decision to continue operating as a huge conglomerate certainly damaged the company's credibility among some observers, but others, who from the beginning didn't like the plan to split into four parts, are breathing a sigh of relief.

For the time being, the camp that isn't sure if Tyco's managers know what they're doing was sending the clearest signal and bailing out of the company's shares. Tyco plunged 18% to $21.17 by midafternoon Thursday after the company abandoned plans to split apart, although it will offer stock in its finance arm


through an initial public offering.

The company's executives now have a very different opinion than the one they held in January. At the time, Tyco, which operates several businesses including health care, electronics and security services, said the plan would mitigate concerns about its accounting techniques while unlocking "tens of billions of dollars of shareholder value."

Many analysts cheered the earlier news about a split, with Merrill Lynch saying the company could be worth $70 to $80 a share on breakup. J.P. Morgan Chase suggested that the sum of Tyco's parts was worth $90 a share.

Still, that didn't seem to matter to investors. Amid concerns that the plan either wouldn't go through or wouldn't produce the lofty returns that had been touted, the stock lost 27.5% within a week of the announcement. Shares of Tyco have fallen 55% since that time.

Giving Up

"For the past few weeks I've been hearing people say 'I wish they'd just give this up,' " said Patrick Kennedy, a bond portfolio manager at Pitcairn Trust. Kennedy believes the plan was "ill conceived" from the outset and said Tyco's bid to change its growth-by-acquisition strategy was a "big mistake."

Tyco had earmarked the proceeds of the breakup to pay down some of its $23 billion in debt, but the spinoff of CIT should still help to reduce the debt burden. Kennedy said he's looking at the news as more of a buying opportunity. "We're through with all the accounting questions; every stone has been unturned," he said.

For others, the flip-flop is too much. "The events of the last couple of months have really got me scratching my head and questioning who's driving the ship," said Brett Gallagher, a portfolio manager at Julius Baer Investment Management, who owns Tyco.

While Gallagher said he never believed analysts' wildly optimistic projections concerning the breakup worth, he did buy into management's claim that this was the best way to maximize shareholder value.

"I'm not really sure how much longer I'm willing to give management the benefit of the doubt," he said.

In a letter to shareholders Thursday, Tyco Chairman and Chief Executive Dennis Kozlowski said the initial plan was devised to improve the company's valuation, as the stock was trading at a discount to its peers. "We know now it was a mistake, and it is time for us to return our focus to what we do best," he wrote in the letter.

Rethinking Shareholder Value

Of course, the letter comes just three short months after Tyco indicated that the separation would lead to happier shareholders all around.

"If everything management said is true (about the breakup) and everyone's talking $50 a share, why should I be in this thing getting knocked around between $20 and $30?" Gallagher said. "There probably is value in the stock, but do I need to sit here and get knocked day after day, or am I better off putting my money aside and waiting for this to be resolved?"

Vanishing Act

With investors confused about which scenario to believe and with analysts adding next to no clarification, a recovery in Tyco's share price doesn't seem likely anytime soon.

Morningstar analyst Rob Plaza said the shares are undervalued and he has a fair value estimate of $40 on the stock. But he is concerned about Tyco's ability to tap the capital markets for easy money to make acquisitions. In addition, Tyco is burdened with too much debt and has limited growth prospects, he said.

Tyco reported a loss of $1.9 billion, or 96 cents a share, for the second quarter, including a $3.2 billion charge, part of which was related to the termination of the breakup plan. The quarterly loss ended a string of 40 consecutive quarters of earnings improvement. The company earned $1.1 billion, or 63 cents a share, in the same quarter a year ago. Revenue rose to $9.8 billion from $8.8 billion in the 2001 second quarter.

Tyco also lowered its earnings and free-cash-flow guidance for 2002 and said it will cut about 7,100 jobs and close 24 facilities, primarily in the electronics and telecom operations, at a cost of $331 million.