Tyco couldn’t sell new debt in the capital markets the way a reputable company could. Tyco, even with Breen stage- managing the damage control, wasn’t a reputable company.

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The board of directors of Tyco International hired Ed Breen from Motorola to rescue their scandal-tarnished company. On September 12, 2002, less than three months after the board hired him as CEO, with annual compensation of $1.5 million plus a signing bonus of $3.5 million and options to buy 8.7 million shares, he began to do exactly that.

At a board meeting conducted via conference call, a director, Lord Michael Ashcroft, who sold ADT to Tyco in 1997, offered a resolution: Every member who served during the era of Dennis Kozlowski, whose corruption and extravagant spending buried Tyco under an avalanche of exposés and investigations, would not stand for reelection at the next annual meeting.

To say that consternation reigned would be an understatement. This was, perhaps, an unprecedented corporate decapitation, and, according to sources close to the company, several board members didn’t conduct themselves with a stoic sense of honor. While half said they might be willing to fall on their swords, the other half’s attitude was: You go first. The gist of the rants: We can’t believe we hired you, and now you’re getting rid of all of us.

For three hours, the directors wrangled with their CEO. Finally, Ashcroft called for a vote. The 10 members on the conference call deciding their own fate voted 5–5. That put Breen in the role of tiebreaker. He put the speakerphone on hold for a few minutes and collected his thoughts.

Surely he had to pause when confronted with the ramifications of casting the deciding “yea” vote. But he was mainly giving the impression of deliberation. Breen was convinced he had to get rid of the old board members who repeatedly acquiesced to Kozlowski and his former managers, approving over-the-top pay, bonuses and loans — including some that reeked of self-dealing.

“There was a crisis of confidence that could sink a ship,” Breen says. “You couldn’t [redeem and rehab Tyco] by waving your hands and making speeches. You had to change the company.” He took the phone off hold and cast the deciding vote to dismiss the board. Tyco’s ship was indeed sinking, and there was no dock to tow it to for repairs. All that had changed was the name of the CEO at the helm. Breen’s plan for Tyco had three phases: save it, fix it and grow it.

Now, five years after Breen put that plan into effect, it’s time to recognize it for what it has become: one of the great turnarounds in modern corporate history.

Step 1

Save It:
Purge Culture, Fix Balance Sheet

Breen doesn’t immediately come across as a charismatic leader. His looks are more ruddy than chiseled, his manner more subdued than electric.

He does, however, possess two qualities best suited for a company facing collapse: decisiveness and focus. “From the first, he projected cheerful, unpretentious confidence,” says Linda Robinson, the well-known crisis manager whose firm, Robinson Lerer & Montgomery, was retained by Tyco. “No aloofness, no swagger.”

“Ed would make an outstanding general,” adds Jack Krol, the former DuPont CEO who, like Jimmy Carter, was selected for Hyman Rickover’s vaunted Navy nuclear-submarine program. “He’s decisive.” The model, he says, would be less bombastic George Patton, more tactical Omar Bradley.

Kozlowski’s team had twice approached Krol about joining Tyco’s board, but Krol had resisted. “I was concerned that the company would be filing for bankruptcy soon,” he says. “And I worried about what new bomb would be going off — what sort of accounting irregularities would suddenly come to light.” Breen similarly craved the integrity and credibility Krol would help bring, and ushered him into his office within a week of arriving.

“Before I left for the meeting, my wife told me that if I took the job I couldn’t come home,” Krol recalls. Krol toted along a list of eight things he would do in the first 90 days. Breen took out a list of six, all of which dovetailed. “He turned me in an hour,” says Krol, who worked with Spencer Stuart to help recruit the rest of the new board and is now Tyco’s lead director. “When I came home, my wife said, ‘I hope you said no.’ But what could I do? I was outsold.”

The board situation resolved, Breen moved to replace top management. By the time he was done, of the roughly 100 people working at company headquarters in the Kozlowski-built Versailles-in-the-sky on 57th Street in Manhattan, the only people who kept their jobs were a receptionist and two assistants. “I knew there was no way I could be completely fair about [the firings],” Breen says. “But during the first six months, every day I came into work I heard scandalous things from everybody about everybody. I was never going to figure out who knew what when. I knew I’d never know who to trust.”

Not long after cleaning out headquarters spiritually, Breen moved it physically to a standard-issue suburban office park in Princeton, New Jersey, where his nicely appointed office now overlooked some shrubs. Then he tackled a still more vexing issue: cleaning up the balance sheet.

When Breen’s appointment as CEO was announced after the market close on July 25, 2002, rumors flew that Tyco would file for bankruptcy as Enron, WorldCom and Adelphia had before it. Tyco’s stock, which had lost 86 percent of its value during the preceding seven months, opened at $9.95 that day and was beaten down still further to $6.98 at one point. “There was a total lack of confidence,” Breen says.

