Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (11 page)

In the visitors’ room at the Mid-State Correctional Facility more than nine years after the Roman orgy on Sardinia, Kozlowski and three former members of the
Endeavour
crew who were visiting him in prison talked about the night they attended the infamous birthday party. Kozlowski said, “It wasn’t one of the better parties I’ve been at in my life.”
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Sparky, Lars, and Joe agreed that the party was not the wild event the media and the Manhattan DA portrayed it to be. All four said Kozlowski was only at the party for around three hours, maybe less, on the night of June 14, 2001.

It didn’t matter that he found the party distasteful, and it didn’t matter that he stayed only a few hours. It didn’t matter that there were Tyco Directors and their spouses at the party. It didn’t matter if many members of the top management team were there. It didn’t matter that Kozlowski instructed Jacques to charge him
for all personal expenses. It didn’t matter that the theme was not his idea. Once the jury saw that video, once the media sensationalized juicy images of Kozlowski’s Roman orgy, that birthday party was used to define him. The taint of Sardinia cost both Dennis Kozlowski and Tyco far more than the $2 million they spent on the birthday bash.

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Extraordinary Times

Tyco and Dennis Kozlowski continued to prosper during fiscal year 2001, which ended on September 30th. In his letter to shareholders published in the 2001 Annual Report, the CEO described another year of outstanding performance with Tyco reporting double-digit percentage increases in revenue and earnings despite the 2001 recession. The accomplishments of FY 2001 included more than just the company’s strong financial performance. The Tyco Board of Directors successfully negotiated and entered into Retention Agreements with both Kozlowski and Swartz; the wildly successful CEO and CFO would be leading Tyco and managing the company’s growth for years to come. In more good news, Standard & Poor’s upgraded Tyco’s credit rating in the spring of 2001. The company was solid, growing, and the future looked bright.
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* * *

Tyco announced the completed acquisition of The CIT Group, Inc. (CIT) on June 1, 2001. It was an almost $10 billion deal—Tyco tendered both cash and stock for the commercial finance company. When the deal closed, Kozlowski said CIT was “an ideal fit for Tyco” and added great value including financing opportunities Tyco intended to offer its customers in several business units. He noted that CIT would be immediately accretive to earnings, as was expected of all acquisitions made by Kozlowski’s Tyco, and stated that the addition of CIT would “result in enhanced levels of organic growth, recurring revenue, stable profitability and competitiveness across [all] Tyco divisions.”

Albert R. Gamper, Jr. was President and CEO of CIT at the time of the acquisition. After Tyco acquired the company, he retained his titles and roles and Gamper joined the Tyco Board. At the time of the acquisition, he said the alliance would enhance CIT’s “leadership position as an innovative global source of financing and capital leasing.” Mike Snyder, who at the time was President of Tyco’s ADT business, said that “our commercial customers have been asking for financing and
leasing options for years and through our new relationship with CIT, we have the ability to quickly and knowledgably respond to our clients’ financing needs effectively providing a higher level of customer satisfaction.” Kozlowski envisioned CIT as a great benefit to customers—Tyco would manufacture and sell products, Tyco would provide installation and other services, and Tyco would benefit from the fees and interest customers paid to finance their purchases.
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The CIT deal seemed to break one of Kozlowski’s hard and fast rules about the types of companies Tyco would and would not acquire. On numerous occasions, Kozlowski said “[a]cquire businesses that you know something about—no new platforms,” and he emphasized that “[a] deal has to fit into one of our four areas of specialty and improve our preexisting business. There are no non-core businesses at Tyco and so no reason to acquire companies outside our areas of expertise.” More than a decade after Tyco acquired CIT, Kozlowski insisted that the deal did not break his rules. “We had been considering the addition of a financing arm for quite some time,” he explained. “CIT gave us the ability to offer financing to our customers. The acquisition was intended to enhance a number of our businesses by providing customers a one-stop solution.” At the time of the acquisition, Kozlowski said he was open to adding other financial services firms—Tyco would use CIT as a platform to expand into finance the way the company used the Kendall acquisition to expand into healthcare.
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Kendall International, Inc.

Kozlowski believed the first significant acquisition Tyco made after he became CEO was Kendall International, Inc. He began thinking about expanding into healthcare businesses when Hillary Clinton spearheaded healthcare reform in 1993. With the market anxious about highly-politicized government healthcare initiatives, “everyone was selling,” Kozlowski said, “but I wanted to buy.” He thought the healthcare industry was a good place for Tyco.

