Tyco

(TYC)

insists it's rolling towardrecovery, but some people can't stop kicking the tiresanyway.

The growing legion of

Tyco fans contends that ayear of scandal has obscured a collection ofmagnificent assets. The stock has nearly doubled offits summer lows since new CEO Edward Breen began afurious housecleaning binge. The rally has been drivenin part by a sense that despite the excesses of theDennis Kozlowski era, new management is well on itsway to unpacking all the old regime's dirty secrets.

But some bears, known for dissectingbalance sheets more complex than any motor, say a lookunder Tyco's hood can be disturbing. Some of theseanalysts and investors still question the company'scash situation and its accounting for the acquisitionsthat made it the far-flung giant that it is today. Afew have even come away comparing Tyco to the likes of

Conseco

, the once-highflying financial companywhose own celebrated "savior" -- former

GeneralElectric

(GE) - Get Report

executive Gary Wendt -- resignedThursday, leaving behind a foundering company thatultimately succumbed to its own failed acquisitionbinge.

"When the ship is sinking, the ship is sinking,"said one short-seller, who's profited handsomely frombearish bets on both companies. "It doesn't matter whothe captain is."

Wall Street Mechanics

Some of the strongest arguments against a Tycorevival center around the notion that the excesses ofthe Kozlowski years extend well beyond dog-shapedumbrella stands and $445 pincushions. During a 10-yearshopping frenzy, the Bermuda-based conglomerate paid asignificant premium for hundreds of companies that,quite often, had no other serious bidders. Today, themarket values Tyco at less than half the amount itspent to make those acquisitions.

Road Rage?
Some still question Tyco

Given the truckload of issues still surrounding Tyco, NicholasHeymann of Prudential Securities -- the lone dissenteramong major research firms -- sees almost no upsidefor the stock. And he sees plenty of near-term risk.To begin with, he says Tyco simply has too little cashto carry it through 2003.

The company has estimated its funding gap at $1.5billion, a span it figures it can bridge. But Heymannsees a gulf nearly twice as wide. He believes Tycomust cough up hundreds of millions of dollars for"earn-out" bonuses promised to supervisors of acquiredcompanies, contributions to a pension plan that'sunderfunded by more than $1 billion and various cashrestructuring expenses. He expects $1 billion of aplanned charge for a scale-back at Tycom, Tyco'sstruggling telecommunications arm, to be in cash. Andhe's reduced his 2003 cash flow projections to betterreflect Tyco's lower earnings guidance, lopping offanother $1 billion there.

Tyco did not respond to recent questions about itsfunding gap. But just weeks ago, Breen insisted thematter was under control.

"I feel very comfortable with our liquiditysituation," Breen said during his introductory sessionwith analysts. "We will be able to fix that veryquickly."

While Heymann calls Breen's funding plan"plausible," he insists the new management team facesserious challenges. And he expects Tyco to shed assets-- possibly at painful, fire-sale prices -- on anyroad to recovery.

Spare Parts

The "new" Tyco has in fact already slammed itshigh-speed acquisition machine into full-throttlereverse.

Faced with a cash crunch last July, Tyco spun offits

CIT

financing division -- considered a"crown jewel" by some -- and saw billions ofhard-spent dollars fly right out the window. Thepublic sale of CIT, attractive to the likes of GeneralElectric before Tyco owned it, generated less thanhalf the $9.2 billion Tyco paid for it one yearearlier.

And some believe that transaction may be as goodas it gets.

Following its divestiture of CIT, Tyco comprises fourcore divisions. Tyco's largest division, fire andsafety, has grown almost entirely through acquisitionsthat the company, now dedicated to "organic growth,"plans to sharply curb. Because Tyco paid dearly forcompanies within this division -- more than doubling acompeting bid for ADT, for example -- selling themalmost guarantees material hits to the balance sheet.

Tyco's second-largest division, electronics, lookseven weaker. The division is dominated by twocompanies that were already suffering from flat salesand sliding profits when Tyco acquired them. Sincethen, the electronics market -- glutted with anoversupply of telecommunications equipment -- hasdramatically worsened. Last quarter, Tyco sawelectronics revenue plunge by 27% and operatingmargins continue to drift lower.

Tyco's health care division, which now equalselectronics in sales, has some problems as well. Likeelectronics, the division includes some majorcompanies that were faltering when Tyco acquired them.It also features a plastics division that Tyco hasalready tried, but failed, to unload.

Tyco's smallest division, engineered products,appears to be its least challenged. But with salesthere expected to rise at a modest 5%, it isn'texactly a growth story, either.

A fire sale in any one of these divisions couldhurt.

"Given Tyco's abnormally large $27 billion ingoodwill on its balance sheet," Heymann wrote, "anyasset sale made under duress would likely result inthe need to write down (this) account."

At last official count, goodwill and intangibleassets accounted for more than half the total assetson Tyco's books.

Speeding Ticket?

Tyco has long justified its overpricedacquisitions by promising to wring out cost savingsand increased productivity from new companies thatcome under the Tyco umbrella. On paper at least, Tycohas been amazingly successful.

Between 1997 and 2001, when a frenetic buyingspree doubled the company's size, Tyco saw itsoperating margins soar past those at industry giantslike GE and

3M

(MMM) - Get Report

. That achievementbecomes even more impressive when considered alongwith Tyco's employee productivity -- which fell as itsbigger peers' climbed.

Tyco critics, including noted short-seller DavidTice, have repeatedly questioned the company's allegeduse of accounting tricks to boost the reportedperformance of its acquisition targets. Tice isconvinced that "the second accounting shoe hasn'treally dropped" on Tyco yet.

Already, reports have begun surfacing thatindicate Tyco may have manipulated the performance ofcompanies before it actually acquired them.

"Tyco took control of companies before the deal soit could artificially inflate the reported benefit ofthe acquisition," speculated Peter Cohan, aMassachusetts author and investment strategist. "Suchaccounting chicanery enabled Tyco to impress WallStreet, get its stock price up and repeat the processall over again."

With a forensic accounting investigation currentlyunderway, Heymann is bracing for the worst. In hislatest report, he says it appears "increasinglyunrealistic" that Tyco's past financial statements areaccurate.

For its part, Tyco has claimed to find no materialaccounting problems nearly halfway through its review.But Heymann maintains that the forensic accountingexamination -- the second leg of an internalinvestigation that began with a search for executivemalfeasance -- has only just begun.

"While recent disclosure of past management'salleged massively fraudulent actions to enrichthemselves ... is unsettling, the implications aboutthe accuracy of past reported financial performancecould yet be far more unsettling," Heymann wrote. "Weremain cautious about the need for a potentialrestatement of Tyco's financials."

Tyco expects to complete its forensic accountinginvestigation late this fall. The company has, so far,been decidedly upbeat about the outcome.

"We've already gone through the majortransactions," Tyco told investors last month. "Ifthere was something in there that was going to be veryserious and material, I think we would have anindication of that by now."