The travails of Tyco. (Corporate Strategy).

The huge corporation is facing a battery of troubles, including questions about its accounting.

But nothing is more distressing to the markets than concerns about its fundamental conglomerate strategy.

Consistency is a cherished word on Wall Street. It's a key trait that investors look for in a company and its management, and when it starts to unravel, so can the stock -- and its reputation.

That appears to be what is happening now with Tyco International, whose creation of an enormous conglomerate -- driven by a pell-mell acquisition strategy during the past decade -- has been questioned by management itself. Coupled with questions about its accounting, the strategic confusion and some apparent floundering to regain its footing have cost the company dearly. Earnings have been restated for several periods, crucial debt ratings have been lowered, increasing borrowing costs, and the stock price has plummeted.

The furor surrounding the company and the stock has been an embarrassment for hard-charging CEO L. Dennis Kozlowski, whose shining record until this year had made him a popular management-circuit speaker. And it has renewed long-standing questions about the fundamental value of conglomerates, especially the questions that analysts often ask: Is there a unifying vision? And, are the parts worth more than the whole?

Those questions have been particular gnawing for Tyco, whose disparate parts often appear to provide few synergies. When the stock took a severe beating in the winter, Tyco responded quickly. But its announcement that it wanted to split into four parts looked foolish only three months later, when it rescinded that plan after management confessed that the divisions would attract only "fire sale" prices and not the value it had expected.

On April 25, Tyco announced in a letter to shareholders that it would keep all of its divisions intact, save for Tyco Capital -- the new name for the CIT Group, acquired less than a year ago -- which would be spun off in an initial public offering. When it then announced losses of $1.9 billion for the second quarter, its stock price kept tumbling -- losing 50 percent of its value from the beginning of the year and some $80 million in market capitalization from its peak.

Not that long ago, Tyco, which is registered in Bermuda but runs its sprawling operations out of offices in Exeter, N.H., was a perennial darling of Wall Street. By 2001, thanks to its shopping spree, Tyco had become a $36 billion (sales) company, a quantum leap from the $2.5 billion in sales it posted in 1992, and Wall Street was cheerleading its 25-40 percent earnings growth rates. "Tyco has the strongest fundamentals and the best business mix of the diversified companies in our universe," a Lehman Brothers report once declared.

Whatever the hype, Tyco's management had unquestionably proved it could roll up its sleeves and put its shoulders to the wheel, wringing costs out of its acquired companies and running them efficiently. By all accounts, its leadership embraced a stern, no-nonsense work ethic, a value system that impressed analysts as "blue-collar" in the best sense of that term. "The culture is very tough but very businesslike," says Harvard Business School professor Robert Kennedy. "A few of these guys are ex-military men. And Kozlowski, whose father was a cop or a fireman, personifies that."

While the company is putting the best face on the latest reversals -- "We will approach our businesses with heightened emphasis on return on capital," Kozlowski bravely declared -- Tyco's every move is being scrutinized. Shareholders, in particular, are losing patience: following the company's announcement that it would remain largely intact, institutions dumped the stock. The Wall Street Journal reported one sale of 11.8 million Tyco shares in a single trade.

"Their credibility has been challenged by their change in direction," says George Meyers, senior credit analyst at Moody's Investor Services, which downgraded the bulk of the company's debt from Baa1 to Baa2 in late April. Meyers says the company's long-term survivability is further dependent on the need to raise money from a proposed initial public offering of the former CIT Group so Tyco can use the proceeds to pay down a crushing debt load of $3.25 billion coming due next year.

Tyco's credibility was further eroded by its stunning failure to find a buyer for its plastics division. The company's message for public consumption was that it never received a reasonable offer, prompting it to take the property off the auction block. But prospective buyers at several leverage buyout firms expressed disappointment that Tyco was not more forthright in producing audited financial statements. It was really this lack of transparency that made it all but impossible to price the plastics division adequately, causing LBO firms to balk, says a well-placed source with close ties to one of the bidders.

Meanwhile, Tyco's troubles are calling into question the numbers game and the growth assumptions that really formed the engine driving the company's remarkable growth. Aggressive accounting practices, high debt loads and inflated stock prices -- all of which factor into a busy acquisition game -- are red flags that are drawing renewed attention as regulators, shareholders, debt ratings agencies and even equity analysts grow increasingly circumspect in the post-Enron environment. "In every area of the investment community, there is increased sensitivity to accounting manipulation," says Doug Carmichael, an accounting professor at Baruch College.

So far, Tyco has managed to escape censure by the Securities and Exchange Commission. Even so, the company has made several separate filings to the SEC in which it has restated earnings, notes Dallas short-seller David Tice. The fund manager (regarded as something of a prophet by his fans but as a rumormonger by critics) has for several years argued to journalists and regulators that Tyco has been engaging "aggressive accounting and financial engineering."

"The last time we counted, three separate SEC filings [by Tyco] listed 10 restatements totaling $254 million," Tice noted.

"There is no issue problem or reprimand from the SEC, which in 1999 made an extensive inquiry and took no action," says a Tyco spokeswoman. The company did not respond to several phone calls asking for confirmation of the restatements alleged by Tice.

Under the umbrella of financial engineering, Tice includes, among other things, "write-offs for goodwill, writing down inventory to lower levels, selling inventory to generate gains, pooling-of-interest accounting and setting up purchase liability accounting where they can set up reserves."

