Tyco International is a company that deals with diverse trades in the manufacturing sector. It was created by Switzerland and United States and has its headquarters in Princeton, New Jersey. After the incorporation, it got its name as Tyco International (US) Inc. It is composed of three major business trades. They include: security solutions, fire protection and control of flow. Tyco International endorsed a corporate separation that split the three segments of its companies to become independent. The three became Covidien Ltd which was formerly known as Tyco Healthcare, TE connectivity which was formerly known as Tyco Electronics and lastly Tyco International Limited which was formerly known as Tyco Fire & Security and Tyco engineered products & services. All these corporate changes happened in June 2007.
In January 2010, Tyco International acquired Brinks Home Security Holding. The security group was operating under the name Broadview Security. The transaction cost for the trade was $2.0 billion. Broad View Security merged with ADT security services to expend its security portfolio. These and many more acquisitions followed years later.
Background Tyco International Ltd
Tyco International was founded in the year 1960 by Arthur J. Gandua. It was founded to be an investment and holding company. During its foundation it had only two segments; Tyco Semi conductors and the Materials Research laboratory. The first two years after its formation, it focused mainly on Government research and military experiments which were done in the private sector only. Tyco International was incorporated in Massachusetts in the year 1962. After the incorporation it focused mainly on the high Tec materials, science and energy products. In the year 1964, Tyco acquired Mule Battery products that it would use to fill the gaps that were present in its development and distribution network. Tyco International was listed on the New York Stock Exchange in 1974. This was after it increased equity and boom in the previous years. It had reached stake holder equity of $ 15 million and had consolidated sales of $34 million. Tyco was able to achieve a net worth of $140 million after a decade of good business. This success was attributed to the acquisition of Simplex Technology, Grinnell Fire Protection systems, Ludlow Corporation and Armin plastics.
Dennis Kozlowski became the CEO of the company in 1992. He introduced a strategy of aggressive acquisition that lasted for several years. Between 1992 and 2001, Kozlowski was able to acquire over 100 companies. Some of the major acquisitions that Kozlowski got included Wormald International Limited, Neotacha Hindle/Winn, classic Medical and many others. Tyco International was included in the standard 4 poor’s, S&P, 500 composite index. This was in 1992 and it included companies in the United States which had the largest market capitalization. The total number of these companies is 500 and they trade publicly. This goes to show that Tyco was doing very well in the business.
Tyco later introduced merging of small companies that traded publicly. The focus of the smaller companies was in the security services. After the merging, Tyco International of Massachusetts became a subsidiary of ADT Limited and was fully owned by it. Tyco acquired additional companies in 1992. These two companies of S&P 500 were bought in the US for $3 billion. In 2000, Tyco closed down its fiber optic cable division. This was a result of continued losses from that sector.
Questionable Accounting Practices and the Financial Statements Highlights
The major cause of the fall of Tyco International was the lack of credible accounting practices. The Corporation executive officers were rewarding themselves illegal bonuses and cancelling loans they had taken from the Corporation. The two, Kozlowski and Swartz, also operated the company’s stock prices in the most unprofessional way. They hiked the prices and forged the real value of the stock prices. The two also took part in the fraud that saw them siphon over $600 million from Tyco International. Kozlowski and Swartz denied access of the company’s documents to external auditors. They hired internal auditors who reported to the two top executives. These actions made it impossible for the investors to be informed about the true state of the company’s status. They also exercised perjury while working as the top executives of Tyco international. These acts that the Kozlowski and Swartz engaged in affected negatively Tyco International. The two were, however, later arrested and faced 23 counts of violations of federal securities laws. The Courts found that they had violated the Corrupt Organization Act and many accounting laws.
The corporate governance was abused in the corporation. Decisions were coming from all corners. No one took charge of the company. The top executives formed no committee that would look into the crucial matters of the corporation. This made them have an easier way to misuse the corporation cash disbursement. There was nobody to question their illegal acts in the Company. The duties and roles of the employees were not clearly defined. Their responsibilities were not defined and all those employed were not allowed to question the moves and decisions of the top executives.
The employees took advantage of the failed corporate governance and started also engaging in unethical practices. The top executives did not offer direct guiding to the employees about what was expected of them. They were busy planning and scheming how to defraud the company. The employees also did not receive ethics training that they would put into practice. No systems were made to enable the employees know how to handle ethics violations. This allowed Kozlowski and Chwartz to flaunt all accounting rules and regulations. They also did not take into consideration the rights of investors to receive information about the company. These acts led to losses of Tyco in the years 2000-2002. The earnings of Tyco earning reduced drastically (Markham, 2006).
Kozlowski was noted for being extravagant with the Company’s funds. He hosted private parties at expensive places and invited many people to attend. Most of those he invited were people he considered his potential business partners. One time he organized and planned a birthday party for his wife. The party cost over $2 billion. Kozlowski charged the bill to the company. When asked about it, he said most of the invited guests were directors and so it was more of a business meeting than a birthday party. Kozlowski’s tactics were noted to be more of greed than fraud. He just took money from the company and kept it for his personal use.
The discovery of the Tyco Scandal
The investigation of the Tyco scandal started in 1999. The Securities and Exchange Commission (SEC) had done an investigation in the form of an analyst report that found questionable accounting practices in Tyco International. It focused mainly on the pre-acquisition of the companies that were acquired by the Tyco International. With all the evidence they had found, SEC did not take any legal action.
Questions emerged later in January 2002 after someone tipped a $20million payment to Tyco director Frank Walsh, Jr. Kozlowski defended himself by saying it was payment for the acquisition of CIT (Maras, 2011). This did not stop the investigations of Kozlowski’s actions for tax evasion. Kozlowski had declined to pay sales tax amounting to $13 million. This tax was accounted from the artwork he had purchased in New York. On seeing that his accounting malpractices would be detected, Kozlowski resigned on “personal grounds”. His immediate replacement was John Fort. The other two top executives resigned the same year.