WEBVTT 00:00:00.000 --> 00:00:02.680 Welcome back to the Deep Dive. Today we are opening 00:00:02.680 --> 00:00:08.140 a file that I think serves as the ultimate Rorschach 00:00:08.140 --> 00:00:10.339 test for business history. Oh, that's a good 00:00:10.339 --> 00:00:12.480 way to put it. Yeah, because depending on how 00:00:12.480 --> 00:00:14.539 you look at it, this is either a story about 00:00:14.539 --> 00:00:17.600 the greatest growth engine of the 1990s, or it's 00:00:17.600 --> 00:00:20.000 a story about a criminal enterprise disguised 00:00:20.000 --> 00:00:22.500 as a corporation. We are talking about Tyco. 00:00:22.899 --> 00:00:25.780 Tyco, right. Just saying the name, it brings 00:00:25.780 --> 00:00:29.660 back a very specific era of cable news chyrons, 00:00:29.699 --> 00:00:32.119 perp walks, extravagant parties. It's almost 00:00:32.119 --> 00:00:34.859 a time capsule in a word. It really is. But before 00:00:34.859 --> 00:00:37.320 we get into, you know, the scandals and the downfall, 00:00:37.399 --> 00:00:39.520 we have to clear up the number one misconception 00:00:39.520 --> 00:00:43.399 immediately. Ah, yes, the toys. Exactly. Because 00:00:43.399 --> 00:00:45.240 every time I mention Tycho to someone who grew 00:00:45.240 --> 00:00:47.460 up in the 80s or 90s, they immediately think 00:00:47.460 --> 00:00:50.479 of one thing. Tickle me, Elmo. Or those remote 00:00:50.479 --> 00:00:52.399 control cars. The rebound remote control cars, 00:00:52.539 --> 00:00:54.600 yes. So we need to put a giant disclaimer at 00:00:54.600 --> 00:00:56.500 the top here. We are not talking about Tyco toys. 00:00:56.619 --> 00:00:59.140 That was a division of Mattel, a completely different 00:00:59.140 --> 00:01:01.320 beast. We are talking about Tyco International. 00:01:01.799 --> 00:01:04.760 Although, you know, in a way, Tyco International 00:01:04.760 --> 00:01:07.819 was playing with toys, except their toys were 00:01:07.819 --> 00:01:09.920 billion -dollar companies. And if they broke 00:01:09.920 --> 00:01:12.420 them, thousands of people lost their pensions. 00:01:12.439 --> 00:01:14.400 A much higher stakes game. A much higher stakes 00:01:14.400 --> 00:01:17.480 game, yes. This is the story of Tyco International, 00:01:17.939 --> 00:01:21.379 a massive security and fire protection conglomerate. 00:01:21.400 --> 00:01:23.959 I mean, at its peak, it was one of those entities 00:01:23.959 --> 00:01:26.140 that seemed to own the actual infrastructure 00:01:26.140 --> 00:01:29.379 of the modern world. Right. It was invisible, 00:01:29.439 --> 00:01:31.620 but everywhere. Exactly. If you were in a hospital, 00:01:31.760 --> 00:01:33.260 you were probably using their needles or their 00:01:33.260 --> 00:01:35.560 surgical tools. If you were in an office, you 00:01:35.560 --> 00:01:37.900 were protected by their sprinklers. If you sent 00:01:37.900 --> 00:01:39.859 an email across the ocean, there was a good chance 00:01:39.859 --> 00:01:42.879 it was traveling over their cables. And today, 00:01:43.079 --> 00:01:46.739 our deep dive is going to use a stack of financial 00:01:46.739 --> 00:01:49.620 reports, court documents, and historical timelines 00:01:49.620 --> 00:01:53.459 to really unpack a very specific narrative arc. 00:01:53.640 --> 00:01:56.000 We want to understand how a company goes from 00:01:56.000 --> 00:01:59.879 a tiny research lab to a global empire that becomes 00:01:59.879 --> 00:02:03.420 too big to manage, how it collapses in one of 00:02:03.420 --> 00:02:05.500 the most famous scandals of the 21st century, 00:02:05.640 --> 00:02:08.400 and then... and this is the part people forget, 00:02:08.599 --> 00:02:11.259 how it effectively dissected itself to survive. 00:02:11.639 --> 00:02:13.939 It's the ultimate case study in corporate evolution. 00:02:14.259 --> 00:02:17.139 It's like it mutated. It started as a single 00:02:17.139 --> 00:02:19.860 cell, grew into this incredibly complex organism, 00:02:20.039 --> 00:02:23.180 got a very aggressive form of cancer, and then 00:02:23.180 --> 00:02:25.900 had to undergo, I mean, just radical surgery 00:02:25.900 --> 00:02:28.539 to save the vital organs. That is a vivid image. 00:02:28.719 --> 00:02:30.560 So let's go back to that single cell because 00:02:30.560 --> 00:02:33.479 the origin story of Tycho is surprisingly... 00:02:34.000 --> 00:02:36.639 nerdy. It is. It wasn't founded by some corporate 00:02:36.639 --> 00:02:39.080 raider on Wall Street. It was founded by a scientist. 00:02:39.300 --> 00:02:42.879 Arthur J. Rosenberg. We are back in 1960 in Waltham, 00:02:42.879 --> 00:02:45.620 Massachusetts. Rosenberg establishes Tyco, Inc. 00:02:45.800 --> 00:02:47.740 And you're right. This wasn't about world domination 00:02:47.740 --> 00:02:49.699 yet. It was an investment and holding company 00:02:49.699 --> 00:02:52.280 for two very specific, very technical ventures, 00:02:52.360 --> 00:02:54.740 Tyco Semiconductors and the Materials Research 00:02:54.740 --> 00:02:57.139 Laboratory. Research Lab. I mean, that sounds 00:02:57.139 --> 00:03:00.050 incredibly money. It was. For the first two years, 00:03:00.110 --> 00:03:02.009 their primary business was doing experimental 00:03:02.009 --> 00:03:04.250 work for the government. They were deep in the 00:03:04.250 --> 00:03:06.750 weeds of solid state science, energy conversion. 00:03:07.409 --> 00:03:11.090 This was high level physics and chemistry, not 00:03:11.090 --> 00:03:13.610 exactly boardroom stuff. So how do we get from 00:03:13.610 --> 00:03:17.729 government physics experiments to global manufacturing 00:03:17.729 --> 00:03:20.990 giant? Yeah. That's a huge leap. Well, it's ambition. 00:03:21.659 --> 00:03:24.039 Rosenberg was a scientist, yes, but he was also 00:03:24.039 --> 00:03:25.979 a man who understood where the wind was blowing. 00:03:26.379 --> 00:03:30.099 By 1962, just two years in, he incorporates in 00:03:30.099 --> 00:03:32.900 Massachusetts and executes the first major pivot. 00:03:33.060 --> 00:03:36.099 He shifts the focus from pure research to commercial 00:03:36.099 --> 00:03:38.419 application. They start looking at high -tech 00:03:38.419 --> 00:03:40.719 materials, science, and energy conservation products, 00:03:40.900 --> 00:03:42.800 but for the private sector. That's a crucial 00:03:42.800 --> 00:03:45.639 shift, moving from government grants to a product 00:03:45.639 --> 00:03:48.340 -based revenue model. Exactly. And to fuel that 00:03:48.340 --> 00:03:51.599 shift, they needed capital. So in 1964, Tyco 00:03:51.599 --> 00:03:53.599 goes public. And this is the moment where the 00:03:53.599 --> 00:03:55.539 Tyco we know, the DNA of the future company, 00:03:55.719 --> 00:03:57.659 starts to be born. Because once you have public 00:03:57.659 --> 00:03:59.860 stock, you have a currency. You have a currency. 00:03:59.919 --> 00:04:02.180 You can use that stock to buy things. And Roseberg 00:04:02.180 --> 00:04:04.060 didn't waste any time, did he? Not a second. 00:04:04.280 --> 00:04:07.520 That same year, 1964, they made their first acquisition, 00:04:08.340 --> 00:04:10.680 Mule Battery Products. Mule Battery Products. 00:04:10.780 --> 00:04:13.060 It doesn't exactly sound like a Fortune 500 move. 00:04:13.219 --> 00:04:16.040 No, it sounds small, and it was. But it was the 00:04:16.040 --> 00:04:19.089 proof of concept. It set the precedent. Rosenberg 00:04:19.089 --> 00:04:21.250 realized that developing products from scratch, 00:04:21.490 --> 00:04:24.490 what we now call organic growth, is incredibly 00:04:24.490 --> 00:04:27.589 slow and expensive. That takes years at R &D. 00:04:27.709 --> 00:04:29.949 Years. But if you just buy a company that already 00:04:29.949 --> 00:04:32.370 makes the product, you get the revenue, the market 00:04:32.370 --> 00:04:34.490 share, the distribution, all of it immediately. 