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Tycom's Big Day

Light Reading
News Analysis
Light Reading
7/27/2000

Despite impending lawsuits from some of its biggest customers, Tycom Ltd. (NYSE: TCM) made a huge splash, as expected, on Wall Street today, raising over $2 billion from its debut on the New York Stock Exchange.

The company offered 61 million shares at a price of $32 per share. As of late afternoon, Tycom shares ended trading up $4.50 at $36.50, giving the company a market capitalization of approximately $18 billion on 511 million shares outstanding.

While the company, which is a spinoff from Tyco International Ltd., is primarily a systems and component vendor that designs, manufactures, and installs undersea cable, it plans to expand its business by also becoming a bandwidth service provider. The first phase of its network build-out is expected to cost $5.7 billion and will be operational by the end of 2002, according to the company’s S-1 filed with the Securities and Exchange Commission.

There's a problem with this plan, however. In transforming itself into a service provider, Tycom will end up competing with some of its service provider customers -- the ones that are currently buying its cable systems and components.

And they aren't happy about that situation. In fact, Global Crossing Ltd. (Nasdaq: GBLX), and IDT Europe Ltd. have already filed lawsuits against Tyco International, which owns 89 percent of Tycom.

IDT Europe alleges that Tyco failed to negotiate in good faith when it entered into supply agreements for a cable system that IDT claims will be substantially similar to the proposed Tycom Global Network. It's seeking $1 billion in compensatory damages, plus another $3 billion in punitive damages and injunctive relief.

Global Crossing filed its lawsuit in May of this year, alleging that Tyco misappropriated trade secrets and confidential information and fraudulently concealed negotiations concerning an undersea cable system that would compete directly with Global Crossing’s South American cable operation. All told, Global Crossing is looking for $1 billion in damages.

But Tyco says Global Crossing has ulterior motives for filing the suit. The same day Global Crossing issued a press release regarding the lawsuit, Tyco issued its own statement accusing Global Crossing of trying to stiff them for an outstanding balance on a $700 million supply contract signed in April 1999 for the construction of Global Crossing’s South American network.

"We have tried to resolve this matter amicably. We were proceeding on that basis when Global Crossing issued its press release, which we believe was issued for tactical reasons, rather than for substantive or worthwhile legal concerns,” reads a press release from Tyco dated May 22, 2000.

This is a sticky situation for Tycom for two reasons. As a subsidiary of Tyco, any huge settlement would directly impact the financials of the company; and, according to its S-1, an unfavorable ruling by the courts could delay or entirely halt the construction of its network. The second issue is that Global Crossing is one of the three major customers of Tycom’s systems business -- along with 360networks (Nasdaq: TSIX) and Telefonica (NYSE:TEF). In fact, Global Crossing comprised approximately 52 percent of Tycom's total accounts receivable as of September 1999 -- but less than 20 percent as of March 31, 2000.

Regardless of what is happening in the courts, investors have been extremely optimistic about the new issue’s debut. The deal was changed three times over the past three days. Last night bankers upped the number of shares to be offered from 54.4 million to 61.13 million. This was after an increase on Monday from 43.5 million shares. Earlier in the day the offering price had also been raised from $26-$30 to $30-$32 per share, to come in at a final pricing of $32. When all the fiddling was complete, the deal increased from a potential $1.5 billion first day to a $1.9 billion first day.

With $629 million in total revenue for 1999 and a net income loss of only $63 million, it's no wonder that Wall Street has been encouraged by the deal. And so far legal matters haven’t dampened the excitement surrounding the company’s debut. At midday the stock was up 14 percent from its already higher-than-expected pricing.

Underwriters for the offering included Goldman Sachs, Salomon Smith Barney, and Merrill Lynch .

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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