A202 PDF Eng Tyco

CASE: A-202
DATE: 03/12/09
TYCO – M&A MACHINE

Good acquirers don’t build empires. They make money.
—Tyco International 2001 Annual Report
Dennis Kozlowski took over the helm of Tyco International, Ltd. (Tyco) in 1992. By the end of
its 2001 fiscal year, Kozlowski’s Tyco had made over 100 announced acquisitions1 with total
revenues in excess of $30 billion (Exhibit 1). Kozlowski’s strategy, called “growth on growth,”
fueled Tyco’s aggressive approach toward acquisitions and took the company from just over $3
billion of sales in 1992 to $36 billion in 2001. Investors supported Tyco’s strategy as evidenced
by the tenfold increase in Tyco’s stock price over the same period (Exhibit 2). Analysts also
lauded Tyco, issuing reports with titles like, “The Proof Is in the Great Numbers! Buy.”2 But
was the proof really there?
TYCO HISTORY
Founding to 1992
Tyco was founded as Tyco, Inc. in 1960 by Arthur Rosenberg as a research and development
company. Tyco’s roots as a serial acquirer trace back to 1964, after Tyco went public and began
growing rapidly through acquisitions, completing 20 and growing revenues to $40 million in the
following nine years. Most of those acquisitions performed poorly and were divested when
Joseph Gaziano was appointed CEO in 1973.
Gaziano wanted Tyco to be a billion dollar company, and initiated another round of acquisitions
in order to achieve that goal. Gaziano’s favored means of acquiring companies was hostile
1
Tyco also made hundreds of other smaller acquisitions that did not meet the materiality threshold for individual
disclosure. In 2002, management disclosed that it had spent $8 billion on 700 unannounced acquisitions (Jennifer
Caplan, “Deconstructing Tyco,” CFO.com, April 1, 2002, http://www.cfo.com/printable/article.cfm/3004088).
2
Phua K.Young and Michael Gardiner, “The Proof Is in the Great Numbers! Buy,” Merrill Lynch, October 26,
2000.
Nathan T. Blair prepared this case under the supervision of Professor Maureen McNichols as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 2009 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
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This document is authorized for use only in DIERKER MARTIN's 2021Fall_BAF608F Mergers and Acquisitions at KAIST (Korea Advanced Institute of Science and Technology) from Sep 2021
to Mar 2022.
Tyco – M&A Machine A-202 p. 2
takeover, which got him a reputation as a corporate raider. In his 10 years as CEO, Gaziano
made several acquisitions to take Tyco from $41 million of sales to $574 million, well short of
his goal because too many companies defended Tyco’s hostile takeover attempts. Gaziano died
of cancer in 1982 at the age of 47 and was succeeded by John Fort.
Where Gaziano was a shoot-from-the-hip dealmaker, Fort was just the opposite. Fort was an
aeronautical engineer by training with a degree from MIT. Analytical, and more concerned with
profits than sales or acquisitions, Fort “rationalized the heaping pile of assets that Gaziano had
haphazardly acquired,”3 including the sale of $68 million of equity accumulated from failed
takeover attempts. In addition to shedding assets, Fort shed employee perks such as company
planes, cars and club memberships. He told his managers and Wall Street, “The reason we were
put on earth is to increase earnings per share.”4
Fort organized Tyco’s remaining businesses around three core segments: Fire Protection/Flow
Control, Packaging Materials, and Electronic and Electrical Components. Fort’s management
philosophy included two key components. The first was to have decentralized management
combined with strong centralized reporting and accounting functions. The second was to have
compensation highly geared towards a variable incentive component based on achieving
operating profit goals. Bonuses were paid in restricted stock that vested over several years to
ensure a focus on long-term profits.
Fort continued Tyco’s acquisition program, albeit more deliberately than Gaziano. During his
tenure, Tyco achieved Gaziano’s goal of becoming a billion dollar company in 1988 and also
saw its stock value appreciate at a 41 percent compound annual growth rate through 1990.
However, at the beginning of the 1990s, 80 percent of Tyco’s sales came from its Fire
Protection/Flow Control division, sales of which saw a substantial decline during the recession of
the early 1990s due to a decline in commercial construction. This resulted in Tyco’s earnings per
share declining by nearly 50 percent from 1990 to 1993.
Kozlowski Takes the Helm
Gaziano recruited Kozlowski to Tyco in 1975. At various points during Fort’s tenure,
Kozlowski ran the Fire/Flow and Packaging segments before becoming COO in 1989. When
Kozlowski succeeded Fort in 1992 he sought to reduce Tyco’s cyclicality and grow earnings at
15 percent annually. To do this, he restarted the acquisition machine with an eye towards
businesses with recurring revenues, such as those with a services component. A prime example
of this approach was Tyco’s purchase of ADT in 1997, which had substantial services revenues
and complemented Tyco’s fire protection business.
He also retained Fort’s philosophy of decentralization, allowing managers to run their divisions
with a large degree of autonomy, provided they were meeting growth targets. Kozlowski said
his approach to managers was, “If you're on forecast, there's no need to talk with me. But if
3
Anthony Bianco, William Symonds, and Nanette Byrnes, “The Rise and Fall of Dennis Kozlowski,”
BusinessWeek, December 23, 2002.
4
Ibid.
to Mar 2022.
there is any bad news at all, find me wherever I am, so we can figure out what actions to take.”5
By 2001, Kozlowski was overseeing a company with more than 200,000 employees with a
corporate headquarters staff numbering only 140.6
Kozlowski kept much of Fort’s compensation system, in particular the emphasis on variable
bonus compensation. Tyco’s compensation program under Kozlowski had unlimited bonuses
that were at least equal to base salary if targets were achieved. The bonuses’ proportion of stock
versus cash varied based on seniority, with more senior executives getting a higher proportion of
bonus in Tyco stock. One division manager, who made $625,000 base salary, tripled his
divisions’ operating income and was rewarded with a $13 million bonus.7 Kozlowski himself
made more than $125 million that same year.
In addition to an aggressive acquisition strategy and compensation structure, Kozlowski’s Tyco