00:04:34.930 --> 00:04:38.209 Growth by acquisition. The drug that Tycho would 00:04:38.209 --> 00:04:40.720 eventually overdose on. Precisely. And they got 00:04:40.720 --> 00:04:44.839 hooked early. Between 1964 and 1968, Tyco went 00:04:44.839 --> 00:04:47.860 on an absolute tear. They acquired 16 companies 00:04:47.860 --> 00:04:50.420 in just four years. Let's pause on that math 00:04:50.420 --> 00:04:53.160 for a second. 16 companies in four years. That's 00:04:53.160 --> 00:04:56.040 one every three months. I mean, even for a large, 00:04:56.060 --> 00:04:58.439 mature company, integrating a new acquisition 00:04:58.439 --> 00:05:00.740 is a nightmare. It's a total nightmare. You have 00:05:00.740 --> 00:05:02.259 different payroll systems, different corporate 00:05:02.259 --> 00:05:03.920 cultures, completely different supply chains. 00:05:04.040 --> 00:05:06.100 For a startup essentially just out of the lab, 00:05:06.199 --> 00:05:10.259 that pace is just frantic. It's breathless. They 00:05:10.259 --> 00:05:12.439 were essentially trying to build a jigsaw puzzle 00:05:12.439 --> 00:05:15.779 by buying random pieces from other puzzles and 00:05:15.779 --> 00:05:18.379 forcing them to fit. They were filling gaps in 00:05:18.379 --> 00:05:20.459 their development and distribution network, trying 00:05:20.459 --> 00:05:22.660 to become a complete player overnight. So this 00:05:22.660 --> 00:05:24.899 pattern, this wasn't an accident. It basically 00:05:24.899 --> 00:05:27.160 became the company's operating manual for the 00:05:27.160 --> 00:05:29.870 next 40 years. That's it. They weren't builders. 00:05:30.029 --> 00:05:32.470 They were buyers. So we moved into the 1970s. 00:05:32.470 --> 00:05:34.970 For a lot of the economy, the 70s were pretty 00:05:34.970 --> 00:05:38.430 rough. Stagflation, oil crises. Yeah, a tough 00:05:38.430 --> 00:05:41.470 decade. But for Tyco, this was the boom era. 00:05:41.670 --> 00:05:44.649 They completely defied the gravity of the decade. 00:05:44.750 --> 00:05:47.350 They started the 1970s with consolidated sales 00:05:47.350 --> 00:05:50.569 of about $34 million. Okay, $34 million. By the 00:05:50.569 --> 00:05:53.310 end of the decade, sales had topped $500 million. 00:05:53.689 --> 00:05:57.149 Wow. From $34 million to half a billion in 10 00:05:57.149 --> 00:05:59.839 years. That is massive scaling. And their net 00:05:59.839 --> 00:06:03.740 worth hit nearly $140 million. In 1974, they 00:06:03.740 --> 00:06:05.800 graduated to the big leagues. They were listed 00:06:05.800 --> 00:06:07.819 on the New York Stock Exchange. And the driver 00:06:07.819 --> 00:06:09.620 was, again, just more and more acquisitions. 00:06:10.040 --> 00:06:12.800 Ambitious ones. This is when they bought Simplex 00:06:12.800 --> 00:06:15.959 Technology. They bought Armin Plastics. They 00:06:15.959 --> 00:06:19.199 bought the Ludlow Corporation. And most importantly, 00:06:19.480 --> 00:06:22.379 they bought Grinnell. Grinnell Fire Protection 00:06:22.379 --> 00:06:25.180 Systems. That was the anchor. That was the acquisition 00:06:25.180 --> 00:06:27.800 that really changed their identity. Right. I 00:06:27.800 --> 00:06:29.519 think anyone who works in an office building 00:06:29.519 --> 00:06:31.939 has seen that name. You look up at the ceiling, 00:06:32.040 --> 00:06:34.279 Kyle, you see a sprinkler head, and it almost 00:06:34.279 --> 00:06:37.490 always says Grinnell. It does. Before that acquisition, 00:06:37.769 --> 00:06:40.850 they were sort of a mishmash of materials and 00:06:40.850 --> 00:06:43.689 tech. Grinnell anchored them in the infrastructure 00:06:43.689 --> 00:06:46.689 space. And fire protection is a great business. 00:06:46.990 --> 00:06:49.290 Because it's mandated by law. It's mandated by 00:06:49.290 --> 00:06:52.069 law. Every building needs it. It's steady, reliable, 00:06:52.550 --> 00:06:55.009 non -cyclical cash flow. But looking at this 00:06:55.009 --> 00:06:57.910 list, batteries, plastics, fire protection, electronics, 00:06:58.269 --> 00:07:00.670 I'm starting to see the problem. These businesses 00:07:00.670 --> 00:07:03.420 don't really talk to each other. Making a plastic 00:07:03.420 --> 00:07:05.879 bag and making a fire sprinkler require completely 00:07:05.879 --> 00:07:07.680 different engineering, different sales teams, 00:07:07.920 --> 00:07:10.600 different raw materials. It's just a random collection. 00:07:11.120 --> 00:07:13.360 You've hit on the classic conglomerate problem. 00:07:13.839 --> 00:07:16.920 And by the 1980s, Tyco's own management looked 00:07:16.920 --> 00:07:19.240 at their portfolio and realized it was a bit 00:07:19.240 --> 00:07:21.600 of a garage sale. It was just a bag of random 00:07:21.600 --> 00:07:25.139 companies. Exactly. So they tried to organize 00:07:25.139 --> 00:07:28.019 the chaos. They did their first major restructuring 00:07:28.019 --> 00:07:30.899 into three segments, fire protection, electronics 00:07:30.899 --> 00:07:33.639 and packaging. Which is a sensible move. You 00:07:33.639 --> 00:07:35.639 know, you group the like items together so you 00:07:35.639 --> 00:07:37.759 can maybe share some resources, get some efficiencies. 00:07:37.800 --> 00:07:40.720 Right. They wanted to achieve significant. market 00:07:40.720 --> 00:07:43.680 share in each product line but the problem with 00:07:43.680 --> 00:07:45.439 being an acquisition addict is that you can't 00:07:45.439 --> 00:07:47.839 stop shopping just because your closet is disorganized 00:07:47.839 --> 00:07:50.420 so later in the 80s they went right back to it 00:07:50.829 --> 00:07:52.829 They bought the Grinnell Corporation, expanding 00:07:52.829 --> 00:07:56.149 that fire hold. They bought Allied Tube and Conduit 00:07:56.149 --> 00:07:58.750 and the Mueller Company, which made water valves. 00:07:58.930 --> 00:08:01.649 So the portfolio gets bigger and weirder. And 00:08:01.649 --> 00:08:04.250 that necessitated another reorganization. By 00:08:04.250 --> 00:08:07.110 the late 80s, they shuffled the deck again. Now 00:08:07.110 --> 00:08:09.709 we have four segments. Electrical and electronic 00:08:09.709 --> 00:08:12.230 components, healthcare and specialty products, 00:08:12.610 --> 00:08:15.189 fire and security services, and flow control. 00:08:15.509 --> 00:08:18.060 Wait. Healthcare. Where did that come from? It 00:08:18.060 --> 00:08:20.360 just sort of crept in during the acquisitions. 00:08:20.360 --> 00:08:22.860 They bought some medical product manufacturers 00:08:22.860 --> 00:08:25.060 along the way, and suddenly they had a healthcare 00:08:25.060 --> 00:08:27.980 business. And I want you, the listener, to remember 00:08:27.980 --> 00:08:32.039 that structure, electrical, healthcare, fire 00:08:32.039 --> 00:08:35.740 security, and flow control. Yes. That specific 00:08:35.740 --> 00:08:39.059 four -legged stool becomes the architecture of 00:08:39.059 --> 00:08:42.019 the entire empire and also the blueprint for 00:08:42.019 --> 00:08:44.659 how it's eventually dismantled. Okay, let's unpack 00:08:44.659 --> 00:08:47.259 the strategy here before we get to the really 00:08:47.259 --> 00:08:50.240 crazy years in the 90s. We've mentioned growth 00:08:50.240 --> 00:08:53.289 by acquisition. On paper, Wall Street usually 00:08:53.289 --> 00:08:55.990 loves this, right? Because the top line revenue 00:08:55.990 --> 00:08:57.769 number just keeps going up. Oh, they love it. 00:08:57.809 --> 00:08:59.950 It's an easy story to sell. But is it sustainable? 