Early in his tenure as CEO, Kozlowski looked for opportunities to make the company more recession-proof; he wanted to be less dependent on cyclical industries. “We were heavy in cyclical commercial building products companies,” Kozlowski explained, “and we were already in the disposable medical products market. We were making transdermal patches for nitroglycerin and other heart medication, and we were also making portable electrodes—the old heavy electrodes used for EKGs were being phased out and we were making the small, portable electrodes that replaced them.” Kozlowski said, “I liked the business. I liked the potential. I thought the healthcare business would give Tyco a more predictable earnings stream.” Kozlowski was also attracted to the potential to dominate the market with the right products. He said, “[O]nce you received FDA approval, you
had something of value that would last for a while. It made it more difficult for competitors to enter the market.”

Tyco began looking at Kendall early in 1994. “The negotiations went on for a few months—the deal was on, and then it was off, and then on again,” Kozlowski said. “Negotiations went on through the Memorial Day weekend and stretched into the summer.” Finally, the companies agreed to a $1.8 billion stock purchase; the deal was announced on July 14, 1994. Kozlowski said he cancelled all of his plans for the summer of 1994. “Initially, our stock was hit pretty hard, so I had to go to investors, mostly sell-side analysts, and explain that Kendall really was a good deal and worked well for us,” Kozlowski said. “I spent the summer trying to get their support. One big shareholder told me, ‘Kendall is a bag of shit and somebody talked you into buying this bag of shit and it is going to ruin Tyco!’”

“Our investors were nervous about jumping into the healthcare industry,” he said. “At the time,
everyone
was nervous about healthcare because of Hillary Clinton’s initiatives. There was no good reason to stay out of healthcare—the patients were still going to be there, the demographics were the same, and I was a thousand percent convinced the government wasn’t taking over healthcare. Not in my lifetime.”

When the $1.8 billion Kendall acquisition was announced in July of 1994, Kozlowski told journalists that “[o]ur processes and equipment are virtually identical to those currently in use at Kendall, which should allow us to share manufacturing efficiencies and technology.” Kozlowski also announced that “[t]he Kendall merger is a very important step in the strategy we developed several years ago to translate our manufacturing expertise in packaging into higher-margin products in the disposable medical products market.” When the acquisition was announced, the company said the transaction would “create a $1.2-billion business segment that will serve as a platform for future growth.” Kozlowski believed CIT, an acquisition met with similar skepticism as voiced during the Kendall deal, would provide Tyco the same type of opportunities in the financial services sector.
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The CIT Group, Inc.

In 2001, many people compared Tyco’s pickup of CIT to General Electric (GE) and its finance unit GE Capital. Over the years, Tyco was often compared to GE, and Kozlowski seemed to use GE as a template for Tyco’s long-term strategy. He considered CEO Jack Welch a “great business leader.”
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GE successfully operated GE Capital; Kozlowski was certain Tyco could do the same with CIT.

In contrast to Kozlowski’s clear vision of CIT’s place in a diversified manufacturing conglomerate, analysts questioned Tyco’s acquisitive entrance into a new and unfamiliar platform—Tyco knew nothing of running a commercial finance
business. However, analysts were soothed by Tyco’s plan to leave Gamper and other top management in place at CIT.
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The CIT deal closed in June of 2001, and Kozlowski had great expectations that it would be yet another profitable multi-billion dollar addition. He had every reason to expect success. He and Tyco had traveled this route hundreds of times, and they had a nearly flawless record of spotting, analyzing, negotiating, buying, and integrating companies that created value for Tyco shareholders. Why would they have expected anything less of the CIT acquisition?

Dennis Kozlowski could not have predicted the devastating events that occurred during the six months after Tyco acquired CIT—events that shook the business and legal environments and changed the world as it existed in the summer of 2001.

The 9/11 Terrorist Attacks

September 11, 2001 was a picture-perfect fall morning in New York City; the air was crisp and the sky a true cerulean blue. The city sparkled . . . until 8:46 am EST, when American Airlines Flight 11 flew into the North Tower of the World Trade Center in lower Manhattan. The remains of the plane filled the gaping puncture wound in the side of the skyscraper and the impact resulted in a fireball of ignited jet fuel, the smoke from which could be seen on news reports across the country and around the world. The damage to the North Tower was severe, and it was obvious that many people inside the building were injured or killed. However, the magnitude and the meaning of the crash didn’t become clear until seventeen minutes later when at 9:03 am EST, hijacked United Airlines Flight 175 flew into the South Tower of the World Trade Center. Millions who were viewing news reports of the first crash watched in stunned disbelief as the airliner crashed into the second skyscraper.
Terrorists.
The United States was under attack.