developed a reputation for other sorts of aggressiveness. When Tyco acquired ADT, it structured
the transaction as a reverse merger in order to change the corporations’ headquarters to Bermuda,
where ADT was based, in order to reduce its tax burden. Tyco was also accused of aggressive
accounting practices related to its acquisitions, leading to an investigation by the SEC in 1999.
The impetus for the investigation was an October 1999 report by Albert Meyer of David W. Tice
& Associates,8 who questioned the quality of Tyco’s earnings and asserted that the company’s
true operating margins were lower than reported. Tyco’s stock declined more than 50 percent in
the following three months but recovered to its pre-investigation value when the SEC completed
its investigation in July 2000 with no recommended enforcement action.
Under Kozlowski’s leadership, Tyco had been transformed into a global company operating in
more than 100 countries and had expanded its presence in its legacy industries in addition to
entering new ones. In its 2000 Annual Report, Tyco was described as follows:
Tyco International Ltd. is a global company that manufactures, distributes and

services products and systems for a broad spectrum of markets, including:
electronics for telecommunications, automotive and industrial businesses;
undersea fiber optic telecommunications systems for telecommunications
providers, Internet and service application providers; disposable medical products
and medical instruments for hospitals, alternate care and long-term care facilities;
plastic and adhesive products for the consumer, do-it-yourself, garment and
industrial markets; fire protection products for commercial, industrial and
residential applications; electronic security systems for residential and
commercial customers; and flow control products for a wide variety of industrial,
municipal and commercial markets. Tyco holds leadership positions in each of its
five core business segments: Electronics, Telecommunications, Healthcare and
Specialty Products, Fire and Security Services, and Flow Control. The Company
5
William C. Symonds, “The Most Aggressive CEO,” BusinessWeek, May 28, 2001.
6
Ibid.
7
Ibid.
8
Tyco International, Behind the Numbers, October 6, 1999.
to Mar 2022.
operates in more than 100 countries and employs more than 215,000 people
worldwide.9
By the start of 2001, Kozlowski appeared to have achieved his goals for Tyco. In the spring of
that year BusinessWeek ranked Tyco number one in its 2001 BusinessWeek 50 issue, which ranks
companies in the S&P 500 using factors such as one-year and three-year shareholder returns,
sales growth and profits. General Electric, the company that Kozlowski most wanted Tyco to
resemble, did not make the list.
TYCO’S ACQUISITION STRATEGY
One of the biggest changes from Gaziano’s approach to M&A was Kozlowski’s mandate that all
acquisitions be friendly deals. According to Tyco, this allowed the company to dig into the
target companies’ finances, operations and people early in the process and develop more
comprehensive integration and cost-cutting plans.
Tyco stated that the following criteria needed to be met to pursue an acquisition:
 It must involve the addition of a new product or service to complement its existing core
business segments;
 It must have strong internal growth potential or fill a gap in existing product lines;
 It must be “championed” by a business unit that will oversee integration;
 It must be immediately accretive to earnings.
Acquisitions were typically sourced from operating division managers who sent them to
corporate for analysis and evaluation. This resulted in a lot of deal flow, and Tyco screened
more than 1,000 potential targets a year.10 In analyzing the benefits of a combination, Kozlowski
emphasized Tyco’s conservative approach:
We do not use revenue enhancements as part of the return.… Chances are we’re
going to share some cost reductions in the pricing of a business, but we know
we’re going to get the cost reductions.… But you’re not always sure about
revenue enhancements. So as a result, we don’t use those. And we’re absolutely
not afraid to walk away from a marginal deal.11
Tyco prided itself on its speed in both the due diligence and integration of acquisitions. The
company relied on a hand-picked team of six in-house M&A specialists that moved quickly and
used outside investment banks sparingly. "Investment bankers will tell you it takes six months to
do a deal; we often get them done in two weeks," said Irving Gutin, a senior vice president who
formerly headed the acquisition team.12
9
Tyco 2000 Annual Report, p. 1.
10
William C. Symonds, op. cit.
11
Cynthia Montgomery, Robert Kennedy, et al., “Tyco International,” Harvard Business School Case 9-798-061,
p. 11.
12
William C. Symonds, op. cit.
to Mar 2022.
QUESTIONS IMPACT VALUE
Despite the admiration of the analyst community and business press, questions about Tyco
weighed on its value. In early 2001, Tyco traded at approximately 18 times earnings compared
to the 34 times earnings ratio it had in September 1999, prior to the SEC investigation. While
overall questions about the economy may have also played a role, Tyco’s PE ratio also compared
unfavorably to General Electric’s, which was valued at 38 times earnings in early 2001.
One of the concerns impacting Tyco’s value was whether its acquisition growth was sustainable.
Phil Hampton, a Tyco board member, said:
As you get larger, it takes more to keep producing the same kind of percentage
returns. Either you do lots of small deals or you have to find larger ones that
make sense. Those are harder to do because there are fewer of them and there is
greater risk in each one of them.13
In addition to questioning the strategy of growth through acquisitions, Tyco’s acquisition

