Mallinckrodt Is Just One Of Dennis Kozlowski's Billion Dollar Babies

NEW YORK (TheStreet) -- On the surface the story seemed simple.

Mallinckrodt Pharmaceuticals of Ireland (MNK) buys Cadence Pharmaceuticals (CADX) of San Diego for $1.3 billion, mainly to get control of an injectable form of acetaminophen, the main ingredient in Tylenol.

But what started for me as a story about pain relief turned into something else, a lesson in why investors should always pay attention and not give up on a company just because something bad happens which has nothing to do with the underlying business.

Because Mallinckrodt isn't really Irish. The name's German, and the company is Missourian. And this story starts with Dennis Kozlowski, the former Tyco (TYC) CEO who emerged last month after eight years behind bars.

Mallinckrodt, it turns out, is one of Kozlowski's many billion dollar babies. Tyco acquired the company, which is actually based in a suburb of St. Louis, in 2001, when Kozlowski was CEO.

The original Mallinckrodt was a chemical company formed by three brothers, the first to introduce barium sulfate as a contrast medium for x-rays, 100 years ago. The name lives in Boston on a research center backed by one of the founder's descendants, Edward Jr.

Kozlowski built Tyco from a small into a very large conglomerate during the 1990s. At its height, sometime after the Mallinckrodt buy, the company had a book value of more than $110 billion. Its actual value, due to publicity surrounding its CEO, was less than that but Tobias Lefkovitz, now with Citigroup, was, even then, in late 2001, pounding the table for the stock.

Maybe you should have listened to him.

Kozlowski's fall eventually left the company in the hands of CEO Edward Breen, now 57, and it is his breakup of the company that eventually led to today's story. It was Breen who split Tyco in three, in 2007, creating (among other things) Covidien (COV) out of the former Tyco Healthcare.

Covidien is presently worth $31.5 billion. The new Mallinckrodt was Covidien's drug unit before being spun out last year.

It is this Mallinckrodt which has now bought Cadence. Since its spin-off last summer the stock has risen nearly 50% in value under the leadership of CEO Mark Trudeau, 51, and the Cadence deal represents another 11.6% pop. Doctors are anxious to find non-opioid solutions to intense pain, and an injectable acetaminophen could be just the ticket. Mallinckrodt, with revenue last year of $2.2 billion, has the capital to deliver Cadence's solution to market

Had Dennis Kozlowski not been charged and later convicted -- a new book called Taking Down the Lion says he was railroaded -- none of this might have happened.

Which leads to this question. What if, when Kozlowski was first charged after a string of high-profile parties and gaudy purchases, you had actually decided to listen to Lefkowitz and double-down on your Tyco investment, or at least hold it?

By now you may have been richly rewarded.

Because in addition to Mallinckrodt, and Covidien, the break-up of Tyco generated the present company, now worth $19.1 billion, along with TE Connectivity (TEL), a manufacturer of a half-million products involved in connecting and protecting power and data, which is worth $23.3 billion.

Following an additional 2012 spin-off you would also have shares in ADT (ADT), the security company, which is worth an additional $5.6 billion.

All of these billion dollar babies have done their own buying and selling of other companies, and had their own adventures in the stock market. Our Richard Saintvilus likes the original Tyco, most analysts following TE call it a buy, and almost all of those following Covidien feel that way.

Kozlowski is now on parole but the fates of his billion dollar babies should at least lead him to smile. It certainly should lead those who stuck with his stock to do so.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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