One Tough Assignment

When CEO Ed Breen took over at Tyco, he fired the very board that had hired him. And that was just the start.

Ed Breen showed up for his first day of work at the midtown Manhattan headquarters of Tyco International at 7:30 on a late July morning two years ago. He'd been hired the previous week to succeed CEO Dennis Kozlowski, who'd resigned in early June. He rode the elevator to the 43rd floor and stepped out. The office was unnervingly quiet. "There was nobody there," Breen recalls.

It was the last hour of calm that Breen would enjoy for more than a year. He was about to be consumed by what he calls "the swirl" -- a series of investigations, firings, restructurings, board battles, and financing events that felt not just chaotic but at times completely unmanageable. "It was a constant barrage of surprises," Breen says. "Every day, you'd pick up the paper and the company was being trashed." Most days, there were more attorneys and SEC investigators in the office than Tyco executives.

Breen, former president of Motorola, had walked into a firestorm: Kozlowski would soon be indicted for looting the company, Tyco was on the verge of declaring bankruptcy, and the company's reputation was in tatters. True, Breen was being richly rewarded for his attempt to resuscitate Tyco: a $3.5 million signing bonus, a $1.5 million annual salary, and a bundle of stock options. But no one welcomes failure, especially the CEO of a high-profile company. Breen focused acutely on the task at hand: to pull Tyco out of its death spiral. And for that, he'd have to make a string of difficult decisions -- fast.

"I had this major corporation in crisis mode, and I didn't have a staff to answer the phones."

First, Breen had a whole lot of firing to do. Kozlowski's chief financial officer, Mark Swartz, was still working at the company. By September, Swartz had been persuaded to resign; Tyco later sued him to try to recover $134 million in what it felt was excessive pay, and federal prosecutors put Swartz on trial with Kozlowski earlier this year. (That case ended in a mistrial.) Breen also cleaned out Tyco's corporate staff. "I had this major corporation in crisis mode, and I didn't have a staff to answer the phones," Breen remembers. It was, he says, a $36 billion startup.

One of Breen's gutsiest moves was to replace the entire board of directors -- something that had never been done before at a company of Tyco's size. This was the board that had just hired him as CEO. Some corporate-governance experts were opposed to the idea, worried about the break in institutional continuity. But Breen was convinced that Tyco "needed a clean sweep to send a message to the market that this is going to be a different company."

The board was split; five members didn't want to resign, and several retained legal counsel. But eventually, Breen and the board hammered out a compromise that satisfied everyone. Two of the old directors would remain for a year as nonvoting advisory members to maintain continuity, but all the others agreed not to stand for reelection at the next annual meeting. "There's no way I could've backed down," he says. "If we didn't replace the board, we wouldn't have been able to proceed."

Of the 300 people who now work at the company's new, more modest headquarters just outside Princeton, New Jersey, fewer than a dozen were employed two years ago. In the field, two of Tyco's five division heads were also replaced. Did everyone need to go? Probably not, but Breen wasn't taking any chances. All told, the housecleaning represents one of the biggest management upheavals ever.

In addition to the people problem, there was the money problem: Although Tyco's individual businesses were mostly pretty healthy, the scandal sent investors and lenders fleeing and put Tyco into a dire cash crunch in 2002. Still, Breen decided not to take the company into bankruptcy. Eric Pillmore, a career CFO who is now Tyco's senior vice president of corporate governance, says that speed was one big component of the decision. "It would have been simpler, but it would've taken the dive much deeper and probably slowed down our recovery," he says. Breen says he was concerned about protecting shareholders, who usually get wiped out in bankruptcies.

Breen gambled that he could find another way to keep Tyco afloat. He dispatched a team to dig into Tyco's financials and disclose what it found. There were 2,150 separate entities that made up Tyco; Breen's team scoured their balance sheets three times over. Thanks to that exercise in transparency, Tyco managed to raise $4.5 billion in a 2003 bond offering.

Having won Tyco some breathing room, Breen didn't just want to turn it into a stronger, more ethical version of its old self. He wanted to make Tyco a "world-class operating company" instead of the holding company it had been under Kozlowski. To do so, he's pumping up R&D spending to produce organic growth, in sharp contrast to the old Tyco's pursuit of growth through relentless acquisitions, and focusing on a major quality initiative to improve costs and customer satisfaction.

Breen's new team also wrestled with the notion of changing the company's name to distance it even more from the bad old days. A fresh start might help -- particularly since any marketing campaigns would have to compete with news coverage of former Tyco officers on trial. While acknowledging that the news was embarrassing to Tyco's employees, Breen was convinced that it would eventually subside. "You can't hide from a problem," he says. "We wanted to prove that we can be a model of a company that works its way out of a crisis."

Since Breen arrived in July of 2002, he's reduced Tyco's debt from $26 billion to about $14 billion. In June, Moody's restored the company's debt to investment grade. Paying a dividend to shareholders, or doing acquisitions with cash, isn't inconceivable anymore. Breen has pulled Tyco back from the brink. At the rate he's going, the name Tyco might well stand for something good again.

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