One thing is clear: Ed Breen, the ex-
exec named CEO of
Thursday, looks like a fabulous value for his new employer. Tyco is reportedly paying him something north of $20 million, but news of his joining added nearly $9
to the market value of the issue-riddled conglomerate Friday.
The leap indicates investors are still willing to believe that one person can come in at the top of a troubled company and turn everything around. The sudden love-in with a corporate Messiah was a common feature of the '90s bull market, despite the disastrous reigns of Al Dunlap at
and Gary Wendt at
, to name just two feted hard-chargers who failed.
But if Tyco wants to convince investors that Breen's rep is solid and that he won't be a disappointment, it should have the executive explain why he left Motorola and specify how he plans to turn around Tyco, among other things. Tyco, down 80% on the year amid persistent liquidity and accounting worries, rose $3.75 to $12.
The first question investors must ask is, why did Breen leave at such a critical time for Motorola? With the Aug. 14 deadline approaching for CEOs and CFOs to swear that their financials are correct and complete, any executive move now naturally draws extra scrutiny, even one involving a chief operating officer who needn't sign off on books at his old company. Ditto any move that involves an exec shifting from one closely watched, underperforming company to another.
Anxiety runs still higher in some quarters when you consider that Motorola is being probed by the
Securities and Exchange Commission
. Of course, the probe Motorola has disclosed centers on fair-disclosure regulations. In and of itself, there's nothing there for Tyco holders to worry about. But there are indications the inquiry may be broader, which could be problematic.
, a research firm that tracks SEC activities, said it recently asked Motorola if the probe was looking at anything more than disclosure issues. According to SEC Insight, Motorola representative Scott Wyman "repeatedly dodged the question." When asked if the probe is broader, Wyman answered in an email that the Motorola's CEO and CFO "plan to file the certification, without exceptions, by the Aug. 14 deadline." After receiving that answer, Wyman was¿asked to specifically deny that the probe was wider,¿but he didn't respond.
So what else might the SEC want to look at? Consider the huge number of charges Motorola has been taking. Accounting sleuths at the
Center for Financial Research and Analysis
calculate that Motorola has recorded aggregate charges of $17 billion since 1997, and has taken charges in each of the past five years. The fear is that companies pile operating costs into these supposedly one-time charges to pad core earnings. That fear should be intense for investors in Motorola.
That leads us to our next question: Just how good is Breen? Much of his quickly won reputation is based on this supposed turnaround at Motorola. But the recently high level of charges leaves a big question mark over the revival.
Recall that the business Breen once headed -- broadband equipment -- has been one of the worst performers within Motorola. So what, bulls will say: Broadband has been terrible at all companies. But investors should take note that Motorola's broadband division has been a place where huge charges have been taken -- some $365 million worth in the second quarter alone. Anyone can look good on an "operating basis" when these sorts of amounts are being written off.
Moreover, don't be surprised if we now get big Motorola-sized write-offs at Tyco. A Tyco spokesman declined to comment on Breen's record, but pointed to remarks made in a Thursday press release by the company's lead director, John Fort. These included: "Ed has a superb record of tackling very difficult and complex business challenges, creating effective strategies and methodically executing on his plans."
Perhaps most important, what will be Breen's first steps at Tyco? A pattern is emerging at beaten-up corporations: A new person comes in and the stock rallies -- only to plunge once the new boss starts to clean up.
If what the CEO finds is serious, it can undermine any good ideas he or she may have to restructure the company. In fact, the relief rally after the big appointment has often proven a good spot to exit the stock or short it. Shorting's¿inadvisable with Tyco stock at such low levels and with the craving¿on the Street to believe in Breen.
But if the new CEO doesn't soon ditch Tyco CFO Mark Swartz, who co-led Tyco into its ditch, we will know that he hasn't even started to do his job.