accounting practices also remained under scrutiny. These questions fell into three general
categories: 1) challenges in financial statement visibility and analysis due to acquisitions; 2)
accounting practices related to non-recurring merger and restructuring charges; and 3) the
accounting practices of target companies during the “stub period” between the announcement of
an acquisition and the closing date. However, it should be noted that even Tyco’s critics
acknowledged that these “questionable” practices were in accordance with GAAP. As one put it,
“The key question here isn't: ‘Are the company's accounting practices illegal?’ But rather ‘Do
they mislead investors?’ ”14
Financial Statement Visibility
In its annual reports, Tyco stated, “When we make an acquisition, the acquired company is
immediately integrated with our existing operations. Consequently, we do not separately track
the financial results of acquired companies.”15 Even analysts who recommended the purchase of
Tyco shares identified the challenges of analyzing Tyco’s financial statements given its rapid
pace of acquisitions. A June 1999 report on Tyco by Bear Stearns, which had a price target for
Tyco’s stock 30 percent above the value at the time of the report, said:
Because Tyco integrates its acquisitions so quickly, it becomes extremely difficult

for an external entity to track the financial performance of acquired companies
much beyond a year after the deal closes (Tyco is internally able to fully monitor
integration and cost-cutting activities). This creates an element of uncertainty as
to whether the company is continuing to deliver on stated integration benefits,
particularly given that, at the time of a typical acquisition, Tyco usually puts
forward a multiyear forecast for EPS accretion. Moreover, the financials for Tyco
13
Laura Johannes, “Tyco International Isn't Playing, It's Out on the Prowl,” The Wall Street Journal, Jan 17, 1997,
p. B4.
14
Jennifer Caplan, op. cit.
15
to Mar 2022.
as a whole are difficult to track given the ongoing changes caused by acquisitions.
The volume of deals also clouds the ability to isolate the performance of a specific
transaction.16
This was particularly challenging because both Tyco itself and the analysts who recommended
the stock touted Tyco’s organic growth. Kozlowski’s “growth on growth” strategy called for
double digit internal growth, and in the fourth quarter of 2000 the company reported 14 percent
internal sales growth. When the company issued that report, analysts from both Merrill Lynch
and Citigroup produced reconciliations to that 14 percent figure (an example of which is outlined
in Exhibit 3). However, just two days later, the same Merrill Lynch analyst said Tyco had
understated its internal growth rate, and that it was actually 16 percent, a difference of more than
$100 million.17
Accounting for Acquisition Costs
In accordance with FASB Emerging Issues Task Force directive 94-3 (Exhibit 4), Tyco accrued
for costs related to its acquisition activities, referred to as “purchase accounting liabilities,” at the
time of acquisition, effectively increasing the purchase price and adding the same amount to
goodwill.18 When it incurred these expenses, Tyco credited cash and debited the purchase
accounting liabilities. For example, in 2000, Tyco spent $5.2 billion on acquisitions, which
consisted of $4.2 billion of cash and the remainder Tyco stock and assumed debt. In connection
with those acquisitions, Tyco recorded $426 million of purchase accounting liabilities, consisting
of $243 million for severance, $88 million for facility shutdown and consolidation and $96
million for transaction costs. In that same year, Tyco used $544 million of cash for current and
prior year acquisition-related charges.19
In his 1999 report that sparked the SEC investigation of Tyco, Meyer questioned whether Tyco
was playing games with its acquisition charges to increase its operating margins. He also said
that Tyco’s accruals could be excessive, creating accounting reserves that were “cookie jars” to
be used to prop up earnings in future periods. On the first point, his report said, “We contend
that Tyco engages in acquisitions so frequently that any effort to make investors believe that
certain charges are non-recurring lacks candor.”20 In the three-year period from 1998 to 2000,
Tyco reported $1.4 billion of non-recurring charges and $9.6 billion of operating income. By
adding back non-recurring charges, as was commonly done by sell side analysts, operating
margins increased by nearly 200 basis points.
16
John G. Inch, “Tyco International – Drinking from the Well,” Bear Stearns Equity Research, June 28, 1999, p. 19.
17
Phua K. Young and Michael Gardiner, “Tyco International – Internal Sales Growth Was Better Than Reported
Numbers,” Merrill Lynch, October 26, 2000.
18
FAS 141(R): Business Combinations, issued in 2007, made significant changes in the guidance for accounting for
business combinations from that which existed at the time of this case. In particular, restructuring and transaction
costs are no longer added to goodwill and instead are expensed as incurred post-acquisition. See Exhibit 4 for more
detail.
19
20
Behind the Numbers, op. cit., p. 4.
to Mar 2022.
Regarding the creation of “cookie jar” reserves, Meyer pointed to the 1998 acquisition of
Sherwood-Davis & Geck, a division of American Home Products:
In connection with this acquisition, Tyco accrued … $159.7 million for severance
costs.… The $159.7 million covers primarily employee termination benefits for
approximately 4,800 employees, averaging $33,000 per employee. By year-end
1998, approximately 1,600 employees had been terminated, yet $126.3 million in
severance accruals remained on the balance sheet. Therefore, the actual cost of
terminating 1,600 employees was 37.5 percent less than the initial accrual. Based
on this fact, a $60 million “cookie jar” will materialize by the time the last
employee is retrenched.21
While the markets took Meyer’s report seriously as evidenced by the resulting drop in Tyco’s
stock price, others questioned his analysis:
We are convinced that Tyco International has no problems with its accounting
policies. We believe that it has strong controls in place to manage and monitor all
of its operations. The corporate culture is clearly up-tempo and employees are
well paid to produce. We take comfort in Tyco International’s financial
statements because of its cash flow generation. Cash is king! If the earnings
materialized without the cash it would be of great concern to us. One can only
“play games” to manufacture cash for so long. After a while it will catch up to the
company. We also take comfort in spending time poring over Tyco
International’s financial statements and working with the company to reconcile all
of the numbers. In addition, since Tyco International is highly acquisitive, it does
have a myriad of filings that are scrutinized by the SEC before being declared
effective. Merrill Lynch’s accounting guru, David Hawkins, after reviewing in
detail Tyco International’s financial statements, has found nothing improper about
the accounting at the company.22
Target Stub Period Accounting
Following Meyer’s report, others began to look at various aspects of Tyco’s accounting
practices. Soon, the accounting practices of companies acquired by Tyco during the period
between the announcement and closing of an acquisition, the “stub period,” were called into
question. A column by Floyd Norris in the New York Times referred to “hidden baths” taken by
companies purchased by Tyco who record significant losses and asset write-downs that provided
multiple advantages to Tyco.23 For one, by writing down the value of a target company’s assets,
Tyco was able to allocate more of the purchase price to goodwill, which does not amortize and
therefore does not impact the income statement. Secondly, pulling forward or exaggerating
losses to assets, such as accounts receivable or inventory, allowed Tyco to boost earnings post-
21
Ibid, p. 4.
22
Phua K. Young and Michael Gardiner, “Tyco International – Fundamentals Remain: The Best of Our Group,”
Merrill Lynch, October 29, 1999, p. 5.
23
Floyd Norris, “At Tyco, Accounting ‘Baths’ Begin Before the Deals Close,” The New York Times, October 29,
1999.
to Mar 2022.
acquisition to the extent those losses were reversed. Tyco was also accused of having acquired
companies manage their working capital in the stub period to benefit cash flows following the
acquisition with actions such as delaying collections from customers or accelerating payments to
vendors.24
THE CIT ACQUISITION
Despite the lingering questions, Tyco continued its pursuit of becoming the next GE as
Kozlowski sought to be remembered as the world’s greatest business executive, “a combination
of what Jack Welch put together at GE and Warren Buffett's very practical ideas on how you go
about creating return for shareholders.”25 But for Tyco to be like GE it needed a finance
division. It got one in March 2001 with the purchase of CIT Group, then the nation’s largest
independent commercial finance company.
At the time of the announcement, CIT had $50 billion of assets, roughly 80 percent of which
were commercial. CIT shareholders received 0.6907 Tyco shares for every share of CIT stock,
which valued CIT at $9.2 billion, more than a 50 percent premium to its stock price prior to the
announcement. When the transaction was announced, analysts forecasted that the purchase
would add $0.10 earnings per share in the first full year (Exhibits 5 and 6 include financial
information on CIT pre and post-acquisition). Tyco’s shares decreased 8 percent following the
announcement. Kozlowski, however, was undeterred. In May 2001 he stated, “I think CIT will
be one of the best deals we’ve ever done.”26
CONCLUSION
Tyco was clearly under pressure to make the CIT purchase pay off for shareholders and remove
the cloud of suspicion regarding its accounting practices. What was less clear was whether those
two objectives could be accomplished at the same time.
24
Caplan. op. cit.
25
Bianco et al., op. cit.
26
Symonds, op. cit.
to Mar 2022.
Exhibit 1
Tyco Announced Acquisitions, 1993-2001
Tyco Acquisition History 1993-2001

