Free of the taint of fraud, Tyco ( TYC) took flight Tuesday as investors bet on a brighter tomorrow. The Bermuda-based conglomerate ended a scandal-clad year on a high note Tuesday. Tyco's stock, pounded to single digits at its low point this summer, soared 13% Tuesday, following the
release of a $50 million forensic audit of the company's accounting. But even after closing the books on that audit -- which accused only past management, led by former CEO Dennis Kozlowski, of outright fraud -- Tyco's new leaders still shoulder a heavy burden in turning the company around. The audit, conducted by high-profile attorney David Boies and a slew of assistants, exposed a company that relied heavily on aggressive accounting tricks to bolster its phenomenal growth. Tyco CEO Ed Breen has already sworn off the nonstop acquisitions tied to those artificial boosts. But some investors say that in choosing to correct only $380 million in accounting "errors" -- and keeping past accounting tricks in place -- the company has left Wall Street staring forward into a somewhat cloudy future. And as some observers have been pointing out, if the company can't keep growing steadily, Tyco stock will become far less palatable.
"This company's going to move forward now, and it's going to grow this business," Breen assured. But Tyco faces some daunting challenges. Most pressing is the need to bridge a $3.6 billion funding gap that has recently doubled from earlier projections this year. The company hopes to end months of negotiations with its lenders by renewing -- at most -- half of a $3.86 billion revolver that matures in February. Tyco is also exploring a combination of capital market transactions and minor divestures to meet its obligations.
Still, a noted short-seller marveled Tuesday at the market's "premature" celebration. "The wording in the report is just amazing," he said. "It claims there was no systemic fraud even though there was a pattern of aggressive accounting. "I'm astonished people think this is such terrific news."