00:09:00.149 --> 00:09:02.730 I mean, really? That is the eternal debate. The 00:09:02.730 --> 00:09:05.370 proponents, and Tycho was the loudest proponent, 00:09:05.470 --> 00:09:08.250 say it creates a diversified portfolio. If the 00:09:08.250 --> 00:09:10.429 construction market crashes, your fire protection 00:09:10.429 --> 00:09:12.830 business might hurt. But hey, your health care 00:09:12.830 --> 00:09:15.009 business is fine because people still get sick. 00:09:15.330 --> 00:09:17.490 It's supposed to smooth out the bunks. That's 00:09:17.490 --> 00:09:19.789 the old synergy argument, or at least the stability 00:09:19.789 --> 00:09:22.950 argument. Right. But the critics, and this view 00:09:22.950 --> 00:09:25.789 became more popular over time, argue that it 00:09:25.789 --> 00:09:27.970 creates what's known as the conglomerate discount. 00:09:28.230 --> 00:09:30.690 Meaning the whole is worth less than the sum 00:09:30.690 --> 00:09:33.169 of its parts. Exactly. Because it is just too 00:09:33.169 --> 00:09:36.340 inefficient to manage. The CEO of Tyco can't 00:09:36.340 --> 00:09:39.019 possibly know the intimate details of the surgical 00:09:39.019 --> 00:09:41.460 suture market and the water valve market and 00:09:41.460 --> 00:09:44.039 the circuit board market. So inefficiencies creep 00:09:44.039 --> 00:09:46.899 in, bloat creeps in, mismanagement creeps in. 00:09:47.000 --> 00:09:49.860 And Tyco was about to test the absolute limits 00:09:49.860 --> 00:09:53.200 of how much bloat a company can handle. Because 00:09:53.200 --> 00:09:55.259 if the 80s were about structuring the beast. 00:09:55.500 --> 00:09:57.840 The 90s were about feeding its steroids. Enter 00:09:57.840 --> 00:10:01.250 Dennis Kozlowski. 1992. Dennis Kozlowski takes 00:10:01.250 --> 00:10:04.049 the helm as CEO. And under his leadership, the 00:10:04.049 --> 00:10:08.049 strategy shifted from aggressive to hyperactive. 00:10:08.269 --> 00:10:10.190 I have a number here from our source material 00:10:10.190 --> 00:10:12.330 that I frankly had to triple check because it 00:10:12.330 --> 00:10:14.409 just seemed impossible. I think I know the one 00:10:14.409 --> 00:10:17.889 you mean. Between 1991 and 2001, Tyco acquired, 00:10:18.090 --> 00:10:21.210 by some accounts, over 3 ,000 companies. It is 00:10:21.210 --> 00:10:23.429 a staggering number. Over 3 ,000. It's almost 00:10:23.429 --> 00:10:25.669 incomprehensible. Let's do the math on that. 00:10:25.889 --> 00:10:29.629 A decade. That is roughly 300 companies a year. 00:10:30.110 --> 00:10:32.769 If you take out weekends and holidays, that is 00:10:32.769 --> 00:10:35.009 more than one acquisition every single working 00:10:35.009 --> 00:10:37.210 day for 10 years. Think about the due diligence 00:10:37.210 --> 00:10:40.210 required to buy a single corner store. You have 00:10:40.210 --> 00:10:42.730 to check the books, check the inventory, check 00:10:42.730 --> 00:10:45.860 for any legal liabilities. Right. It takes weeks, 00:10:45.899 --> 00:10:48.220 months sometimes. Now imagine doing that for 00:10:48.220 --> 00:10:51.059 a multinational corporation every Tuesday. It 00:10:51.059 --> 00:10:53.679 is physically impossible to do it well. So they 00:10:53.679 --> 00:10:55.480 weren't doing it well. They were doing it fast. 00:10:55.580 --> 00:10:57.200 That was the only metric that mattered. They 00:10:57.200 --> 00:10:58.879 were rolling up the market. They bought everything 00:10:58.879 --> 00:11:01.600 in sight. Wormald International, Kendall International, 00:11:02.000 --> 00:11:04.799 United States Surgical, Wells Fargo Alarm. The 00:11:04.799 --> 00:11:09.299 list is just endless. And in 1993, they changed 00:11:09.299 --> 00:11:13.100 the name to Tyco International LTD. to reflect 00:11:13.100 --> 00:11:15.919 that they were now this global titan. A titan 00:11:15.919 --> 00:11:17.580 built on acquisitions, and the market rewarded 00:11:17.580 --> 00:11:20.559 them for it, which just fueled the fire. In 1996, 00:11:20.860 --> 00:11:23.360 they were added to the S &P 500. They were officially 00:11:23.360 --> 00:11:26.000 blue chip royalty. And being in the S &P 500 00:11:26.000 --> 00:11:28.299 gives you a whole new level of legitimacy and 00:11:28.299 --> 00:11:31.519 access to capital. It does. And it empowered 00:11:31.519 --> 00:11:36.139 them to make even bigger moves. In 1997, they 00:11:36.139 --> 00:11:38.259 made an acquisition that really signaled their 00:11:38.259 --> 00:11:41.080 intent to own the plumbing of the future. They 00:11:41.080 --> 00:11:44.639 acquired AT &T Submarine Systems. Now, when we 00:11:44.639 --> 00:11:46.620 say submarine systems, we aren't talking about 00:11:46.620 --> 00:11:49.759 military subs with periscopes. No, no. We are 00:11:49.759 --> 00:11:51.179 talking about the Internet. We're talking about 00:11:51.179 --> 00:11:53.960 the massive fiber optic cables that run across 00:11:53.960 --> 00:11:56.980 the ocean floor connecting continents. The physical 00:11:56.980 --> 00:12:00.740 backbone of the web. physical backbone. With 00:12:00.740 --> 00:12:03.480 this purchase, combined with their existing cable 00:12:03.480 --> 00:12:06.480 manufacturing facility in New Hampshire, Tyco 00:12:06.480 --> 00:12:09.799 Telecommunications became the world's first vertically 00:12:09.799 --> 00:12:13.960 integrated global optical network supplier. Vertically 00:12:13.960 --> 00:12:16.460 integrated. Let's break that down. It means they 00:12:16.460 --> 00:12:18.659 did everything in the chain. Everything. They 00:12:18.659 --> 00:12:21.139 designed the cable. They manufactured the cable. 00:12:21.340 --> 00:12:23.720 They loaded it onto their own fleet of specialized 00:12:23.720 --> 00:12:26.139 ships. They sailed out and laid it on the ocean 00:12:26.139 --> 00:12:28.379 floor, and then they maintained it. That's incredible 00:12:28.379 --> 00:12:30.940 control. It's total control. And remember, this 00:12:30.940 --> 00:12:34.179 is 1997. The dot -com boom was just starting 00:12:34.179 --> 00:12:36.659 to roar. Owning the pipes that carried the internet 00:12:36.659 --> 00:12:39.440 seemed like owning the railroads in the 1800s. 00:12:39.460 --> 00:12:42.080 It looked like a license to print money for decades 00:12:42.080 --> 00:12:45.190 to come. But 1997 was notable for another reason, 00:12:45.289 --> 00:12:48.889 a move that was much less about technology and 00:12:48.889 --> 00:12:50.830 much more about financial engineering, the ADT 00:12:50.830 --> 00:12:54.210 deal. Yes. This is a classic, almost textbook 00:12:54.210 --> 00:12:56.730 case study in corporate tax avoidance. So Tyco 00:12:56.730 --> 00:12:59.809 merged with ADT Limited, the security giant. 00:12:59.929 --> 00:13:02.289 Everyone knows ADT. Right. Now, Tyco was the 00:13:02.289 --> 00:13:04.690 bigger company by far. In a normal world, Tyco 00:13:04.690 --> 00:13:07.830 buys ADT. Simple. But ADT was incorporated in 00:13:07.830 --> 00:13:11.039 Bermuda. And Bermuda has... Let's say favorable 00:13:11.039 --> 00:13:13.360 tax loss. Let's say zero corporate income tax. 00:13:13.539 --> 00:13:16.480 Right. So they structured this as a reverse takeover. 00:13:16.860 --> 00:13:19.860 Technically, on paper, the smaller ADT bought 00:13:19.860 --> 00:13:22.379 the giant Tyco. But the new company was still 00:13:22.379 --> 00:13:24.820 called Tyco, and it was still run by Dennis Kozlowski 00:13:24.820 --> 00:13:26.960 and the rest of Tyco management. Correct. Nothing 00:13:26.960 --> 00:13:29.440 changed operationally. But legally, the headquarters 00:13:29.440 --> 00:13:32.120 of the combined company moved to Bermuda. This 00:13:32.120 --> 00:13:34.220 is called a corporate inversion. So they kept 00:13:34.220 --> 00:13:37.620 their operational HQ in the U .S. first in Exeter, 00:13:37.639 --> 00:13:39.799 New Hampshire, and later Princeton, New Jersey. 