. Kozlowski unveiled the restructuring plan last month as Tyco's stock price plummeted on investor concerns about its accounting methods. The concerns were sparked by Enron Corp.'s collapse.

When asked about the cash payments of $10 million to Tyco director Frank Walsh and $10 million to a New Jersey charity in which Walsh is a trustee, Kozlowski said it would never happen again.

Walsh, who is leaving the Tyco board, was instrumental in brokering the deal. The payments have raised eyebrows among investors and corporate ethics specialists because of the questions they cast on Walsh's independence as a director.

"At the end of the day, the board unanimously thought directors have certain fiduciary responsibilities and we put in bylaws saying that this will never happen again at Tyco," Kozlowski said. "We should (have) had those bylaws before. And (Walsh) is not standing for re-election to the board."

Kozlowski's strategy appeared to be working at least in part with investors, as Tyco's shares gained.

Tyco's stock surged $3.10, or 11.9 percent, to $29.02 in Thursday afternoon on New York Stock Exchange trade. Still, since the beginning of the year about $61 billion has been erased in shareholder value.

"There was a huge amount of irrational concern on a variety of issues," said Ted Wheeler, an analyst at Buckingham Research Group. "Slowly people are going to realize those concerns were over done."

Wheeler also said Tyco's move to accelerate asset sales will help the company deal with the perception that, because of its share price fall, it was under a cash crunch.

CIT either will be spun off to Tyco shareholders or sold outright, as credit rating agencies cut their ratings on Tyco and CIT debt. The downgrades restricted Tyco's and CIT's access to the commercial paper market, which offers corporations less expensive debt compared with bank credit lines.

When Tyco bought CIT, Kozlowski hailed it as the financial lever that would bolster Tyco's other businesses and provide more diversity amid recessionary pressures. Since taking the helm of Tyco in 1992, he has overseen more than $65 billion worth of acquisitions with a goal of becoming the next GE.

Tyco paid more than a 65 percent premium for CIT, and worked quickly to clean up its balance sheet, unloading some $5 billion in noncore and low-margin assets. Kozlowski said CIT is a better company today than it was before the deal.

But it wasn't revealed until last month that Walsh was instrumental in brokering the deal. Walsh also was a CIT shareholder at the time of the acquisition.

Kozlowski reiterated that Tyco was not experiencing a cash crunch.

"If Tyco's goal on (Wednesday's) call was to drive home the point that it is in credit outpatient treatment and not getting fitted for a toe tag, that was handled well," said Glenn Reynolds, a bond analyst at CreditSights.

"We assume that was the unstated goal," he continued in a research note. "If its goal was to show that it has been working with its banks to move ahead on multiple IPOs and spin-offs and tenders, it was a failure. The way the market psychology has turned, however, most people with credit exposure to companies in the "Enronitis Ward" are happy to be able to justify 'hold' with all limbs intact."

Reuters and the Associated Press contributed to this report.