Quotes of the Day
Ed Breen, the man who succeeded the infamous Dennis Kozlowski as CEO of Tyco, took time off from the job in mid-November to speak at Grove City College, his alma mater. "I get goose bumps when I walk into this chapel," Breen told the assembly at the small Christian college in rural Pennsylvania. A churchgoer known for his plain lifestyle, Breen has never forgotten the old-fashioned values he learned as a student. "Humility, service and lifting the human spirit work as well in the boardroom as they do in the classroom," he said. That same week his flamboyant predecessor at Tyco, a sprawling $37 billion conglomerate, was sitting through his trial in a Manhattan courtroom on charges of looting the company of $600 million. Kozlowski, whose extravagance became legendary after he left Tyco in June 2002—remember the $6,000 shower curtain?—had to listen as former assistant Mary Murphy admitted that she had been having an affair with him, even as she agreed to his requests to cover his personal expenses with company money.
In what is fast emerging as a corporate morality play, Breen (the good) has set out to methodically reform the Tyco that Kozlowski (the bad) left in disarray. To Wall Street's approval, Breen, formerly president of Motorola, is having considerable success at a company that under Kozlowski had come to represent corporate greed. Tyco's share price has more than tripled, from a low of $8.21 when Breen took over in July 2002. The mountainous debt Kozlowski amassed is steadily being paid down. Tyco is heading back into solid profitability this year, having lost money in 2002 and narrowly avoiding another loss last year after transferring charges to previous years' results. A jury is still hearing evidence against Kozlowski in a trial that has dragged into its fifth month, but when the company releases first-quarter earnings this week, Breen hopes investors will see that Tyco has learned its lesson.
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Taking over a conglomerate mired in controversy poses unusual challenges. "I wasn't naive about what I was entering," Breen says. "My first day, almost 20% of our investor base showed up — in the third hour — in my office." They wanted to know how Breen was going to restore credibility to a health-care, electronics and security-alarm company that once aspired to be the next GE before Kozlowski's fall brought it to disrepute. The new CEO moved quickly. In his first six months he replaced Tyco's board of directors wholesale, fired the entire top corporate team and hired 80 executives to fill their spots. He also set out to restructure the company's $24 billion debt—$11 billion of which was due in 2003, a burden that threatened the company's viability. He undid the go-go ethos of the Kozlowski era, in which Tyco, from 1994 to 2001, spent $63 billion to acquire 1,000 companies. (Kozlowski was known as "Deal-a-Day Dennis.") Breen also moved the corporate headquarters from an expensive Manhattan office with views of Central Park to a nondescript commercial complex in Princeton, N.J., with a view of a parking lot.
From the beginning, Breen took the long view of what would be required to resuscitate Tyco. "There were very strong operating businesses in Tyco that got lost in the spotlight," he says. Breen inherited more than 2,000 individual businesses — and some 267,000 employees — that are involved in everything from health care to plastics to fire alarms. He tried to determine which units needed rebuilding and which just required a little push. He introduced a new system of financial checks and balances and drew up long-term plans for each division, something completely new to some Tyco units. "During the first six months, I didn't worry about operations — because I couldn't," Breen says.
Rich Meelia, president of Tyco Healthcare, a unit that makes syringes, gauze and other medical products, remembers one of his first meetings with Breen. It took place about six weeks after Breen arrived at Tyco and, Meelia says, signified an end to the old regime. He explains, "We go to him and we say, 'We got to take $50 million and not report it as earnings. We got to plow it back into the business.'" Meelia, who has led the health-care group since 1995, expected resistance, because he knew the company was strapped for cash. "He said, 'Go ahead,'" Meelia recalls. "To us, that was the defining moment of this attitudinal switch — from 'How's the quarter looking?' to 'How are you going to continue to grow this business?'" Meelia used the money for marketing new products; last year health care generated 23% of Tyco's revenue and nearly 60% of its $3.5 billion operating income. This year health-care revenue is expected to grow as much as 7%.
