Tyco's Deal A Month Man

Dennis Kozlowski buys to get fast growth

Everywhere L. Dennis Kozlowski goes in the world, he scrutinizes the local fire hydrants. The chief executive of Tyco International Ltd. isn't a wannabe firefighter. He's gauging sales of one of the prosaic but vital industrial products made by his conglomerate. "Our wives sometimes think we're a bunch of dogs," jokes a colleague, who admits that he, too, is a hydrant-spotter.

For the sake of the Tyco spouses, perhaps it would be better if Kozlowski doesn't snare his latest acquisition target: American Standard Cos., the world's largest maker of toilets. News that Tyco might be interested in Standard broke on Jan. 13, when The Wall Street Journal reported that Standard had rejected a tentative $50-per-share offer from Kozlowski, worth $4 billion, back in early December. Public disclosure of the spurned offer sent Standard's stock soaring 7.5%, to $43 1/4. That, in turn, stirred speculation that shareholders might pressure Standard's board to open talks with Tyco.

For the moment, Kozlowski rules out a hostile bid but says: "If the owners of American Standard want to put pressure on management, we're open and ready for discussions." Although he calls $50 a "fair price," Kozlowski says "there might be opportunity" for Tyco to raise its offer--if Standard agrees to talks and Tyco executives are free to perform a "due diligence" probe into Standard's books. In addition to Standard's plumbing business, Tyco likes the company's big air-conditioning operation. Standard, based in Piscataway, N.J., insists it isn't for sale and won't talk to Tyco.

Failing to complete the Standard deal won't put a dent in Kozlowski's well-oiled machine. A disciplined CEO who has run Tyco since mid-1992, Kozlowski, 50, has wrung impressive growth and profits from mundane businesses. Tyco had earnings of $310 million on revenues of $5.1 billion for the year ended June 30, up 226% and 64%, respectively, since Kozlowski took the helm. Its stock is a Wall Street favorite, soaring 67% in the past year, to about $55. "This is one of the great companies of America, both in performance and corporate governance," says Robert A.G. Monks, a shareholder activist who was a Tyco director for 10 years until 1994.

Acquisitions are crucial to Tyco's fast growth. Executives sort through several hundred potential deals a year to find a dozen or so gems. Since mid-1994, the company has paid $2.4 billion for 24 companies. Most were small to midsize concerns in little-heralded businesses such as valves, pipes, and disposable medical supplies. "I don't want to be in sexy industries that the whole world is paying attention to," says Kozlowski.

Kozlowski insists on a few simple rules: Deals must be friendly and must immediately add to earnings. In calculating whether one will pay off, Tyco managers are only allowed to assume cost savings, not sales growth. "Cost reductions we know we can get," says Kozlowski. "Revenue growth can be more elusive." Insiders say Kozlowski isn't afraid to walk away from overpriced deals. "He knows it's not closing the deal that matters, it's what you do with it afterwards," says Terry L. Hall, a former Tyco chief financial officer. UNCAPPED BONUSES. In most cases, Tyco has succeeded in wringing marked gains out of its acquisitions. One reason: The company's operating executives are given an unusual degree of autonomy. Only 40 people staff Tyco's modest Exeter (N.H.) headquarters. Operating executives agree on an ambitious annual plan with headquarters, then are left to run their divisions with minimal interference--unless their numbers are poor. "It's like being an entrepreneur," says John C. McIntyre, a retired Tyco executive.

Far more than most companies, Tyco gears managers' compensation to performance. Only a small part of an executive's pay is guaranteed salary, and bonuses are uncapped. In the past fiscal year, two operating heads at Tyco made close to $2 million. Kozlowski took home $8.9 million, the bulk in stock-based pay.

A home-grown Tyco executive who joined the company in 1975, Kozlowski relaxes in his free time by flying his own airplane and helicopter. Back in the office, he works 12-hour days to keep up Tyco's deal-a-month pace. He says the company plans to acquire three smallish valve makers in the next two months, adding more than $250 million in annual revenues. Tyco also is bidding for AT&T's fiber-optic operation, which could fetch $1 billion. But even with these deals in the offing, the patient and methodical Kozlowski hasn't given up hope that he may eventually flush out American Standard.

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