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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Meanwhile, employees and investors are still suffering from Kozlowski- era deals. Tyco IPO'ed a 14% stake in its telecommunications unit TyCom for $32 a share in 2000, but bought the company back with Tyco stock for $15.42 a share a year later. Unfortunately, TyCom shareholders got 0.31 Tyco shares at a value of nearly $50 for each of their shares. Tyco's 2007 split at $33.79 made TyCom shares worth closer to $10, a near 70% loss.

Investors in a $2.2 billion May 2001 Tyco secondary share offering at $56.50 are also smarting from a near 40% loss.

Those losses can be taken as the lingering impact of Kozlowski even as optimism on the earnings of spun entities abounds on a 2012 share rally.

Wednesdays spin and merger with Pentair, will give Tyco investors an over 50% stake in what's set to be an industrial pump and valve powerhouse worth nearly $10 billion. Meanwhile, investors are also likely to benefit from a recently announced Covidien breakup that will further dismantle the Tyco empire in what could yield at least seven companies. While not the breakup of Standard Oil, the effort is impressive nonetheless.

"We continue to believe TYC management is focused on maximizing shareholder value," wrote Credit Suisse analyst Julian Mitchell in a note reacting to Wednesday's announcement. Tyco is expected to continue with spinoffs, in a separation of its ADT security unit and its fire safety unit. "We reiterate our "outperform" rating as we see further potential M&A catalysts," adds Mitchell, who gives Tyco shares a $60 price target.

Wednesday's deal may also be beneficial for other spinoffs previously announced by Tyco. "We believe the preemptive divestiture of Tyco Flow prior to the spin bodes well for the takeout prospects of ADT and Comm'l Fire," wrote Citigroup analyst Deane Dray in a note upgrading Tyco shares to a price target of $63 from $57.

Analysts are optimistic about the growth prospects of other Tyco components. There isn't a single "sell" rating for any standalone pieces of the former Tyco empire, according to Bloomberg compilations of consensus analyst estimates. Tyco gets 12 "buy" ratings and 7 "holds" and a price target of $57, while TE Connectivity warrants 12 "buys," just 2 "holds" and an average price target of $39.82. Meanwhile Covidien shares warrant a price target of $59.47 on 20 "buy" ratings and 3 "holds," according to Bloomberg data.

See 5 short sighted stock spinoffs for more on corporate breakups. For more on spinoff speculation in the healthcare sector, see why Goldman Sachs thinks Pfizer needs to think about a breakup.

-- Written by Antoine Gara in New York.