Tyco Made $8 Billion Of Acquisitions Over Three Years

The Wall Street Journal
Mark Maremont
02/04/2002
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Tyco International Ltd. said it spent about $8 billion (9.28 billion euros) in its last three fiscal years on more than 700 acquisitions that were never announced to the public.

The revelation raises new questions about the completeness of financial disclosures by the huge conglomerate, which has come under close investor scrutiny in recent weeks for its complex accounting practices.

Although Tyco says its disclosures have been adequate, the company late last week sent a special alert to its investors giving new details about its unannounced acquisitions after questioned about them for this article. The alert, which gave fresh information about last year but not the full three-year period, revealed that Tyco paid $4.19 billion in cash for unannounced deals in the year ended Sept. 30, 2001, or about 37% of the $11.3 billion in cash it spent on all deals. The company said separately that it made 350 unannounced acquisitions in that year.

Investors have raised the issue in recent days as they pore over the company's financial statements, in part trying to figure out why debt has grown so rapidly as Tyco has reported generating billions of dollars annually in free cash flow.

Tyco's debt attributable to its industrial businesses nearly doubled during its most recent fiscal year, to $21.6 billion, even as it said it had $4.8 billion in free cash flow, which it defines as cash flow from operations minus capital expenditures and dividends. The company added an additional $3 billion in debt in its first quarter ended Dec. 31, in part because of $1.3 billion in new unannounced deals.

Mark Swartz, Tyco's chief financial officer, said the company clearly states in its financial filings the "net" amount of cash it paid for all acquisitions, a number that includes the hundreds of unannounced deals. He said the company doesn't disclose details on its numerous smaller deals because they aren't "material" given Tyco's huge size.

When asked about earlier years, Mr. Swartz said Tyco paid about $2.3 billion for 225 unannounced deals in fiscal 2000, and roughly $1.5 billion for between 150 and 175 companies in fiscal 1999.

Mr. Swartz agreed that it would be impossible for an investor to discern the amounts it spent on unannounced deals, because Tyco doesn't provide a crucial piece of information in its regulatory filings: the amount of cash on the balance sheets in companies it acquires. Tyco subtracts that amount from its total acquisition spending to get the "net" figure, but calculating the unannounced deals requires it to be added back. "You could fault me for that," Mr. Swartz said, adding that the company may include that extra detail in future financial filings.

J. Edward Ketz, professor of accounting at Penn State University's Smeal College of Business, said Tyco's acquisition disclosures seem to be adequate under generally accepted accounting principles. But he said the $4.2 billion in unannounced deals during 2001 is a "big number" that investors probably would want to know about directly, or have a way to calculate. "They could do more to make it more transparent," Mr. Ketz added, especially in "these post-Enron days when companies are trying to restore the confidence of shareholders."

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