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Lucent’s stock, at $51.062 on June 30, 2000, finished 2002 at $1.26—a loss of nearly $190 billion in market value in two-and-a-half years.

The Acquisition Magician

To describe Tyco International Ltd., we can only paraphrase Winston Churchill and say that never has so much been sold by so many to so few. From 1997 through 2001, this Bermuda-based conglomerate spent a total of more than $37 billion—most of it in shares of Tyco stock—buying companies the way Imelda Marcos bought shoes. In fiscal year 2000 alone, according to its annual report, Tyco acquired “approximately 200 companies”—an average of more than one every other day.

The result? Tyco grew phenomenally fast; in five years, revenues went from $7.6 billion to $34 billion, and operating income shot from a $476 million loss to a $6.2 billion gain. No wonder the company had a total stock-market value of $114 billion at the end of 2001.

But Tyco’s financial statements were at least as mind-boggling as its growth. Nearly every year, they featured hundreds of millions of dollars in acquisition-related charges. These expenses fell into three main categories:

“merger” or “restructuring” or “other nonrecurring” costs,

“charges for the impairment of long-lived assets,” and

“write-offs of purchased in-process research and development.”

For the sake of brevity, let’s refer to the first kind of charge as MORON, the second as CHILLA, and the third as WOOPIPRAD. How did they show up over time?

FIGURE 17-2 Tyco International Ltd.

All figures are as originally reported, stated in hundreds of millions of dollars.

“Mergers & acquisitions” totals do not include pooling-of-interests deals.

Source: Tyco International annual reports (Form 10-K).

As you can see, the MORON charges—which are supposed to be nonrecurring—showed up in four out of five years and totaled a whopping $2.5 billion. CHILLA cropped up just as chronically and amounted to more than $700 million. WOOPIPRAD came to another half-billion dollars.3

The intelligent investor would ask:

If Tyco’s strategy of growth-through-acquisition was such a neat idea, how come it had to spend an average of $750 million a year cleaning up after itself?

If, as seems clear, Tyco was not in the business of making things—but rather in the business of buying other companies that make things—then why were its MORON charges “nonrecurring”? Weren’t they just part of Tyco’s normal costs of doing business?

And with accounting charges for past acquisitions junking up every year’s earnings, who could tell what next year’s would be?

In fact, an investor couldn’t even tell what Tyco’s past earnings were. In 1999, after an accounting review by the U.S. Securities and Exchange Commission, Tyco retroactively added $257 million in MORON charges to its 1998 expenses—meaning that those “nonrecurring” costs had actually recurred in that year, too. At the same time, the company rejiggered its originally reported 1999 charges: MORON dropped to $929 million while CHILLA rose to $507 million.

Tyco was clearly growing in size, but was it growing more profitable? No outsider could safely tell.

CONCLUSION: In fiscal year 2002, Tyco lost $9.4 billion. The stock, which had closed at $58.90 at year-end 2001, finished 2002 at $17.08—a loss of 71% in twelve months.4

A Minnow Swallows a Whale

On January 10, 2000, America Online, Inc. and Time Warner Inc. announced that they would merge in a deal initially valued at $156 billion.

As of December 31, 1999, AOL had $10.3 billion in assets, and its revenues over the previous 12 months had amounted to $5.7 billion. Time Warner, on the other hand, had $51.2 billion in assets and revenues of $27.3 billion. Time Warner was a vastly bigger company by any measure except one: the valuation of its stock. Because America Online bedazzled investors simply by being in the Internet industry, its stock sold for a stupendous 164 times its earnings. Stock in Time Warner, a grab bag of cable television, movies, music, and magazines,