That $50 million now seems well spent; Breen calls the decision a "no-brainer." Tyco Healthcare's management was already strong, Breen says, and its products (more than 40 are in the pipeline for release in the next two years) are well positioned for an aging U.S. population. All the unit needed was some basic management. It's a far cry from how Kozlowski ran things. Meelia says that before Breen's arrival he had little contact with Tyco's corporate management, which didn't review the strategic plans Meelia submitted and for some reason lumped health care with plastics and adhesives into one division. At other units, the troubles went deeper. An internal audit of the company's accounting problems found some of the worst at Tyco Fire & Security, best known for its ADT home security alarm subsidiary. By manipulating the way payments for its accounts with local dealers of security systems were recorded, Tyco executives allegedly overpaid for accounts, shifted the money around and then counted it as profit. Breen fired 15 top executives at the unit, which was also implicated in some of Kozlowski's exploits, including a 13-day hotel stay in London billed at $110,000.
Every new detail that emerges in the trial about Kozlowski's alleged excesses only reinforces Breen's reforming mission. Last month a former Tyco spokesman testified that Kozlowski used company funds to pay for a $20,000 background check on the fiance of a Merrill Lynch analyst who followed the company. And, of course, there was the birthday party in Sardinia for Kozlowski's wife, which prosecutors claim was partly paid for with Tyco funds and featured a cake in the shape of a woman with exploding breasts.
Changing the culture of such a company takes time. "We were optimistic early on that this would be a matter of months," says Eric Pillmore, Tyco's head of governance. "We now know realistically that this will take several years." It would take ages just to visit all of Tyco's 2,000 locations to present new governance guidelines. "If I were on the road every day for six years, I could visit one a day," Pillmore says. And some of the most important changes, like restoring financial integrity, are the hardest to implement. Each unit's finance chief, for example, now reports to Tyco's chief financial officer but also answers to a business-unit president. "They have to balance that every day, and there are conflicts in doing that," Pillmore says.
But the true test of success is performance, and the new Tyco is just starting to prove itself. Investors have responded to Breen's bold governance reforms in the first year, but they are now looking for old-fashioned profits. "We need to achieve the operational and financial goals that we've stated to investors," says David FitzPatrick, Tyco's chief financial officer. To make that happen, Tyco's new management team has to correct years of apparent operational neglect. David Robinson, the new head of the Fire & Security division, says that when he arrived at Tyco last March, he found "hundreds, maybe thousands of people every day making decisions on accounting matters." Fire & Security often had two or three branch offices in the same city, and made little effort to coordinate telephone or trucking services.
While Breen's overhaul is improving margins, Tyco is still "a little behind the curve," says Joel Levington, an analyst at Standard & Poor's. He notes that Tyco's recent gains in efficiency had been accomplished by most other industrial manufacturers several years earlier. Once Tyco catches up, it will have to find ways to drive organic growth — increasing revenue by adding customers and developing new products, rather than just finding one-off savings by streamlining business models. Healthcare has already started to do that, but Tyco's other business units have further to climb. Still, a sustained rebound for industrial enterprises, the main customers for Tyco's products, could give the company a lift over the next two years.
Eventually, Tyco will again start acquiring and may even consider a major "transformational" deal, says FitzPatrick. But that's likely to be at least two years off, as banks wait to see whether the company can continue to pay down debt. Breen has pledged to come up with an annual $1 billion in cash over the next several years to reduce debt. "There's nothing like cash to prove you got a great company," he says. Tyco may also need a cushion against claims from shareholder lawsuits for mismanagement under Kozlowski — which some analysts say could amount to $10 billion or more. "I'm the first to admit that there is uncertainty there," FitzPatrick says.
Yet amid the doubts and daily press reports of Kozlowski's trial, Breen says he's staying focused on the "blocking and tackling" of just running a company. And with the numbers starting to turn in his favor, he is even hoping to take his first vacation since joining Tyco. It won't be to a Mediterranean island for an over-the-top toga party a la Kozlowski (the bad). Instead, Breen (the good) is thinking of taking a few days at home in New Hope, Pa., when his children come home for spring break. Tyco shareholders might be thankful for such a plain CEO.
- Jyoti Thottam