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            Write Off Tice on Tyco
            

            With absolutely no malice aforethought (honest, it's just happened this
way), Moneybox this week has been devoted to the thoroughly scintillating
issues of double-parking and corporate accounting. I promise next week to
return to our usual diet of sex and scandal. But in any case, class, today's
topic is "write-off charges after acquisitions: good or evil?"

            Hey, you in the back row, stop snoring! And you, put down that Game Boy!

            Ahem. Actually, write-offs have been in the news all week. Intel
reported its third-quarter results, which included a hefty write-off related to
its acquisition of Level One Communications, upon which some commentators cast
a jaundiced eye. Motorola, meanwhile, announced that it would be taking a $700
million write-off because of its investment in troubled satellite-phone company
Iridium, and added that it might have to take an additional $350 million
write-off in the next quarter. Those write-offs were generally described as
sensible, since Iridium may very well turn out to be a complete bust, and
Motorola needs to make sure it has enough money on hand to account for its
losses from the investment.

            The biggest write-off-related news, though, has to do with Tyco, which until
this week has been one of the hottest companies and hottest stocks in America.
This is Tyco International, not Tyco Toys. Along with GE, it's one of the few
truly successful industrial conglomerates left in this country, with lines of
business ranging from disposable medical products to underwater
telecommunications. Tyco has turned itself into a $30 billion company through
an aggressive program of acquisitions (a total of 110 in the last seven years),
acquisitions that it has done a rather remarkable job of integrating into its
broader management structure.

            This week, though, David Tice, who runs the Prudent Bear Fund out of Dallas,
issued a report calling into question "the quality of Tyco's earnings," which
is a nice way of saying Tice is suggesting that Tyco's acquisition-driven
strategy may be a way of masking slow growth in its underlying business. In
particular, Tice pointed to Tyco's hefty write-offs of its acquisition costs,
write-offs that have totaled something like $3.9 billion in the last four
years.

            Companies take one-time write-offs because they're better than having to
write off a little bit each year. Investors and analysts tend to treat large
write-offs as one-time events, and therefore disregard them. Skeptical
investors, like Tice, don't like this, especially when--as in the case of
Tyco--a company is taking large write-offs year after year. The write-off, in
the minds of bears, can be a way for companies to hide the costs of
acquisitions.

            This critique of write-offs is completely wrongheaded. If the cost of
acquisition is hidden by a write-off, it's hidden in plain sight, since the
company announces it quite publicly. And while it's possible that there are
investors who get tricked by write-offs into believing that an acquisition was
free, it's also true that there are people who still believe their fates are
governed by the stars. Companies are no more responsible for the former than
the latter. The market as a whole cannot be systematically deluded by
accounting gimmicks, as long as the gimmicks are publicly disclosed.

            Here, though, we get into the other potential problem with write-offs.
Essentially, when a company takes a write-off with regard to an acquisition,
it's setting aside a reserve of money that it says it believes it will need to
complete the acquisition. The danger is that an unscrupulous company will set
aside too much money--since with a big write-off investors tend to disregard
the hit to earnings--and then use the excess to make its bottom line look
better in future years. In other words, I set aside $3 billion to pay for the
acquisition of Company X, but in reality it only costs me $2.8 billion, giving
me $200 million that I can feed back into my income statement in upcoming
years. You need a couple of pennies of income to meet Wall Street estimates?
You got 'em.

            This, for instance, is exactly what Sunbeam did when Al Dunlap was CEO.
(Dunlap denies knowing about the shenanigans that took place under his watch.)
And although Tice hasn't come out and said it, this is what he's implying may
(or could) be happening at Tyco. The charges have had a dramatic effect,
driving the stock down 6 percent on Wednesday and another 10 percent on
Thursday, even though the company's CEO denounced the charges as utterly
baseless and just about every Wall Street firm reiterated "buy" ratings on the
stock.

            Looking at the numbers, I think Tice is completely off base about Tyco. And,
in theory, feeding a write-off reserve back into operating income shouldn't
even be possible. The reality, though, is that this kind of stuff still happens
all the time (even though eventually everyone does seem to get caught). And
Tice was onto Sunbeam before almost anyone else. But to a man with a hammer
everything looks like a nail. Write-offs themselves are not the problem. It's
the lack of transparency in the way that companies--like Sunbeam, and not like
Tyco--use them that is.