$000s
Company Name Division Date Price Sales Price/Sales
U-Brand Flow Control F2Q93 $7,000 $30,000 0.2x
Rockwood Flow Control F3Q93 $5,900 $13,000 0.5x
Rockwood Fire Protection F4Q93 $675 $2,000 0.3x
Winn/Hindle Flow Control F4Q93 $54,200 $37,500 1.4x
IRS Fire Protection F4Q93 $7,300 $9,000 0.8x
Modern Integrated Sys. Ltd. Fire Protection F2Q94 $200 $600 0.3x
Classic Healthcare F2Q94 $3,300 $3,000 1.1x
James River (Bone Guard) Healthcare F2Q94 $1,900 $5,200 0.4x
Stanley Flagg Flow Control F2Q94 $4,200 $25,000 0.2x
Unipatch Healthcare F2Q94 $9,100 $7,900 1.2x
Promeon Healthcare F3Q94 $5,200 $5,000 1.0x
Enterprise Healthcare F3Q94 $600 $2,500 0.2x
All State Fire Protection Fire Protection F3Q94 $525 $1,400 0.4x
Preferred Pipe Flow Control F4Q94 $18,200 $18,000 1.0x
National Fire & Security Fire Protection F4Q94 $3,100 $15,000 0.2x
Sepci Fire Protection F1Q95 $4,300 $5,000 0.9x
LMI Healthcare F2Q95 $6,800 $10,000 0.7x
Sheridan Healthcare F2Q95 $15,000 $20,000 0.8x
Kendall Healthcare F2Q95 $1,200,000 $800,000 1.5x
Cambrex Healthcare F2Q95 $700 $2,400 0.3x
JJ Pipe Flow Control F2Q95 $400 $1,500 0.3x
Innodouble Flow Control F2Q95 $350 $1,000 0.4x
Tectron Flow Control F3Q95 $28,300 $31,000 0.9x
Smith Valve Flow Control F3Q95 $4,000 $12,000 0.3x
Debro Engineering Flow Control F3Q95 $800 $3,000 0.3x
Capital FP Engineering Fire Protection F3Q95 $900 $4,000 0.2x
Lintott Fire Protection F4Q95 $2,200 $9,000 0.2x
Unistrut Flow Control F4Q95 $64,300 $90,000 0.7x
WAJAX-GAAM Fire Protection F1Q96 $1,600 $8,000 0.2x
Automatic Sprinkler Fire Protection F1Q96 $12,300 $16,800 0.7x
Rathgerber Healthcare F1Q96 $700 $1,000 0.7x
Belgicast Flow Control F1Q96 $14,300 $16,000 0.9x
Neotecha GmBH Flow Control F1Q96 $950 $5,500 0.2x
Triange Flow Control F1Q96 $8,000 N/A N/A
Promed Healthcare F3Q96 $101,900 $140,000 0.7x
Earth Tech Specialty F3Q96 $105,400 $160,000 0.7x
Whitman & Howard Specialty F3Q96 $3,200 $10,000 0.3x
Star Springkler Fire Protection F3Q96 $4,400 $13,000 0.3x
Bell Waler Engineering Specialty F4Q96 $800 $5,000 0.2x
Preferred CO2 Systems Fire Protection F4Q96 $600 $2,500 0.2x
Sentry Healthcare F4Q96 $17,100 $13,000 1.3x
Betham Specialty F4Q96 $21,000 $20,000 1.1x
Nashua Specialty F4Q96 $27,100 $50,000 0.5x
Santex (JV) Flow Control F4Q96 $1,100 $5,000 0.2x
Stockham Flow Control F4Q96 $10,000 $15,000 0.7x
Door/HVAC Businesses Australia/NZ F4Q96 $7,500 $22,500 0.3x
to Mar 2022.
Exhibit 1 (continued)

