Tyco International- Corporate Malfeasance

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Tyco International- Corporate Malfeasance

Case Summary

Tyco began in 1960 when it was founded by Arthur Rosenberg and started as an investment holding firm. In 1973 Joseph Gaziano took over for Rosenberg as CEO and pursued many hostile acquisitions. He was successful and was able to grow the company to a net worth of $140 million before he passed away in 1982. The CEO who took his place was John Fort who came in with the basic strategy of maximizing shareholder wealth through dramatically cutting costs. When John Fort left his position in 1992, Tyco was comprised of Fire Protection, Electronics, and Packaging departments. Dennis Kowalski was able to work his way to the top of Tyco and take the CEO position in 1992. Kowalski began as an aggressive CEO looking to acquire businesses that were in synergy with Tyco. He succeeded with this by diversifying the company with 1,000 acquisitions by 2002. Throughout the peak of his reign at Tyco the stock price soared from only $5.00 in 1992 to $62.00 in 2001. Although, what investors did not know and should have legally known, was that Kowalski and Swartz had so much influence over the board of directors that they were able to hide substantial amounts of money which they gave to executives throughout the company. In the end, Kowalski stepped down as CEO in June of 2002 when it became evident that he was stealing money from the company. He and Swartz (CFO) were convicted of grand larceny, conspiracy, and fraud and were sentenced to 8-25 year prison sentences in June of 2005. This could have been prevented if the corporate governance structure was not so overpowered by these two individuals.

Situational Analysis

Industry Attractiveness Analysis

Tyco now has many different main industries that it does business in. Although, there is not enough space to cover all of them so I will use two of the most important industries. They are fire protection, and electronics industries. It is very important to use the five forces of competition model when looking at the attractiveness of both of these industries. The five forces of competition model includes the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, rivalries among firms, and the threat of substitute products. The fire protection industry seems to have a mediocre barrier to entry for new firms entering the industry. This industry is a mature one where firms have already established themselves in the market place and therefore it would be hard for new entrants to be profitable. Although, there is a chance that a new entrant will have a core competency in their product in the form of a unique fire protection technology that is hard for other firms to imitate. Since the demand for fire protection equipment is relatively stable and there are many firms in the industry, the bargaining power of suppliers is relatively low. The bargaining power of buyers is mediocre because firms produce many differentiated and unique fire protection devices. These customers could also go and switch to a substitute product and not incur much more of a cost. Therefore, the threat of substitute products is high in the fire protection industry. The fire protection industry is very competitive and companies strive to differentiate themselves from competitors. Therefore, this industry has an intense rivalry among competitors. Overall, Tyco should still compete in this industry because of the constant demand and the potential to have a product go above and beyond expectations. The electronics industry is very competitive, in which firms must concentrate on constantly making their products better. Once a firm is established in this industry, like Tyco, there is no significant threat that new entrants pose. This is because a new entrant would get a very big competitive response right away from other innovative mature firms in the industry and not be able to gain a significant market share. Suppliers in this industry...
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