The politics of market cap destruction.

• Author: KABACK, HOFFER

Tyco's experience shows how the mere accusation of accounting impropriety can produce the punishing effects of guilt.

DURING THE impeachment process, President Clinton bemoaned the "politics of personal destruction." The stock market possesses a powerful counterpart. For even the suggestion of accounting irregularities can have devastating consequences to a company.

Consider the $25 billion obliteration in Tyco International Ltd. (TYC) market value from early October to mid-January.

Tyco CEO Dennis Kozlow-ski has been remarkably successful in growing Tyco from about $3 billion in sales in 1992 to over $22 billion today, largely through numerous acquisitions (using its high p/e stock) followed by cost improvements.

Up until October, Tyco benefited from laudatory press. But then: in early October, when TYC was about $53, Dallas investment firm David W. Tice & Associates Inc. wrote a report saying that Tyco's success was due to "adept use of 'cookie jar' reserves" and that "a look 'behind the numbers' gives cause to question Wall Street's enthusiasm" for the company. Tice suggested, among other things, that Tyco's reported operating margins of over 15% for the last few years should be adjusted downwards by more than a third.

The share price promptly got chopped. On October 28, Bear Stearns accounting analyst Pat McConnell and her colleagues wrote a 32-page report challenging Tice's analysis. Conclusion: "We have absolutely no reason to believe that there have been any accounting irregularities at Tyco."

On October 29, New York Times columnist Floyd Norris questioned Tyco's disclosure of writeoffs, pre-closing, by companies it was in process of acquiring. Norris volunteered that he had been "tipped off about the issue" by TYC short seller Jim Chanos. TYC got chopped again.

And then, on December 9, Tyco announced that the SEC had commenced an "informal inquiry" into its acquisition charges and reserves. TYC got totally destroyed after that announcement: it traded (intraday) as low as $22 1/2. At that price, the decrease in TYC's market cap from just two months earlier was about $50 billion. (As of January 18, TYC had recovered to the high $30s after announcing good 1Q earnings and a stock buyback.)

Is Tyco's accounting clean or is it not? And, if it is clean, what dynamic is at work (in the financial markets and in the world at large) such that billions of dollars of value can be destroyed in this way?

It's highly probable that TYC's accounting...