The Investor

The Greatest Fool

The capacity of the American investor to get snookered is limitless. Look what he's willing to think about Tyco.

By 9.19.02

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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.

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About the Author

Michael Craig is a writer in Scottsdale, Arizona.