$000s
Thorn Security F1Q97 $225,000 $300,000 0.8x
Melbourne Fire Brigade Fire Protection F1Q97 $2,000 $3,000 0.7x
RJ Brodie Fire Protection F1Q97 $3,000 $8,000 0.4x
Shield IND Fire Protection F1Q97 $1,000 $5,000 0.2x
Metabilt Fire Protection F1Q97 $5,000 $8,000 0.6x
Arbo Healthcare F1Q97 $19,400 $24,000 0.8x
Rochester Electrical F1Q97 $32,000 $38,000 0.8x
Watts Flow Control F1Q97 $90,000 $80,000 1.1x
Carlisle Specialty F1Q97 $302,000 $400,000 0.8x
Unistrut Europe F2Q97 $20,000 $30,000 0.7x
Steel Support Systems Flow Control F2Q97 $4,000 $25,000 0.2x
T.J. Cope Flow Control F2Q97 $16,600 $30,000 0.6x
Zettler Fire Protection F2Q97 $17,000 $160,000 0.1x
Electrostar Electrical F3Q97 $116,500 $70,000 1.7x
Sempell Valve Group Flow Control F3Q97 $44,100 $130,000 0.3x
American Tube & Pipe Flow Control F3Q97 $106,100 $120,000 0.9x
Different Dimensions Inc. Specialty F4Q97 $18,600 $26,000 0.7x
Professional Fire Protection Fire Protection F4Q97 $1,300 $46,000 0.0x
Contour Medical Healthcare F4Q97 $9,300 $5,000 1.9x
Panmedica Healthcare F4Q97 $5,800 $4,000 1.5x
AT&T Submarine Systems Electrical F4Q97 $850,000 $700,000 1.2x
ADT Security F4Q97 $5,600,000 $1,700,000 3.3x
Armourgard Security Security F4Q97 $23,000 $35,000 0.7x
Proclinics Healthcare F4Q97 $10,000 $12,000 0.8x
Camp Healthcare F4Q97 $16,000 $22,000 0.7x
INBRAND Healthcare F4Q97 $315,000 $230,000 1.4x
Keystone Flow Control F4Q97 $1,200,000 $700,000 1.7x
Holmes Protection F2Q98 $107,000 $70,000 1.5x
Sherwood Healthcare F2Q98 $1,770,000 $975,000 1.8x
Confab Healthcare F3Q98 $200,000 $210,000 1.0x
Wells Fargo Alarm Security F3Q98 $425,000 $240,000 1.8x
Sigma Circuits Printed Circuit Group F4Q98 $56,000 $90,000 0.6x
CIPE Security F4Q98 $450,000 $230,000 2.0x
Crosby Valve Flow Control F4Q98 $125,400 $65,000 1.9x
to Mar 2022.

