Can This Man Save Tyco?

(2 of 3)

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.