00:13:40.179 --> 00:13:42.820 But their tax domicile was an island in the Atlantic. 00:13:43.120 --> 00:13:45.159 It's the best of both worlds for them. They get 00:13:45.159 --> 00:13:47.620 all the benefits of operating in the U .S., the 00:13:47.620 --> 00:13:49.580 massive market, the infrastructure, the legal 00:13:49.580 --> 00:13:51.879 system, the talent pool, but they don't pay the 00:13:51.879 --> 00:13:54.320 U .S. corporate tax rates. And that saved them. 00:13:54.679 --> 00:13:56.960 What, millions, billions? Hundreds of millions 00:13:56.960 --> 00:13:59.259 of dollars over the years. Money that Kozlowski 00:13:59.259 --> 00:14:01.580 immediately turned around and used to, you guessed 00:14:01.580 --> 00:14:05.000 it, buy more companies. Which brings us to 1999. 00:14:05.559 --> 00:14:08.240 This seems to be the absolute peak of this insanity, 00:14:08.539 --> 00:14:11.500 the billion -dollar buyouts. It was a shopping 00:14:11.500 --> 00:14:15.139 spree of epic proportions. They bought AMP Inc. 00:14:15.360 --> 00:14:20.700 for $12 .22 billion. $12 billion. And AMP made 00:14:20.700 --> 00:14:23.740 what? Electronic connectors. The little plastic 00:14:23.740 --> 00:14:25.879 and metal plugs that go inside your computer 00:14:25.879 --> 00:14:29.340 or your car or your phone. A foundational, if 00:14:29.340 --> 00:14:32.000 unglamorous, business. And then they bought RaycubCore 00:14:32.000 --> 00:14:35.080 for another $1 .4 billion. Right. These weren't 00:14:35.080 --> 00:14:37.059 small startups they were snapping up anymore. 00:14:37.240 --> 00:14:39.559 These were S &P 500 companies being eaten by 00:14:39.559 --> 00:14:41.240 a bigger shark. They were swallowing whales. 00:14:41.720 --> 00:14:45.700 Absolutely. By the fiscal year 2000, Tyco's revenue 00:14:45.700 --> 00:14:50.159 exceeded $28 billion. They acquired Mallinckrodt 00:14:50.159 --> 00:14:54.340 Inc. a major healthcare player, and Simplex Time 00:14:54.340 --> 00:14:57.029 Recorder Company. merging it with Grinnell to 00:14:57.029 --> 00:15:00.009 form Simplex Grinnell. They were now the undisputed 00:15:00.009 --> 00:15:02.570 kings of fire protection, security, and electronic 00:15:02.570 --> 00:15:05.070 components. It really feels like they were trying 00:15:05.070 --> 00:15:07.450 to become the entire economy. I mean, if you 00:15:07.450 --> 00:15:09.490 were building a skyscraper in the year 2000, 00:15:09.850 --> 00:15:12.629 Tycho made the fire alarms. The security cameras, 00:15:12.769 --> 00:15:15.090 the copper wiring in the walls. The fiber optics 00:15:15.090 --> 00:15:17.269 connecting the servers in the basement. And probably 00:15:17.269 --> 00:15:19.190 the first aid kits on the wall and the syringes 00:15:19.190 --> 00:15:21.389 in the nurse's office. It's a very accurate description. 00:15:21.649 --> 00:15:23.929 But here's the fundamental problem with building 00:15:23.929 --> 00:15:26.320 an empire that fast. You have to pay for it. 00:15:26.340 --> 00:15:28.299 And they weren't paying with cash they had sitting 00:15:28.299 --> 00:15:30.700 in the bank. No, they were using a mix of their 00:15:30.700 --> 00:15:34.700 own. Some say inflated stock and debt, massive 00:15:34.700 --> 00:15:36.860 amounts of debt. The numbers are mind boggling. 00:15:36.940 --> 00:15:38.799 While the book value of the company was over 00:15:38.799 --> 00:15:42.340 $140 billion in 2000, their long term debt had 00:15:42.340 --> 00:15:44.820 doubled in a very short period to over $80 billion. 00:15:45.419 --> 00:15:48.340 They were leveraged to the absolute limit. And 00:15:48.340 --> 00:15:51.759 leverage, as we know, works both ways. It magnifies 00:15:51.759 --> 00:15:53.519 your wins when things are good, but if things 00:15:53.519 --> 00:15:56.340 slow down even a little, it magnifies your losses 00:15:56.340 --> 00:15:58.200 catastrophically. And we are hitting the year 00:15:58.200 --> 00:16:00.679 2000. The world is about to change. The tech 00:16:00.679 --> 00:16:03.419 bubble bursts. It bursts. And remember that brilliant 00:16:03.419 --> 00:16:07.659 AT &T submarine systems purchase? The Tyco Global 00:16:07.659 --> 00:16:10.840 Network or TGN? The internet toll road that was 00:16:10.840 --> 00:16:12.820 supposed to print money forever? Well, it turns 00:16:12.820 --> 00:16:15.000 out that during the battle, everyone and their 00:16:15.000 --> 00:16:18.980 cousin had the same idea. Global Crossing, WorldCom. 00:16:19.820 --> 00:16:22.080 Everyone was laying fiber optic cable under the 00:16:22.080 --> 00:16:25.299 ocean. There was a massive unprecedented oversupply. 00:16:25.299 --> 00:16:28.279 We call it dark fiber because there was no light, 00:16:28.320 --> 00:16:30.700 no data passing through most of it. Demand just 00:16:30.700 --> 00:16:32.320 didn't keep up with the infrastructure they built. 00:16:32.440 --> 00:16:34.580 Not even close. It was a classic speculative 00:16:34.580 --> 00:16:36.820 bubble. The value of that network, which they 00:16:36.820 --> 00:16:40.000 had poured billions into, just plummeted. How 00:16:40.000 --> 00:16:42.940 bad was the loss? In 2002 alone, the Tyco Global 00:16:42.940 --> 00:16:45.419 Network generated a loss of over $3 billion. 00:16:45.919 --> 00:16:49.820 $3 billion. Yeah. Just evaporated from. one division 00:16:49.820 --> 00:16:53.159 in one year. It gets worse. They eventually realized 00:16:53.159 --> 00:16:55.399 the asset was toxic and they had to unload it. 00:16:55.480 --> 00:16:59.179 In 2005, they sold the entire network to VSNL, 00:16:59.259 --> 00:17:01.379 which is part of the Tata Group in India. Do 00:17:01.379 --> 00:17:02.600 you want to guess the sale price? Well, they 00:17:02.600 --> 00:17:05.200 put billions and billions into it. A billion? 00:17:05.400 --> 00:17:10.160 Maybe half a billion? $130 million. Ouch. That 00:17:10.160 --> 00:17:15.039 is fractions of pennies on the dollar. A rounding 00:17:15.039 --> 00:17:17.940 error. It was a financial cataclysm. And it wasn't 00:17:17.940 --> 00:17:20.019 the only problem. The sheer complexity of the 00:17:20.019 --> 00:17:23.200 company was becoming unmanageable. That conglomerate 00:17:23.200 --> 00:17:25.200 discount we talked about was hitting them hard. 00:17:25.500 --> 00:17:27.000 Investors couldn't figure out what they were 00:17:27.000 --> 00:17:30.460 buying. And so in January 2002, they had this 00:17:30.460 --> 00:17:33.819 idea. Yes. Tyco actually announced a surprise 00:17:33.819 --> 00:17:36.180 plan to split the business into four separate 00:17:36.180 --> 00:17:38.839 companies just to handle the complexity. So the 00:17:38.839 --> 00:17:41.019 idea of splitting up, which we will talk about 00:17:41.019 --> 00:17:43.519 later, is the solution. actually started way 00:17:43.519 --> 00:17:47.039 back in 2002 under Kozlowski. It did. He saw 00:17:47.039 --> 00:17:49.019 the writing on the wall. He realized the market 00:17:49.019 --> 00:17:51.700 didn't value the whole anymore. But the timing 00:17:51.700 --> 00:17:54.960 was just awful because when they announced the 00:17:54.960 --> 00:17:58.099 split, the market panicked. Investors didn't 00:17:58.099 --> 00:18:00.240 see it as a smart strategic move. They thought 00:18:00.240 --> 00:18:02.259 if they're suddenly trying to split up, they 00:18:02.259 --> 00:18:04.920 must be hiding a massive liquidity crisis. They 00:18:04.920 --> 00:18:07.759 must be desperate for cash. It smelled like desperation, 00:18:07.980 --> 00:18:11.089 not strategy. It did. The credit rating agencies 00:18:11.089 --> 00:18:13.369 immediately downgraded their debt. The stock 00:18:13.369 --> 00:18:16.410 price dropped like a stone. Tyco had to abandon 00:18:16.410 --> 00:18:18.410 the plan almost as soon as they announced it. 00:18:18.509 --> 00:18:20.390 They were trapped in the very structure they 00:18:20.390 --> 00:18:22.950 had built. And then the dam finally broke. 