$000s
US Surgical Healthcare F1Q99 $3,300,000 $1,400,000 2.4x
Graphic Controls Healthcare F1Q99 $460,000 $280,000 1.6x
Entergy Security Security F1Q99 $237,000 $75,000 3.2x
Sunbelt Plastics Specialty F2Q99 $85,000 $105,000 0.8x
Alarmguard Security F2Q99 $51,800 $34,000 1.5x
Glynwed Metals Flow Control F3Q99 $231,000 $313,000 0.7x
AMP Inc. Electronics F3Q99 $11,300,000 $5,500,000 2.1x
Raychem Electronics F4Q99 $3,448,000 $1,800,000 1.9x
Temasa Submarine F4Q99 $280,000 $65,000 4.3x
Central Sprinkler Fire Protection F4Q99 $213,000 $224,000 1.0x
General Surgical Healthcare F1Q00 $100,000 $24,000 4.2x
AFC Cable Systems Flow Control F1Q00 $503,000 $272,792 1.8x
Siemens Electromechanical Electronics F1Q00 $1,100,000 $900,000 1.2x
Praegitzer Industries Printed Circuit Group F1Q00 $72,000 $189,100 0.4x
Critchley Electronics F2Q00 $200,000 $75,000 2.7x
Thomas & Betts OEM Electronics F4Q00 $687,000 $750,000 0.9x
Mallinckrodt Healthcare F1Q01 $4,200,000 $2,752,500 1.5x
Innerdyne Healthcare F1Q01 $180,000 $20,400 8.8x
Autoliv AB Electronics F1Q01 N/A $45,000 N/A
Lucent Power Systems Electronics F1Q01 $2,600,000 $1,600,000 1.6x
Simplex Fire Protection F2Q01 $1,150,000 $867,000 1.3x
Pactiv Plastics F2Q01 $75,000 $200,000 0.4x
Scott Technologies Fire Protection F3Q01 $400,000 $255,000 1.6x
CIT Group Financial F3Q01 $10,144,660 $5,250,000 1.9x
SecurityLink Security FQ401 $1,070,000 $525,000 2.0x
Bard Healthcare FQ102* $3,200,000 $1,250,000 2.6x
Edison Select Security FQ401* $269,500 $154,000 1.8x
Sensormatic Security FQ102* $2,300,000 $1,100,000 2.1x
TOTAL 108 Transactions $61,830,460 $34,484,092 1.8x

* Announced but not closed as of FY01
Source: Jeffrey Sprague, Tyco International Ltd. – Passing the Test for Higher Valuation, Saloman Smith Barney,
September 7, 2001, pp. 67-69.
to Mar 2022.
Exhibit 2
Tyco Stock Price 1992-2001
TYC Stock Price

$70
$60
$50
$40
$30
$20
$10
$0
2-Dec-96
30-Sep-92
2-Oct-97
2-Aug-93
2-Aug-98
2-Apr-95
2-Apr-00
2-Nov-94
2-Nov-99
2-Jan-99
2-Jan-94
2-Sep-95
2-Sep-00
2-Feb-01
2-Feb-96
2-May-97
2-Jun-99
2-Jun-94
2-Jul-96
2-Jul-01
2-Mar-93
2-Mar-98
Source: Chart Data from Google Finance
Exhibit 3
Tyco Organic Growth
Tyco Organic Growth Reconcilliation

($ Millions)
Q4 1999 Reported Sales 6,225

Divestitures (181)
Q4 1999 Internal Sales 6,044
Q4 2000 Reported Sales 7,805
Impact of:
Plastic/Steel Pricing (7)
Foreign Exchange 237
Unannounced Acquisitions (222)
Acquisitions (898)
Q4 2000 Organic Sales 6,916
Organic Growth 14.4%
Source: Compiled from Merrill Lynch analyst report
to Mar 2022.
Exhibit 4
Accounting Guidance Overview
This exhibit provides a brief overview of some of the relevant accounting guidance discussed in
the case and subsequent changes to that guidance since 2001.
FAS 141: Business Combinations was originally issued in June 2001 and called for all business
combinations to be accounted for under the purchase method, thereby eliminating the “pooling”
combinations. FAS 141 was revised in December 2007 and this required an acquirer to
recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date. Originally, FAS 141
required the acquirer to include the costs incurred to effect the acquisition (acquisition-related
costs) in the cost of the acquisition that was allocated to the assets acquired and the liabilities
assumed. Among other changes, FAS 141(R) required those costs to be recognized separately
from the acquisition. In addition, in accordance with Statement 141, restructuring costs that the
acquirer expected but was not obligated to incur were recognized as if they were a liability
assumed at the acquisition date. FAS 141(R) required the acquirer to recognize those costs
separately from the business combination.
FAS 142: Goodwill and Other Intangible Assets. Prior to its issuance in June 2001, companies
were required to amortize goodwill over a long time (up to 40 years) and this non-cash expense
reduced reported EPS. FAS 142 eliminated amortization and instituted an annual impairment test
for the value of goodwill carried on the balance sheet.
FAS No. 146: Accounting for Costs Associated with Exit or Disposal Activities was issued in
June 2002 and provided more consistent accounting for costs associated with exit or disposal
activities at the time they were incurred rather than at the date of a commitment to an exit or
disposal plan. These costs may include lease termination, certain employee severance associated
with a restructuring, discontinued operations, plant closings, or other exit or disposal activity.
EITF 94-3: Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring) permits (a) the
recognition as a liability today of future expenditures for involuntary termination benefits to be
paid to employees and (b) the recognition of a liability today for future expenditures that are
directly associated with a plan to exit an activity―provided those expenditures will have no
future economic benefit. This directive was nullified by FAS 146.
EITF 95-3: Recognition of Liabilities in Connection with a Purchase Business Combination

expands on 94-3 to say that, in a business combination, expenditures to relocate employees may
also be recognized as a liability at the time of the business combination, in addition to the
employee termination benefits and exit costs covered by 94-3. The majority of this directive
was nullified by FAS 146.
to Mar 2022.
Exhibit 5
Excerpts from Tyco’s 2001 Annual Report
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
to Mar 2022.
Exhibit 6
Excerpts from CIT June 2001 10Q
CIT Group and Subsidiaries

