Man Without Qualities

Friday, September 13, 2002

More Tyco Follies

Floyd Norris of the New York Times seems headed in the right direction in asking how likely it is that a management team that looted Tyco did not play games with the company's financial statements and its representations to investors.

Mr. Norris even broaches the tender subject of investment bank complicity: "Along the way, we are told, Mr. Kozlowski got an unnamed brokerage firm to replace one analyst with a friendlier one and then exchanged gifts worth thousands of dollars with that analyst."

But if Mr. Norris' suspicions are borne out - and the Man Without Qualities believes they are likely to be - it is rather easy to see how Merrill and Goldman could be drawn into the ensuing maelstrom way beyond any bank complicity in the Enron mess. Tyco is a conglomerate, put together in a huge string of mergers and acquisitions in which Merrill and Goldman were intimately involved and for which they earned huge fees. Indeed, they are hoping to earn more huge fees breaking the company up. The Man Without Qualities has no bias against huge fees, or against investment bankers profiting where the opportunities arise. However, if Mr. Norris is on target, and Tyco management has committed serious securities fraud in the course of executing the series of transactions that formed the existing company, how likely is it that the super-smart investment bankers that made it all happen had no inkling of what was under the sheets?

Tyco looks as if it is on the brink of replacing all - or almost all - of its board of directors. In addition to the Justice Department, SEC and New York investigations, the company has hired David Boise to aid it in its investigations of prior management. Mr. Boise is very smart and thorough. And working for a new board would mean he would be probably be fully incentivised to uncover anything prior management tried to hide. So it looks like there is a good chance that many of past management’s efforts at concealment will be unavailing, if such efforts were made.

Of course, no one has yet shown that past Tyco management did any of those bad things. So no one has yet shown that there was any bad thing for the investment banks to facilitate. Future investigations may turn up nothing.

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