2002 00:18:22.950 --> 00:18:27.470 became a year of just financial hemorrhage. An 00:18:27.470 --> 00:18:30.509 absolute bloodbath. They lost $9 billion that 00:18:30.509 --> 00:18:33.490 year. $9 billion. They tried to sell off their 00:18:33.490 --> 00:18:35.789 financial arm, the CIT Group, which they had 00:18:35.789 --> 00:18:38.089 acquired not long before in another massive deal. 00:18:38.309 --> 00:18:41.289 They took a $6 billion loss on that divestment 00:18:41.289 --> 00:18:43.849 alone. These numbers are astronomical. I mean, 00:18:43.849 --> 00:18:45.789 we're talking about the GDP of small countries 00:18:45.789 --> 00:18:48.069 disappearing from a balance sheet in a matter 00:18:48.069 --> 00:18:50.730 of months. The stock price plummeted. Investors 00:18:50.730 --> 00:18:53.410 were fleeing in droves. But the financial losses, 00:18:53.630 --> 00:18:56.289 as staggering as they were, were about to be 00:18:56.289 --> 00:18:58.630 completely overshadowed. Right. Because midway 00:18:58.630 --> 00:19:02.190 through 2002, the headlines shifted from Tyco 00:19:02.190 --> 00:19:06.910 loses money to Tyco executives steal money. Here's 00:19:06.910 --> 00:19:09.490 where it gets really interesting and really, 00:19:09.569 --> 00:19:12.730 really dramatic. We're entering the scandal zone. 00:19:12.930 --> 00:19:15.710 The scandal of 2002, it stands right there next 00:19:15.710 --> 00:19:18.349 to Enron and WorldCom as the defining corporate 00:19:18.349 --> 00:19:21.250 crimes of that era. So let's look at the allegations. 00:19:21.589 --> 00:19:24.269 What exactly were Kozlowski and the others accused 00:19:24.269 --> 00:19:27.069 of? The Manhattan District Attorney, Robert Morgenthau, 00:19:27.150 --> 00:19:30.609 brought the charges. He charged CEO Dennis Kozlowski 00:19:30.609 --> 00:19:34.130 and CFO Mark H. Swartz with grand larceny, enterprise 00:19:34.130 --> 00:19:36.809 corruption and securities fraud. A whole raft 00:19:36.809 --> 00:19:38.890 of charges. The core allegation was that they 00:19:38.890 --> 00:19:40.670 had effectively looted the company of more than 00:19:40.670 --> 00:19:44.509 $600 million. Looted is a strong word. How exactly 00:19:44.509 --> 00:19:46.210 were they doing this? I assume they weren't, 00:19:46.210 --> 00:19:48.789 you know, walking into the bank vault with burlap 00:19:48.789 --> 00:19:51.089 sacks. It was more sophisticated than that, but 00:19:51.089 --> 00:19:53.250 honestly, not that much more. A huge part of 00:19:53.250 --> 00:19:55.950 it revolved around unauthorized bonuses and benefits. 00:19:56.230 --> 00:19:58.420 For example, they created... at something called 00:19:58.420 --> 00:20:02.460 the Key Employee Loan Program or KELLP. It was 00:20:02.460 --> 00:20:04.779 supposed to be a way for executives to get company 00:20:04.779 --> 00:20:07.900 loans to pay taxes on their stock grants. Seems 00:20:07.900 --> 00:20:10.359 reasonable on the surface. But Kozlowski and 00:20:10.359 --> 00:20:13.279 Swartz allegedly used it as their personal piggy 00:20:13.279 --> 00:20:15.900 bank. They would take out millions in loans for 00:20:15.900 --> 00:20:18.299 themselves and then they would just forgive the 00:20:18.299 --> 00:20:20.779 loans. So I borrow five million dollars from 00:20:20.779 --> 00:20:23.440 the company and then I, as an executive, sign 00:20:23.440 --> 00:20:25.660 a piece of paper that says I don't have to pay 00:20:25.660 --> 00:20:28.660 it back. Exactly. And they allegedly did this 00:20:28.660 --> 00:20:31.259 without the proper approval of the board of directors 00:20:31.259 --> 00:20:34.339 or, crucially, any disclosure to shareholders. 00:20:34.640 --> 00:20:37.440 They were also accused of secretly selling millions 00:20:37.440 --> 00:20:39.559 of dollars of their own stock while publicly 00:20:39.559 --> 00:20:41.759 telling investors on conference calls that they 00:20:41.759 --> 00:20:43.559 were holding onto it, that they believed in the 00:20:43.559 --> 00:20:45.680 company. And this brings us to a fascinating 00:20:45.680 --> 00:20:48.140 legal concept that played a huge role in the 00:20:48.140 --> 00:20:50.980 aftermath, the faithless servant doctrine. Yes. 00:20:51.549 --> 00:20:54.289 This is incredible. Years later, in a civil case 00:20:54.289 --> 00:20:57.569 in 2010, Judge Thomas Grisa invoked this doctrine 00:20:57.569 --> 00:21:00.529 against Kozlowski. It sounds medieval. It's a 00:21:00.529 --> 00:21:03.609 very old legal principle rooted in agency law. 00:21:03.869 --> 00:21:07.549 It basically says that an employee is a servant 00:21:07.549 --> 00:21:10.809 of the employer. And if that servant is faithless, 00:21:10.890 --> 00:21:13.210 if they are disloyal, if they steal, if they 00:21:13.210 --> 00:21:15.650 act against the employer's interest, they are 00:21:15.650 --> 00:21:18.289 not entitled to any compensation for the entire 00:21:18.289 --> 00:21:20.750 period of their disloyalty. So it's not just 00:21:20.750 --> 00:21:24.009 paybacks the $150 million you stole. No, it's 00:21:24.009 --> 00:21:26.779 much more severe. It's payback every single salary 00:21:26.779 --> 00:21:29.619 check, every intimate bonus, every stock option 00:21:29.619 --> 00:21:31.680 you earn during the years you were stealing. 00:21:31.900 --> 00:21:34.680 Exactly. The court ruled that because Kozlowski 00:21:34.680 --> 00:21:38.140 was proven to be disloyal between 1997 and 2002, 00:21:38.460 --> 00:21:41.440 he had to forfeit all compensation and benefits 00:21:41.440 --> 00:21:43.960 earned during that period. That totaled something 00:21:43.960 --> 00:21:46.819 like $500 million. That is the nuclear option 00:21:46.819 --> 00:21:49.019 of employment law. It is. It sends a powerful 00:21:49.019 --> 00:21:51.420 message that you can't be partially honest. You're 00:21:51.420 --> 00:21:53.259 either a faithful servant or you aren't. There's 00:21:53.259 --> 00:21:55.740 no in -between. But before we get to that conviction, 00:21:55.980 --> 00:21:58.059 we have to talk about the criminal trial itself. 00:21:58.140 --> 00:22:00.839 Because the first trial in 2004 was an absolute 00:22:00.839 --> 00:22:03.599 circus. It was a media spectacle from day one. 00:22:04.029 --> 00:22:06.829 You had all these salacious details of Kozlowski's 00:22:06.829 --> 00:22:10.430 spending coming out. The famous $2 million birthday 00:22:10.430 --> 00:22:13.950 party for his wife in Sardinia with an ice sculpture 00:22:13.950 --> 00:22:17.369 of Michelangelo's David that... That peed vodka. 00:22:17.549 --> 00:22:20.410 Yeah, that peed vodka. But then the trial itself 00:22:20.410 --> 00:22:23.210 was completely derailed by a single hand gesture. 00:22:23.390 --> 00:22:26.069 The OK sign incident. Yes. Juror Ruth Jordan, 00:22:26.289 --> 00:22:29.289 we are deep in deliberations. The jury is reportedly 00:22:29.289 --> 00:22:31.849 deadlocked, leaning towards conviction, but with 00:22:31.849 --> 00:22:34.589 one holdout. As the jury is walking through the 00:22:34.589 --> 00:22:37.410 courtroom, Jordan, an elderly juror, appears 00:22:37.410 --> 00:22:39.589 to look at the defense table at Kozlowski and 00:22:39.589 --> 00:22:42.109 Swartz and makes an OK gesture with her hand. 00:22:42.369 --> 00:22:44.430 And the interpretation from the media and the 00:22:44.430 --> 00:22:46.450 prosecution was that she was signaling to them, 00:22:46.529 --> 00:22:48.869 don't worry, I'm your holdout. I'm going to get 00:22:48.869 --> 00:22:51.269 you a hung jury. That was the fear. And it caused 00:22:51.269 --> 00:22:53.430 an absolute firestorm. The Wall Street Journal, 00:22:53.569 --> 00:22:55.630 in a very controversial move, actually published 00:22:55.630 --> 00:22:58.369 her name, which is rare for a sitting juror, 00:22:58.410 --> 00:23:01.049 and ran a caricature of her. The pressure was 00:23:01.049 --> 00:23:03.230 immense. So it became impossible to continue. 