At 9:37 am, American Airlines Flight 77 crashed into the Pentagon in Washington, DC, and at 10:02 am United Airlines Flight 93 crashed into a field in Shanksville, Pennsylvania. At 9:45 am on September 11, 2001, U.S. airspace was shut down and did not reopen until September the 14th.

The world watched as the tragedy unfolded. At 9:58 am, the South Tower of the World Trade Center collapsed. In ten seconds, the building disintegrated into a plume of debris that coated lower Manhattan with the remains of 2 World Trade Center. The North Tower collapsed at 10:28 am. An hour earlier, the towers at 1 and 2 World Trade Center stood as symbols of American capitalism and embodied the strength of the U.S. economy. On a beautiful fall morning in September of 2001, they crumbled into ruins. In total, 2,973 people were killed during the 9/11 terrorist attacks—the deadliest ever on American soil.
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As a result of the attacks, the U.S. stock market was closed for four consecutive trading days—from the closing bell on Monday, September 10 until the opening bell on Monday, September 17. The New York Stock Exchange, located a few blocks from the World Trade Center, had not yet rung the opening bell on September 11 when the towers were attacked. It was the longest market shutdown since 1933, during the Great Depression. When the market reopened on September 17, it fell nearly 700 points, a 7.1 percent decline—the biggest single-day loss in history. By the end of the first week of trading after 9/11, the Dow Jones had dropped over 14 percent and the Standard & Poor’s Index was down nearly 12 percent.

The loss of life was so great, it was difficult to bemoan the financial impact of the attacks. But the economic damages were profound; the losses reverberated through many industries and were felt around the world. The attacks exacerbated the 2001 recession in the United States and struck at the heart of American finance. Many individuals and organizations suffered tremendous financial losses as a result.

Dennis Kozlowski was in Midtown Manhattan on September 11, 2001. He and Mark Swartz were at the Essex House meeting with a group of investors and analysts, some of whom had left their offices in the North and South Towers of the World Trade Center to attend the Tyco meeting. In an interview with
CFO Magazine
in the fall of 2001, Mark Swartz said, “We were under way for about 20 minutes when we heard about a fire at the Trade Center.” Once news of the tragedy reached the shaken New Yorkers, the meeting ended and never resumed. Immediately after the attacks, Swartz said he and his Tyco colleagues were “trying to figure out where we stood in the world.” He said they focused on getting respirators and healthcare supplies to first responders. Tyco provided 400 portable respirators and 30 cases of wound-care supplies during the first days after the attacks. When the market reopened the following week, Tyco stock fell eighteen percent in the first ten days and Tyco’s leaders, like those of thousands of other business organizations, were faced with managing the company through an unprecedented crisis. Kozlowski and Swartz fared better than many. Tyco bounced back quickly as Tyco stock returned to its pre-9/11 value in early October.
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Tyco’s market cap peaked in December of 2001 when it reached $120 billion. When Kozlowski became CEO in 1992, Tyco’s market cap was less than $2 billion. In January of 2002, Kozlowski was once again featured in a
Businessweek
cover story when he was named one of “The Top 25 Managers of the Year.”
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With the worst of the recession and the economic impact of the terrorist attacks behind them, Tyco and Dennis Kozlowski were poised to enter 2002 on strong footing.

Enron

Corporate America was forever changed on December 2, 2001 when Enron declared bankruptcy. The Chapter 11 filing opened a Pandora’s box of scandal the aftermath of which reordered U.S. business and legal environments. Many have dubbed December 2, 2001 as the marker of corporate existence B.E. (before-Enron) and P.E. (post-Enron).
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The failure of the Houston-based energy giant cost thousands of employees and retirees their livelihoods and retirement savings. Shareholders were devastated as the value of Enron stock plummeted to mere pennies. Thousands of Enron’s creditors also took a direct blow. But the ramifications spread far beyond those closest to Enron; its sins created an infectious atmosphere of suspicion and doubt, primarily targeted at other large, quickly growing corporations. Questions hung like ominous clouds over the market and darkened the boardrooms of many publicly traded corporations. How could this have happened? Where were the internal and external controls that should have prevented this type of scandal?