Summary Consolidated Balance Sheets
($ millions)
30-Jun-01 31-Mar-01 31-Dec-00
(Successor) (Predecessor) (Predecessor)
ASSETS
Financing and Leasing Assets
Commercial 28,085.0 29,102.2 29,304.0
Consumer 2,780.7 4,198.5 4,193.5
Finance receivables 30,865.7 33,300.7 33,497.5
Reserve for credit losses (463.8) (462.0) (468.5)
Net finance receivables 30,401.9 32,838.7 33,029.0
Operating lease equipment, net 7,182.4 7,186.7 7,190.6
Finance receivables held for sale 2,073.9 2,624.8 2,698.4
Cash and cash equivalents 900.2 740.0 812.1
Goodwill and other intangibles, net 6,101.7 1,942.1 1,964.6
Other assets 4,932.8 3,053.1 2,995.1
TOTAL ASSETS 51,592.9 48,385.4 48,689.8
LIABILITIES AND SHAREHOLDER'S EQUITY

Total debt 36,758.7 37,718.2 37,965.1
Credit balances of factoring clients 1,945.3 2,131.4 2,179.9
Accrued liabilities and payables 2,403.3 2,315.2 2,287.6
Total liabilities 41,107.3 42,164.8 42,432.6
Total equity 10,485.6 6,220.6 6,257.2
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 51,592.9 48,385.4 48,689.8
to Mar 2022.
CIT Group and Subsidiaries

Summary Consolidated Income Statements
($ millions)
January 1 Three Months Six Months

through June June 2 through Ended March Ended June 30,
1, 2001 June 30, 2001 31, 2001 2000
(Predecessor) (Sucessor) (Predecessor) (Predecessor)
Finance income 2,298.8 417.9 1,376.8 2,530.6
Interest expense 1,022.7 161.8 625.7 1,202.8
Net finance income 1,276.1 256.1 751.1 1,327.8
Depreciation on operating lease equipment 588.1 110.0 346.4 619.5
Net finance margin 688.0 146.1 404.7 708.3
Other revenue, net 237.5 95.9 211.6 470.5
OPERATING REVENUE 925.5 242.0 616.3 1,178.8
Salaries and general operating expenses 446.0 83.0 263.5 525.7

Provision for credit losses 216.4 18.6 68.3 125.6
Goodwill amortization 37.8 14.4 22.5 41.1
Acquisition related costs 54.0 - - -
OPERATING EXPENSES 754.2 116.0 354.3 692.4
Income before taxes 171.3 126.0 262.0 486.4

Provision for income taxes (85.1) (53.9) (97.1) (184.8)
Minority interest (4.9) (0.9) (4.8) (6.3)
NET INCOME 81.3 71.2 160.1 295.3
to Mar 2022.
NOTE 1―SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF

PRESENTATION
The unaudited financial statements presented herein include the consolidated accounts of The
CIT Group, Inc. and its subsidiaries ("CIT" or "the Company"). On June 1, 2001 CIT was
acquired by a wholly-owned subsidiary of Tyco International Ltd. ("Tyco" or "Parent") in a
purchase business combination (see Note 2). As a new wholly-owned subsidiary of Tyco, CIT
will continue to operate its business independently within Tyco and will continue to report its
results separately. In accordance with the guidelines for accounting for business combinations,
the purchase price paid by Tyco plus related purchase accounting adjustments have been
"pushed-down" and recorded in CIT's financial statements for the period subsequent to June 1,
2001. This resulted in a new basis of accounting reflecting the fair market value of its assets and
liabilities for the "successor" period beginning June 2, 2001. Information for all "predecessor"
periods prior to the acquisition is presented using CIT's historical basis of accounting.
These financial statements have been prepared in accordance with the instructions to Form 10-Q,
do not include all of the information and note disclosures required by generally accepted
accounting principles in the United States and should be read in conjunction with CIT's Annual
Report on Form 10-K for the year ended December 31, 2000. These financial statements have
not been examined by independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly CIT's financial position and results of
operations.
NOTE 2―ACQUISITION BY TYCO INTERNATIONAL LTD.
The purchase price paid by Tyco plus related purchase accounting adjustments was valued at
approximately $9.5 billion and is presented as "Parent company investment" as of June 1, 2001
in the Consolidated Statement of Changes in Shareholder's Equity. The $9.5 billion value
consisted of the following: the exchange of approximately 192.5 million outstanding CIT
common shares (including exchangeable shares) for Tyco common shares at 0.6907 per share
valued at $6,650.4 million; the purchase of 71 million common shares from The Dai-Ichi
Kangyo Bank, Limited at $35.02 per share for $2,486.4 million in cash; the estimated fair value
of stock options of $318.6 million; and $29.2 million in acquisition related costs incurred by
Tyco.
As of the acquisition date, CIT recorded each asset and liability at its estimated fair value, which
amount is subject to future adjustment when appraisal or other valuation data are obtained.
Approximately $4.2 billion of incremental goodwill and other intangible assets were recorded,
which represents the excess of the transaction purchase price over the fair value of CIT's net
assets and purchase accounting liabilities. Goodwill and other intangible assets are being
amortized on a straight-line basis over periods ranging from 5 to 40 years.
to Mar 2022.
As part of CIT's integration with Tyco, the Company has begun to formulate workforce
reduction and exit plans. As of June 30, 2001, management determined that approximately 350
employees would be terminated and announced the benefit arrangements to those employees. As
a result, $39.1 million in severance costs and other related exit costs were accrued.
At June 30, 2001, a total of $48.3 million in purchase accounting reserves remained in the
Consolidated Balance Sheet. The total consists of $39.1 million related to the integration of CIT
and Tyco and $9.2 million related to lease termination costs associated with CIT's acquisition of
Newcourt in 1999.
NOTE 3―DERIVATIVE FINANCIAL INSTRUMENTS
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which became effective for CIT on January 1, 2001. SFAS No. 133 was amended by
SFAS No. 137 and SFAS No. 138. Under SFAS No. 133, as amended, all derivative instruments
are recognized in the balance sheet at their fair values and changes in fair value are recognized
immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For
derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair
value is recorded temporarily in shareholder's equity, and contractual cash flows, along with the
related impact of the hedged items, continue to be recognized in earnings. Any ineffective
portion of a hedge is reported in earnings as it occurs.
The ineffective portion of changes in fair values of hedge positions reported in earnings for the
predecessor period April 1 through June 1, 2001, amounted to $0.6 million before income taxes,
or $0.4 million after taxes, and was recorded as an increase to interest expense. The ineffective
portion of changes in fair values of hedge positions included in earnings for the successor period
June 2 through June 30, 2001 was $0.5 million before income taxes, or $0.3 million after taxes.
On January 1, 2001, CIT recorded a $146.5 million, net of tax, cumulative effect adjustment to
Accumulated Other Comprehensive Loss, a separate component of shareholder's equity, for
derivatives qualifying as hedges of future cash flows to reflect the new accounting standard for
derivatives. As described in Note 1, in conjunction with the Tyco acquisition, "push-down"
accounting for business combinations was implemented as of the June 1, 2001 acquisition date.
to Mar 2022.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS
Other Revenue, net