00:23:03.470 --> 00:23:06.910 The judge felt the jury's impartiality was hopelessly 00:23:06.910 --> 00:23:10.210 compromised. He had to declare a mistrial. Unbelievable. 00:23:10.710 --> 00:23:12.710 Millions and millions of dollars in legal fees, 00:23:12.950 --> 00:23:15.990 months of testimony, and it ends because of a 00:23:15.990 --> 00:23:18.130 hand gesture that may or may not have meant anything. 00:23:18.369 --> 00:23:20.789 But the reprieve was short -lived. The district 00:23:20.789 --> 00:23:23.890 attorney retried the case in 2005, and this time 00:23:23.890 --> 00:23:26.710 there were no hand gestures, no holdouts. The 00:23:26.710 --> 00:23:29.509 jury convicted Kozlowski and Swartz on almost 00:23:29.509 --> 00:23:32.190 all counts. And the sentence wasn't a slap on 00:23:32.190 --> 00:23:33.829 the wrist, which sometimes happens in these white 00:23:33.829 --> 00:23:36.650 -collar cases. No, this was serious. They were 00:23:36.650 --> 00:23:39.710 sentenced to eight and one -third to 25 years 00:23:39.710 --> 00:23:43.000 in prison. They serve substantial time. Kozlowski 00:23:43.000 --> 00:23:45.859 wasn't granted parole until 2014. It was a very 00:23:45.859 --> 00:23:47.720 real punishment. And what about the shareholders, 00:23:48.019 --> 00:23:49.740 the people who lost their retirement savings 00:23:49.740 --> 00:23:52.559 when the stock tanked from over $60 a share to 00:23:52.559 --> 00:23:54.859 less than $10? They eventually got some measure 00:23:54.859 --> 00:23:58.119 of restitution. In 2007, a class action settlement 00:23:58.119 --> 00:24:00.480 was approved where Tyco, the company, agreed 00:24:00.480 --> 00:24:03.460 to pay $2 .92 billion to the defrauded shareholders. 00:24:03.779 --> 00:24:06.539 A huge sum. At the time, it was one of the largest 00:24:06.539 --> 00:24:08.839 securities class action settlements in history. 00:24:09.259 --> 00:24:11.839 Now, I have to mention one specific detail from 00:24:11.839 --> 00:24:13.859 the source material, because it really became 00:24:13.859 --> 00:24:16.400 the symbol of the whole scandal. We often hear 00:24:16.400 --> 00:24:19.579 about golden parachutes or private jets, but 00:24:19.579 --> 00:24:23.599 Tycho gave us... The umbrella stand. Ah, yes. 00:24:23.880 --> 00:24:27.339 The $15 ,000 umbrella stand. Dog -shaped umbrella 00:24:27.339 --> 00:24:29.859 stand, to be precise. Correct. During the trial, 00:24:29.980 --> 00:24:32.680 prosecutors listed items that Kozlowski had purchased 00:24:32.680 --> 00:24:34.559 with company funds for his New York apartment. 00:24:34.839 --> 00:24:38.019 There was a $6 ,000 shower curtain, which is 00:24:38.019 --> 00:24:41.200 already absurd. Absurd. But the $15 ,000 umbrella 00:24:41.200 --> 00:24:43.880 stand captured the public's imagination. Why 00:24:43.880 --> 00:24:46.680 that item? I mean, why not the $2 million party? 00:24:46.759 --> 00:24:48.799 That's way more money. It's a concept called 00:24:48.799 --> 00:24:51.799 the law of triviality. Most people, myself included, 00:24:51.960 --> 00:24:53.779 don't really know what a $2 million party looks 00:24:53.779 --> 00:24:56.440 like. It's too abstract. But everyone knows what 00:24:56.440 --> 00:24:58.019 an umbrella stand is. Right. You can buy one 00:24:58.019 --> 00:25:01.099 at Target for $20. Exactly. The idea of spending 00:25:01.099 --> 00:25:04.619 $15 ,000, the price of a decent used car on a 00:25:04.619 --> 00:25:07.819 bucket for your wet umbrella, that is viscerally 00:25:07.819 --> 00:25:10.500 offensive. It's relatable in its absurdity. It 00:25:10.500 --> 00:25:12.980 became the perfect symbol of corporate greed 00:25:12.980 --> 00:25:16.039 and a complete disconnect from reality. It really 00:25:16.039 --> 00:25:18.180 paints the picture of an executive who had just 00:25:18.180 --> 00:25:22.849 lost all perspective. So Kozlowski is out. Swartz 00:25:22.849 --> 00:25:26.150 is out. The company is bleeding money and its 00:25:26.150 --> 00:25:29.250 reputation is in tatters. The brand is toxic. 00:25:29.529 --> 00:25:31.529 Who on earth would want to come in and clean 00:25:31.529 --> 00:25:34.650 up this mess? Enter the cleanup crew. In July 00:25:34.650 --> 00:25:38.190 2002, the board appointed Edward D. Breen as 00:25:38.190 --> 00:25:41.230 the new CEO. He was formerly the president and 00:25:41.230 --> 00:25:44.869 COO of Motorola, and he had arguably the toughest 00:25:44.869 --> 00:25:46.990 job in corporate America at that moment. I imagine 00:25:46.990 --> 00:25:48.369 the first step is just stopping the bleeding. 00:25:48.490 --> 00:25:52.109 Triage. The very first step was a purge. Breen 00:25:52.109 --> 00:25:53.750 came in with the view that he couldn't trust 00:25:53.750 --> 00:25:56.049 the old guard. He effectively gutted the entire 00:25:56.049 --> 00:25:59.430 existing board of directors. His logic was, if 00:25:59.430 --> 00:26:01.289 you were sitting in the room while Kozlowski 00:26:01.289 --> 00:26:03.210 was looting the place and you either didn't know 00:26:03.210 --> 00:26:05.660 or didn't stop it, Breen didn't want you there. 00:26:05.759 --> 00:26:07.359 That makes perfect sense. You need a completely 00:26:07.359 --> 00:26:09.599 clean break from the past. He brought in a whole 00:26:09.599 --> 00:26:12.299 new executive team, David Fitzpatrick as CFO, 00:26:12.539 --> 00:26:15.180 William Litton as general counsel. He needed 00:26:15.180 --> 00:26:17.619 people who were known for integrity and by -the 00:26:17.619 --> 00:26:20.079 -book processes, not for creative deal -making. 00:26:20.339 --> 00:26:22.000 And I see here he went very heavy on corporate 00:26:22.000 --> 00:26:24.559 governance. He had to. He had to signal to the 00:26:24.559 --> 00:26:27.079 market that things had changed. He established 00:26:27.079 --> 00:26:29.700 a guide to ethical conduct. He made ethics courses 00:26:29.700 --> 00:26:33.119 mandatory for all employees worldwide. Does that 00:26:33.119 --> 00:26:35.640 stuff actually work or is it just for show? Well, 00:26:35.700 --> 00:26:38.059 it can be just for show. But in this context, 00:26:38.240 --> 00:26:40.880 it was essential signaling. He had to tell Wall 00:26:40.880 --> 00:26:43.819 Street, regulators, and his own employees, we 00:26:43.819 --> 00:26:46.200 are not the Wild West anymore. We are going to 00:26:46.200 --> 00:26:48.480 be a boring, rule -following company from now 00:26:48.480 --> 00:26:51.460 on. So did it work? Did he manage to stabilize 00:26:51.460 --> 00:26:53.519 the company? Surprisingly well and surprisingly 00:26:53.519 --> 00:26:57.119 quickly. From 2003 to 2006, they really stabilized 00:26:57.119 --> 00:26:59.660 the ship. Revenue bounced back to $40 billion 00:26:59.660 --> 00:27:03.599 by 2004. And Breen started a massive divestiture 00:27:03.599 --> 00:27:05.980 program, selling off 21 non -core businesses. 00:27:06.400 --> 00:27:08.880 He looked at the vast portfolio and started asking 00:27:08.880 --> 00:27:11.019 the simple question, why do we own this? And 00:27:11.019 --> 00:27:12.940 if there wasn't a good strategic answer, he sold 00:27:12.940 --> 00:27:15.940 it. He sold it. He started untangling the mess 00:27:15.940 --> 00:27:18.059 that Kozlowski had created. They even launched 00:27:18.059 --> 00:27:20.980 a new ad campaign, right? Yes. Tyco, a vital 00:27:20.980 --> 00:27:23.299 part of your world. A very deliberate attempt 00:27:23.299 --> 00:27:26.180 to pivot the narrative. They were trying to shift 00:27:26.180 --> 00:27:29.980 the focus from the scandal to the products, reminding 00:27:29.980 --> 00:27:32.880 people that Tyco wasn't just Dennis Kozlowski. 