I just wrote a book titled The 5 Minute Investor. The
book explains how, with very little effort, investors can do the
research to protect themselves from “surprise” business collapses
like Enron and Lucent. Conversely, in this environment where every
company is seemingly under suspicion, these same techniques allow
investors to separate the bargains from the
disasters-in-waiting.
It is not my goal to promote the book (though it is reasonably
priced and available at your local bookstore as well as
Amazon.com and
Barnesandnoble.com). One of my favorite parts of the book, and
the reason I bring it up, is the page of quotations at the
beginning. Amid quotes from real and fictitious luminaries like
Yogi Berra, Alice in Wonderland, and Gordon Gekko, is one from
yours truly:
Fool me once,
Shame on you.
Fool me twice,
Shame on me.
Fool me three times —
Wait, what were we talking about?
The capacity of the American investor to get snookered is
limitless. And I’m not just talking about us last-to-know suckers
2,000 miles from Wall Street. The mutual fund and pension guys have
been the biggest losers during the fall of so many high fliers over
the past few years.
Part of the problem is that everybody thinks the corporate
crisis is nearly past. Sure, there may be more revelations, but
that’s all “old business.” Jack Welch is giving back his perks. The
departing CEO of Dollar General just volunteered to give back
performance bonuses he received due to improper accounting. Dennis
Kozlowski and his ilk at Tyco International are standing before the
dock. Now we can get back to the business of making money.
Not so fast, sucker. Look at Tyco, that conglomerate of 1,000
acquisitions in 10 years, as a proxy of that big, bad, crooked
world we believe that the sunshine of disclosure will chase away,
as if Kozlowski was Nosferatu.
The stock market is ebullient about Tyco’s prospects. Once
trading as high as $60 per share (with a market capitalization of
$120 billion), Tyco fell below $9 per share last July on the
resignation and indictment of former CEO Kozlowski and the
resignation of CFO Mark Swartz and general counsel Mark Belnick.
The company’s strategic quagmire, first making all those
acquisitions, then reversing course and planning four spin-offs,
then reconsidering that, then flip-flopping on the spin-off or sale
of recently-acquired CIT, left stunned investors racing for the
exits.
But now the stock is near $17 and brokerage firms are raising
their ratings. The new CEO, Ed Breen, has acted decisively, ridding
the company of its top officers and all its directors. A
blue-ribbon panel of outside directors will stand for election in
October. David Boies is leading an investigation to air all the old
regime’s dirty laundry. Now, all those stable, solid businesses
that make up the Tyco empire can bring in the money without all the
sideshows and corruption.
You are a fool if you believe any of this. Okay, Breen is
cleaning house and picked a well-regarded executive, David
FitzPatrick from United Technologies, as CFO. These guys could ooze
integrity, but it wouldn’t change the fact that the company is
rotten to the core. Jim Gipson, who runs the Clipper Fund, one of
Tyco’s largest shareholders, told Fortune that “this isn’t
Enron. Tyco bought simple, understandable businesses with real
customers, products, and sales.”
Maybe Gipson, a legendary value investor, is confusing Tyco
International with Tyco Toys. Yes, Tyco International owns
security-alarm businesses and medical supply businesses. But it
also is Bermuda-incorporated and New Hampshire-headquartered as tax
dodges, and has numerous offshore subsidiaries designed for
financial trickery, just like Enron. Tyco has run neck-and-neck
with Enron in the race for the most incomprehensible financial
reporting.
And if Gipson is such a great value investor, he also knows if
you overpay for something, it doesn’t matter if it has real
customers, products, and sales. Tyco is staring down the barrel of
huge debt payments in 2003. Total debt earlier this year was $27
billion. It sold CIT just months after acquiring it to reduce its
debt load, for billions less than it paid. Another big acquisition
from 2001, of some businesses from Lucent, has turned out to be a
big loser. You have to really screw up to get taken advantage of by
Lucent. Do you really think Tyco did so much better on the other
998 acquisitions that it can pay for these mistakes, the hundreds
of millions Kozlowski looted, and pay back all that debt?
Even if you could point to some financial information suggesting
Tyco will be able to pay its bills, why would you believe it? The
CEO, CFO, and general counsel are under indictment. If these guys
were looting the company, forthright financial disclosure was the
last thing on their minds. Also remember that these guys were
compensated primarily in high-flying Tyco stock, which they sold in
massive amounts.
The stock analysts — and we can trust these guys now — are
upbeat. J.P. Morgan analyst Don MacDougall upgraded his rating to
“buy” from “long-term buy.” “We think the new CFO would have done
exhaustive due diligence on accounting, finance and legal issues
before taking the job.”
I’d love to hear MacDougall’s theories on astral projection,
Bigfoot, and the lost island of Atlantis. How much due diligence
could FitzPatrick do? Ask Kozlowski or Swartz? Get information from
Breen, who is still in the dark? Breen’s got David Boies telling
him what went on, and there is a long line of federal prosecutors,
state prosecutors, securities regulators, and Congressional
committees trying to figure it out.
If you really learned anything over the last year, you would
share my amazement that anyone would touch this stock with long
tongs. But millions of shares are changing hands per day, with a
consensus that the stock is worth $17. Not for long, I bet.
