Tyco Investors Not Free From Kozlowski

NEW YORK (TheStreet) -- As shares in the once giant conglomerate Tyco International (TYC) close on new highs, it may be a surprise that longtime stockholders are still waiting to see a payoff from divestitures like Wednesday's spin and merger of Tyco's water flow business and with Pentair (PRN).

After climbing to nearly $56 a share, Tyco appears to be approaching all-time highs above $60 a share reached in 2001, before C-suite fraud scandals rocked the company and precipitated a near 80% stock drop.

But the impact of former Chief Executive Dennis Kozlowski and his merger spree - which included 15 acquisitions worth $1 billion or more between 1997 and 2001 -- remains nearly a decade after a fraud scandal erupted as long-time shareholders try and reclaim Tyco's inflated pre-bust share price.

In 2005, Kozlowski and Tyco CFO Mark Swartz were convicted of grand larceny, conspiracy, securities fraud and falsifying business records after the two used mergers, improper tax filings and distributions to defraud Tyco of what prosecutors estimated to be $600 million. Kozlowski and Swartz were given eight to 25 year prison sentences, with Kozlowski now on work release in Manhattan.

While the company's succeeding management can be lauded for undoing a merger spree and raising the split-adjusted value of Tyco shares by over 40% since July 2002, according to Bloomberg data, more work needs to be done to make some shareholders whole.

At the time of the split, Tyco investors essentially got a stake three separate publicly traded businesses worth $34 a share, when share interests in each of the split off companies are added together.

In June 2007, current Chief Executive Edward Breen made the boldest step to wipe Tyco clean of Kozlowski's impact in near $20 billion spins of the company's TE Connectivity (TEL) electronics unit and its Covidien (COV) healthcare unit. Remaining ADT Security, water flow and fire protection divisions continued under the Tyco name. In the spin and stock split, investors effectively received a .25 share in Tyco, TE Connectivity and Covidien for each previous Tyco share.

By adding .25 share stakes in each of the three companies for every Tyco share, pre-spin Tyco shares are now effectively worth over $36, an 8% gain from a $33.79 value prior to the split, beating a similar sized loss on the S&P 500. Still, that gain falls short of a near 20% year-to date gain at Tyco and spunoff entities in 2012, signaling that investors can benefit from timing spin plans, even if some longtime shareholders remain underwater.

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