00:27:32.940 --> 00:27:35.700 It was the surgeon using Tyco instruments to 00:27:35.700 --> 00:27:38.660 save a life or the firefighter using Tyco equipment 00:27:38.660 --> 00:27:41.700 to put out a fire. But even with all that stabilization, 00:27:42.200 --> 00:27:45.480 the Breen era led to a fundamental realization. 00:27:45.839 --> 00:27:48.529 Yes. The company was just too big. Yeah. The 00:27:48.529 --> 00:27:51.009 growth by acquisition model that built the beast 00:27:51.009 --> 00:27:52.990 was also the thing that was killing it. Exactly. 00:27:53.170 --> 00:27:55.029 Brain and the new board looked at the structure 00:27:55.029 --> 00:27:57.250 and realized that no matter how good the management 00:27:57.250 --> 00:28:00.529 was, the structure itself was flawed. The healthcare 00:28:00.529 --> 00:28:02.450 division had absolutely nothing to do with the 00:28:02.450 --> 00:28:04.809 security division. They were fighting for capital, 00:28:04.970 --> 00:28:07.390 fighting for the CEO's attention. There was no 00:28:07.390 --> 00:28:09.450 synergy. It was just a holding company. So they 00:28:09.450 --> 00:28:11.809 decided to do what Kozlowski had tried and failed 00:28:11.809 --> 00:28:14.710 to do back in 2002. They decided to dismantle 00:28:14.710 --> 00:28:17.539 the empire. This brings us to section six. The 00:28:17.539 --> 00:28:20.160 Great Dismantling. And it wasn't just a simple 00:28:20.160 --> 00:28:22.940 split. It was a multi -stage process of breaking 00:28:22.940 --> 00:28:25.299 the company down into its atomic parts over several 00:28:25.299 --> 00:28:27.380 years. Let's walk through this because it's fascinating 00:28:27.380 --> 00:28:29.480 to see where all these famous pieces ended up. 00:28:29.500 --> 00:28:33.369 It started in 2007. Right. In January 2007. They 00:28:33.369 --> 00:28:35.890 announced the plan, and by mid -year, they executed 00:28:35.890 --> 00:28:39.430 the first major separation. They split into three 00:28:39.430 --> 00:28:42.450 independent, publicly traded companies. OK, who 00:28:42.450 --> 00:28:45.289 were the three players? Player one was Covidian 00:28:45.289 --> 00:28:48.769 Ltd. This was the new name for what was formerly 00:28:48.769 --> 00:28:51.640 Tyco Healthcare. It took all the medical products, 00:28:51.880 --> 00:28:54.319 the bandages, the imaging equipment, the surgical 00:28:54.319 --> 00:28:56.680 tools. And COVID went on to become a massive 00:28:56.680 --> 00:28:59.240 success on its own. A huge success. It was eventually 00:28:59.240 --> 00:29:02.079 acquired by Medtronic in 2015 for nearly $50 00:29:02.079 --> 00:29:05.319 billion. A validation that this business was 00:29:05.319 --> 00:29:08.160 incredibly valuable when it wasn't shackled to, 00:29:08.279 --> 00:29:10.599 you know, a valve manufacturer. Okay, player 00:29:10.599 --> 00:29:13.960 two from the 2007 split. Tyco Electronics LTD. 00:29:14.079 --> 00:29:16.920 This later rebranded itself as TE Connectivity. 00:29:17.079 --> 00:29:18.940 They took all the AMP assets, the connectors, 00:29:19.079 --> 00:29:20.700 the sensors. the wiring components. They are 00:29:20.700 --> 00:29:22.980 a massive supplier to the automotive and aerospace 00:29:22.980 --> 00:29:25.460 industries today. Again, a huge, successful company. 00:29:25.640 --> 00:29:28.500 And Player 3. Player 3 kept the name Tyco International 00:29:28.500 --> 00:29:32.700 LTD. This entity held on to the core fire and 00:29:32.700 --> 00:29:35.400 security business and the flow control and other 00:29:35.400 --> 00:29:38.440 engineered product segments. So it was a smaller, 00:29:38.480 --> 00:29:41.319 more focused version of the old Tyco. So the 00:29:41.319 --> 00:29:44.980 one company became three. But they weren't done 00:29:44.980 --> 00:29:46.789 yet, were they? It sounds like the remaining 00:29:46.789 --> 00:29:49.049 Tyco is still a bit of a conglomerate. No, they 00:29:49.049 --> 00:29:50.390 weren't done. The remaining Tyco International 00:29:50.390 --> 00:29:53.930 still felt it was too complex. So in 2012, they 00:29:53.930 --> 00:29:56.710 split again. It's like a set of Russian nesting 00:29:56.710 --> 00:29:58.990 dolls, but in reverse. It's exactly like that. 00:29:59.029 --> 00:30:01.509 It's cellular division. This time, they spun 00:30:01.509 --> 00:30:04.549 off the ADT Corporation. This became the standalone 00:30:04.549 --> 00:30:06.869 North American residential and small business 00:30:06.869 --> 00:30:09.950 security company. If you have an ADT sign in 00:30:09.950 --> 00:30:11.569 your yard today, this is where that independent 00:30:11.569 --> 00:30:13.710 company came from. And the industrial stuff, 00:30:13.849 --> 00:30:15.670 the flow control part. They took the flow control 00:30:15.670 --> 00:30:17.829 segment, all the valves and industrial controls, 00:30:17.990 --> 00:30:20.230 and they merged it with another company, Pentair. 00:30:20.650 --> 00:30:23.250 That division was later acquired by Emerson Electric. 00:30:23.329 --> 00:30:26.309 So that piece found a new home as well. So what 00:30:26.309 --> 00:30:28.730 was left of the name Tyco after the 2012 split? 00:30:29.160 --> 00:30:31.359 What remained as Tyco was the international fire 00:30:31.359 --> 00:30:33.519 and security business and the commercial security 00:30:33.519 --> 00:30:36.099 business in North America. They branded that 00:30:36.099 --> 00:30:38.220 commercial side as Tyco Integrated Security. 00:30:38.440 --> 00:30:40.539 So a much smaller, much more focused company. 00:30:40.740 --> 00:30:44.039 So we've gone from one massive, incomprehensible 00:30:44.039 --> 00:30:49.359 blob to Covidian, TE Connectivity, ADT, a piece 00:30:49.359 --> 00:30:52.400 inside Pentair and a smaller, leaner Tyco. And 00:30:52.400 --> 00:30:54.420 then came the final chapter for Tyco's independence. 00:30:54.859 --> 00:30:58.339 In 2016, what was left of Tyco merged with Johnson 00:30:58.339 --> 00:31:00.779 Controls. Johnson Controls is another huge name 00:31:00.779 --> 00:31:03.619 in building efficiency, HVAC systems, batteries. 00:31:03.920 --> 00:31:06.880 Right. It was a merger of two giants in the smart 00:31:06.880 --> 00:31:09.240 building space. The combined company took the 00:31:09.240 --> 00:31:12.000 name Johnson Controls International Power. And 00:31:12.000 --> 00:31:14.900 with that merger, Tyco as a standalone parent 00:31:14.900 --> 00:31:17.720 entity effectively ceased to exist. It's just 00:31:17.720 --> 00:31:20.160 incredible. It took 40 years to build this massive, 00:31:20.240 --> 00:31:22.640 sprawling empire. about 10 years to take it all 00:31:22.640 --> 00:31:25.539 apart piece by piece. And the irony is the parts 00:31:25.539 --> 00:31:27.960 were arguably much more successful and valuable 00:31:27.960 --> 00:31:30.380 on their own than they ever were when they were 00:31:30.380 --> 00:31:32.900 all glued together. It's the ultimate proof that 00:31:32.900 --> 00:31:35.559 the conglomerate discount was real. The market 00:31:35.559 --> 00:31:38.180 was right. Once these businesses were set free 00:31:38.180 --> 00:31:40.720 from the central holding company, they thrived. 