Can This Man Save Tyco?

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.