($ millions)
Three Months Ended Six Months Ended

30-Jun-01 30-Jun-00 30-Jun-01 30-Jun-00
Fees and other income 117.3 121.1 223.9 242.5
Gains on securitizations 34.7 23.0 72.1 42.0
Factoring commissions 35.3 38.2 72.0 76.7
Gains on sales of leasing equipment 10.8 39.4 36.8 61.2
Gains on venture capital investments 1.8 10.6 6.7 48.1
Non-recurring charges (78.1) - (78.1) -
Total other revenue, net 121.8 232.3 333.4 470.5
Other revenue, net was $121.8 million for the combined three months ended June 30, 2001 as
compared to $232.3 million during the three months ended June 30, 2000. Other revenue, net for
the combined three months ended June 30, 2001 includes $78.1 million of non-recurring charges
for the write-downs of certain equity investments in the telecommunications industry and e-
commerce markets of which the Company plans to dispose. Excluding these charges, other
revenue, net for the period decreased to $199.9 million due principally to lower gains on
equipment sales and venture capital investments. Fees and other income includes miscellaneous
fees, syndication fees and gains from receivable sales.
Securitization gains were $34.7 million, or 13.5% of pretax income, excluding non-recurring
charges, on $1.3 billion of volume securitized, as compared to $23.0 million or 9.4% of pre-tax
income on $0.9 billion of volume in the three months ended June 30, 2000. Gains on equipment
sales decreased due to the impact of push-down accounting during the successor June 2001
period. Weak economic conditions in the public equity markets resulted in venture capital gains
of $1.8 million, down from $10.6 million last year.
to Mar 2022.

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CASE: A-202

TYCO – M&A MACHINE

Kozlowski Takes the Helm

In addition to an aggressive acquisition strategy and compensation structure, Kozlowski’s Tyco

Tyco International Ltd. is a global company that manufactures, distributes and

TYCO’S ACQUISITION STRATEGY

QUESTIONS IMPACT VALUE

In addition to questioning the strategy of growth through acquisitions, Tyco’s acquisition

Financial Statement Visibility

Because Tyco integrates its acquisitions so quickly, it becomes extremely difficult

Accounting for Acquisition Costs

Target Stub Period Accounting

THE CIT ACQUISITION

Tyco Acquisition History 1993-2001

Tyco Acquisition History 1993-2001

Tyco Acquisition History 1993-2001

TOTAL 108 Transactions $61,830,460 $34,484,092 1.8x

TYC Stock Price

Source: Chart Data from Google Finance

Tyco Organic Growth Reconcilliation

Q4 1999 Reported Sales 6,225

Q4 2000 Reported Sales 7,805

Source: Compiled from Merrill Lynch analyst report

EITF 95-3: Recognition of Liabilities in Connection with a Purchase Business Combination

CIT Group and Subsidiaries

LIABILITIES AND SHAREHOLDER'S EQUITY

Total equity 10,485.6 6,220.6 6,257.2

TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 51,592.9 48,385.4 48,689.8

CIT Group and Subsidiaries

January 1 Three Months Six Months

OPERATING REVENUE 925.5 242.0 616.3 1,178.8

Salaries and general operating expenses 446.0 83.0 263.5 525.7

OPERATING EXPENSES 754.2 116.0 354.3 692.4

Income before taxes 171.3 126.0 262.0 486.4

NET INCOME 81.3 71.2 160.1 295.3

NOTE 1―SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Other Revenue, net

Three Months Ended Six Months Ended

Total other revenue, net 121.8 232.3 333.4 470.5

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