00:31:40.799 --> 00:31:42.720 Before we wrap up, we have to look at one more 00:31:42.720 --> 00:31:45.420 aspect of the Tyco legacy, because while they 00:31:45.420 --> 00:31:47.980 were busy buying companies and handling scandals, 00:31:48.000 --> 00:31:51.019 they were also. You know, a real manufacturing 00:31:51.019 --> 00:31:53.819 company making physical things. And that left 00:31:53.819 --> 00:31:56.559 a footprint. A very real one, yes. The environmental 00:31:56.559 --> 00:31:59.299 record. You can't run a manufacturing empire 00:31:59.299 --> 00:32:02.400 of that size, especially one built so quickly, 00:32:02.539 --> 00:32:05.740 without impacting the environment. And Tyco had 00:32:05.740 --> 00:32:08.079 some serious violations that showed it wasn't 00:32:08.079 --> 00:32:10.819 just financial corners they were cutting. Let's 00:32:10.819 --> 00:32:13.160 look at the specifics from our sources. We have 00:32:13.160 --> 00:32:15.759 notes on a facility in Hamburg, New Jersey. Right. 00:32:16.160 --> 00:32:18.339 This was a metal forming and finishing facility 00:32:18.339 --> 00:32:21.220 they operated for decades. They were fined over 00:32:21.220 --> 00:32:25.299 $1 .1 million by the EPA for Clean Air Act violations. 00:32:25.720 --> 00:32:28.319 The issue was their use of trichloroethylene 00:32:28.319 --> 00:32:30.960 to degrease metal parts. Trichloroethylene. That 00:32:30.960 --> 00:32:33.589 sounds nasty. It is. It's a volatile organic 00:32:33.589 --> 00:32:37.150 compound, a VOC. It's a toxic air pollutant that 00:32:37.150 --> 00:32:39.410 can cause serious health effects. And they were 00:32:39.410 --> 00:32:41.369 venting it into the atmosphere without proper 00:32:41.369 --> 00:32:43.930 controls. And then there was the situation in 00:32:43.930 --> 00:32:46.589 Connecticut. This one reads like a villain plot 00:32:46.589 --> 00:32:49.210 in a movie. It doesn't sound like just negligence. 00:32:49.210 --> 00:32:52.000 It feels very deliberate. This was at their plant 00:32:52.000 --> 00:32:54.279 in Enfield, Connecticut. It was a Clean Water 00:32:54.279 --> 00:32:57.940 Act violation. The plant had sand filters installed 00:32:57.940 --> 00:33:00.619 to treat their industrial wastewater before it 00:33:00.619 --> 00:33:02.759 was released into the public sewers. And sand 00:33:02.759 --> 00:33:04.960 filters are slow, right? They take time. They 00:33:04.960 --> 00:33:07.930 are. They create a production bottleneck. And 00:33:07.930 --> 00:33:10.289 when you are under immense pressure from a CEO 00:33:10.289 --> 00:33:13.650 like Dennis Kozlowski to increase revenue and 00:33:13.650 --> 00:33:16.210 output every single quarter, bottlenecks are 00:33:16.210 --> 00:33:18.650 the enemy. So what did they do? Managers at the 00:33:18.650 --> 00:33:21.230 plant deliberately routed the wastewater around 00:33:21.230 --> 00:33:23.630 the sand filters. They installed a bypass pipe. 00:33:24.009 --> 00:33:26.690 Effectively, yes, a secret bypass to speed up 00:33:26.690 --> 00:33:29.109 production. But it meant they were discharging 00:33:29.109 --> 00:33:31.930 untreated wastewater with toxic levels of copper 00:33:31.930 --> 00:33:35.029 and led directly into the Manchester public sewers. 00:33:35.150 --> 00:33:37.509 And they knew they were doing it. They falsified 00:33:37.509 --> 00:33:39.750 reports to the Department of Environmental Protection 00:33:39.750 --> 00:33:42.920 to cover it up. It eventually came out. And it 00:33:42.920 --> 00:33:46.759 resulted in $10 million in fines and guilty pleas 00:33:46.759 --> 00:33:49.359 from the managers involved. That is the definition 00:33:49.359 --> 00:33:51.599 of putting profit over public safety. And it 00:33:51.599 --> 00:33:53.440 connects directly back to the corporate culture 00:33:53.440 --> 00:33:56.309 of the scandal. The pressure to perform to meet 00:33:56.309 --> 00:33:58.829 the numbers at all costs was so high that it 00:33:58.829 --> 00:34:01.250 corrupted everything from the accounting department 00:34:01.250 --> 00:34:03.589 in the executive suite to the factory floor. 00:34:03.849 --> 00:34:06.450 If you are willing to fake the earnings reports, 00:34:06.630 --> 00:34:08.590 you're probably willing to fake the environmental 00:34:08.590 --> 00:34:11.550 reports. And when they acquired Ansel, a fire 00:34:11.550 --> 00:34:14.369 protection company, they also inherited a massive 00:34:14.369 --> 00:34:17.269 arsenic salt contamination issue from that company's 00:34:17.269 --> 00:34:19.550 past. That's the other side of the acquisition 00:34:19.550 --> 00:34:22.289 coin. When you buy a company, you buy its assets, 00:34:22.329 --> 00:34:25.309 but you also buy its sins. You acquire its pollution 00:34:25.309 --> 00:34:28.230 liabilities. Tyco had to spend millions cleaning 00:34:28.230 --> 00:34:30.710 up messes they didn't personally create simply 00:34:30.710 --> 00:34:32.650 because they bought the company that did. So 00:34:32.650 --> 00:34:34.289 what does this all mean? We've looked at the 00:34:34.289 --> 00:34:36.309 rise, the fall, the crime, the punishment and 00:34:36.309 --> 00:34:38.710 the dismantling. What's the big takeaway from 00:34:38.710 --> 00:34:41.670 the Tyco saga? I think if we zoom out, Tycho 00:34:41.670 --> 00:34:44.789 is the ultimate cautionary tale of growth for 00:34:44.789 --> 00:34:47.929 growth's sake. For a long, long time, Wall Street 00:34:47.929 --> 00:34:51.210 loved the story. We buy companies, we get bigger, 00:34:51.309 --> 00:34:54.429 our stock goes up, we make you money. But there 00:34:54.429 --> 00:34:56.849 was no underlying industrial logic. It was just 00:34:56.849 --> 00:34:59.929 complexity masking inefficiency. Exactly. And 00:34:59.929 --> 00:35:02.610 complexity is a great place to hide fraud. When 00:35:02.610 --> 00:35:05.309 you have literally thousands of subsidiaries 00:35:05.309 --> 00:35:07.369 and billions of dollars moving around the globe, 00:35:07.510 --> 00:35:11.250 it's much easier to hide $150 million theft or 00:35:11.250 --> 00:35:14.670 a $15 ,000 umbrella stand. No single auditor 00:35:14.670 --> 00:35:17.110 can possibly check everything. It also challenges 00:35:17.110 --> 00:35:20.150 the idea of the super CEO, the cult of personality. 00:35:20.960 --> 00:35:22.880 Kozlowski was treated like a business genius 00:35:22.880 --> 00:35:25.320 until he wasn't. And then Ed Breen, the guy who 00:35:25.320 --> 00:35:27.159 came in to fix it, didn't try to be a genius 00:35:27.159 --> 00:35:29.480 builder. He was a dismantler. His genius was 00:35:29.480 --> 00:35:31.440 in realizing that the value was in the pieces, 00:35:31.480 --> 00:35:34.340 not the whole. He proved that sometimes the best 00:35:34.340 --> 00:35:36.739 way to manage a giant company is to admit that 00:35:36.739 --> 00:35:39.000 it shouldn't exist in that form. So here is a 00:35:39.000 --> 00:35:40.920 provocative thought for you to chew on as we 00:35:40.920 --> 00:35:44.440 finish up. We live in an era of constant tech 00:35:44.440 --> 00:35:47.619 mergers and massive conglomerates. Big companies 00:35:47.619 --> 00:35:50.760 are buying smaller ones every single day. Tyco 00:35:50.760 --> 00:35:53.039 shows us that sometimes the most valuable move 00:35:53.039 --> 00:35:55.559 isn't building an empire, but breaking it apart. 00:35:56.300 --> 00:35:58.780 When a company owns everything from diapers to 00:35:58.780 --> 00:36:01.699 fiber optics to nuclear valves, can anyone really 00:36:01.699 --> 00:36:04.079 know what's going on inside? I think the answer, 00:36:04.159 --> 00:36:07.199 as Tyco proved so dramatically, is no. And when 00:36:07.199 --> 00:36:08.900 no one really knows what's going on, that is 00:36:08.900 --> 00:36:10.960 when the umbrella stands start showing up on 00:36:10.960 --> 00:36:13.320 the expense reports. A vital lesson for investors 00:36:13.320 --> 00:36:15.880 and business leaders alike. Thanks for listening 00:36:15.880 --> 00:36:17.480 to The Deep Dive. We'll catch you on the next 00:36:17.480 --> 00:36:17.619 one.