He learned that the bankruptcy rumors were half-true: Though no filings were prepared, creditors would soon be poised to push Tyco into Chapter 11. Tyco was carrying roughly $30 billion in debt, $12 billion of which the company had to repay in Breen’s first year. Although it had around $2 billion in cash, it couldn’t be used for debt repayment. “We needed that to run the company,” he says. “Like gas in the car.”

But Tyco couldn’t sell new debt in the capital markets the way a reputable company could. Tyco — even with Breen stage-managing the damage control — wasn’t a reputable company. “Our debt was a crisis, because we had to raise money when we were in the middle of a scandal,” he says. Even though Tyco had a number of divisions with strong brands and dominant market share, those assets wouldn’t be good for long if they were starved for capital because of the company’s debt burden.

To make matters worse, in fiscal 2002 (ending September 30 of that year), Tyco lost $9 billion. Although previous management boasted that Tyco generated around $4 billion a year of free cash flow, it produced a measly $894 million in fiscal 2002. Of the roughly $12 billion owed in 2003, $2.5 billion was needed to repay bank and bond debt as early as February.

Destroyed reputations are tough to rebuild quickly, but that’s what Breen had to do to borrow money to repay the soon-to-be-due debt. Tyco was in a race to rehabilitate its image before it defaulted.

Breen’s swift personnel moves were seen as steps in the right direction. He appointed a new senior vice president of corporate governance who reported directly to the new board. He set up an internal audit staff that grew to 110 people, with the audit chief reporting to the new board’s audit committee chairman, Jerome York, a former CFO of Chrysler and IBM. He also brought on Boies, Schiller & Flexner, the law firm of attorney David Boies, to conduct what turned into an intense four-month investigation of the company’s accounting and other practices.

When Boies’s investigation began, nobody knew how long it would take or whether it would find more instances of venality and fraud. What Tyco’s leaders did understand was that the SEC wouldn’t allow it to file its year-end financial results, let alone a registration statement for a debt offering, until the company answered a number of questions from the agency. As a practical matter, those questions and regulatory reservations couldn’t be laid to rest until Boies filed his report. The clock was ticking.

Meanwhile, Breen made cost-cutting moves and publicized his priorities. In his presentations, he emphasized that Tyco would focus first on cash flow and second on earnings, and would not concentrate on growth for a while — a stark contrast to Kozlowski’s regime.

Then Breen acted to turn priorities into realities. For example, Tyco had spent $5 billion to develop an enormous undersea cable business called Tycom. It planned to spend another $1.5 billion in 2003. “I immediately stopped that and put it up for sale,” Breen says. “Spending this money to build an undersea cable business that was worth nothing made no sense.” Tyco lost billions on the venture, but cut its losses and sold it in 2005 for some $300 million to Videsh Sanchar Nigam, an Indian company controlled by the Tata Group.

Initiatives such as this cut costs and moved the company forward constructively, but still didn’t cover its debt repayments. Fortuitously, on the day before New Year’s Eve 2002, Boies, with the assistance of three accounting firms working overtime, issued its report. It didn’t exonerate Tyco, finding accounting practices pertaining to earnings growth that it termed “aggressive.” The company had to restate its results for 2002, but the investigation didn’t find any “significant or systemic fraud.”

Tyco exhaled a heady breath of collective relief. In short order, it answered the SEC’s questions, filed its registration statement and, before the end of January, sold $4.5 billion in convertible bonds. “We paid the debt we had to pay literally the next month,” Breen says.

Since then, Tyco has rehabbed its capital structure, reduced debt to $10.2 billion and boosted free cash flow, from $894 million in 2002 to $3.7 billion last year. It also bought back 11 percent of its shares outstanding while the price was (relatively) low, spending around $8 billion to repurchase more than 220 million shares.

“The credibility that Breen established in the early days facilitated restoring the stability of the company,” says Jack Kelly, who followed Tyco for years as a managing director of industrials research at Goldman Sachs. Tyco would survive.

Step 2

Fix It:
Deprogram ADT’s Sales

ADT was, by a wide margin, Tyco’s largest division — last year, it logged revenues of $7.2 billion — with a sales model that could have dragged the entire company down. ADT had a dominant 11 percent share of the fragmented $65 billion global electronic-security market — built up mostly by buying new accounts from outside dealers. And these middlemen were well-paid. In 2002, ADT spent $1.5 billion getting two-thirds of its new accounts from dealers or others outside ADT, and planned to boost that customer-acquisition number to $2.4 billion in 2003. This sales approach meant that, on average, ADT paid a little over $1,000 per new account.

For all its size, revenues and opportunity, ADT had a parasitic relationship with Tyco — in 2002, Tyco subsidized its acquisitions to the tune of $220 million. It was emblematic of Kozlowski’s era: growth as a crutch, with a complete lack of oversight. The division didn’t have to focus on new products or new services.

It didn’t have to earn its growth the hard way: by doing it internally. “It was just another acquisition spree, like Kozlowski’s,” says Goldman’s Kelly. “Breen forced them to refocus.”

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