Tice also contends that the company was willing to pay dearly to acquire companies in order to take advantage of the bigger goodwill numbers, which, in turn, serve as an asset for accounting purposes and a boon to further acquisitions. "I thought the break-up strategy was doomed to begin with because they needed to grow to be able to make acquisitions to provide reserves," he remarked.

Paul Regan, a forensic accountant and president of Hemming, Morse in San Francisco, has not studied Tyco. But he explains how companies on acquisitive binges sometimes take advantage of accounting rules that allow a purchaser to book liabilities as higher amounts than actually required. "When you have a lot of acquisitions, liabilities are offset by an increase to goodwill," he says. "It makes it easier to set up a little cookie jar on your books for the future."

Meantime, Tyco is having to defend itself against a former employee's charges that it has played fast and loose with generally accepted accounting principles in another area. There have been charges in the press that Tyco pressed companies it acquired to recognize expenses early, a practice that resulted in higher earnings performance once the company came under Tyco's umbrella.

Those kinds of accounting concerns, the company's frantic zigzagging in its corporate strategy, the fact that it may have overpaid for properties by as much two to three times, and the fact that Tyco is incorporated in Bermuda -- which has reduced its overall tax rate to 25 percent from 36 percent and is perceived as an "offshore" tax haven -- add up to a company in crisis, critics say.

Still, the company and its CEO have their champions. Shareholder activist Robert A.G. Monks, a former Tyco board member and chairman of Ram Trust Services, a money management firm with holdings in Tyco, says: "It's an ugly time, but I think Tyco can see its way through."

Accounting Defended

He cites myriad reasons for his confidence. Tyco still has ample cash flow. He knows Kozlowski personally, and describes him as "an honest man, who understands numbers and is not going to cheat"; Monks expects him to survive any inquiries into the company's accounting practices. "Many of these questions were raised 18 months ago," Monks notes, "and the SEC put on a full-court press. As a matter of law, the SEC signed off on the company.

"I think the question is: 'Did they do something in a rising market that people can look at differently in a falling market?'" Monks asks rhetorically.

And it looks as if Harvard, too, is still on Kozlowski's side. "I think it's important to distinguish between the stock price and sales and profits," says Prof. Kennedy. "Last year, Tyco had almost $37 million in revenues, and so this is not some kind of scam. This is not Enron. There is no comparison to Enron except for the fact that both companies are on the front page of the business section."

RELATED ARTICLE: A Celebrated CEO Under Fire

As recently as six months ago, L. Dennis Kozlowski, the company's hard-charging CEO, was still inviting favorable comparisons to Jack Welch, the former General Electric Co. CEO and business icon. Despite Tyco's involvement in the unglamorous -- and often unrelated -- businesses of cranking out fire hydrants, sprinkler heads, medical syringes and burglar alarm systems, Kozlowski was emerging as a business celebrity. There was the coveted cover story in Business Week last year, for example, billing him as Corporate America's "most aggressive CEO."

Kozlowski's Midas touch was even the subject of a laudatory case study by the Harvard Business School, which asked, "What was so special about Tyco?" The answer seemed to lie mainly in the fact that the conglomerate was a "disciplined acquirer," a company that managed to dominate nearly every business segment it targeted. It gobbled up more than 200 companies in the 10 years since 1992, when Kozlowski took the helm.

"We're in industries that for the most part are consolidating -- consolidating in manufacturing, distribution, and the after-market," Kozlowski told interviewers from the Harvard Business School. "And so we have no one big competitor or one big customer in any one of our businesses. So that puts us in a very opportune position to continue this and consolidate more."

In May, a Business Week columnist called prominently for Kozlowski, a sailing enthusiast, to abandon ship and resign. So far the skipper doesn't seem inclined to take the columnist's advice, saying recently that the company was on track to meet analysts' quarterly earnings estimates of $2.60 to $2.70 a share.

The CIT Conundrum

The problems surrounding Tyco Capital shows how Tyco's expand-at-any-cost strategy has occasionally backfired. An IPO is expected to bring in no more than $7.15 billion, compared with the $9.5 billion that Tyco paid for it a year ago. "Monetizing CIT is now job No. 1" if the company hopes to manage its debt payments and restore health to its core businesses, says Mark Demos, a buy side analyst at Fifth Third Bank in Cincinnati, an institutional owner of the stock.

But Tyco will have to work hard to succeed at that task. "Independent finance companies are slowly disappearing," says Bert Ely, a Washington D.C.-area economic consultant and president of a company that bears his name, who thinks that a sale of the finance division remains as likely as an IPO. He cites the purchase of Beneficial Finance by Household International as a shining example of that trend. "It will be interesting to see if CIT, in fact, goes through an IPO or if someone doesn't scoop it up," Ely adds. "Companies like this operate a lot better, and fund themselves more cheaply, if they are part of a larger financial company."

Ely wonders, moreover, whether there may be questionable loans on the books that might impede an P0. "Commercial finance companies have tended not to disclose as much as people would have liked," he says. "I think there may be concerns as to what extent Tyco was using CIT as a piggy bank... There may be some bad paper." In order to effect an IPO, he adds, "They may need to disclose more than they would like and agree to a buyback arrangement."

In a conglomerate where Tyco Capital's cost of funds must remain low for it to turn a profit -- after all, money is the most important resource for a specialty financial services firm that engages in leasing and lending -- the division's very survival is dependent on the parent company's overall debt rating. That has made this division the segment most severely endangered by the parent's credit rating downgrade. Analysts note that Tyco's other core units, mostly nuts-and-bolts industrial concerns, are much less sensitive to debt ratings.

Paul Sweeney is a freelance business writer in Brooklyn, N.Y.