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Wall Street History
https://www.gofundme.com/s3h2w8
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11/08/2002
The ITT Story, Part I
The story of ITT, International Telephone & Telegraph, contains
many lessons for today and over the next few weeks, as you read
the tale you will also be undoubtedly reminded of the present-
day cases of conglomerates like Tyco, as well as a company such
as Microsoft because of the antitrust angle.
For starters we go back to 1920 and the founding of ITT by a
former lieutenant colonel in the U.S. Army and sugar broker
from the Virgin Islands, Sosthenes Behn.
ITT started out as a little operator of telephone companies in
Puerto Rico, Cuba and the Virgin Islands when Behn began to
broaden the company’s operations in a big way.
Using connections both in the financial community and
Washington, he worked out a partnership with AT&T’s Brussels-
based International Western Electric and its manufacturing arm.
Then ITT moved in to acquire Spain’s struggling telecom. Behn
next finalized the full purchase of IWE, following a Justice
Department ruling that if AT&T didn’t give it up, the company
would be in violation of antitrust regulations. After this move,
Behn then brought Thomson-Houston into the fold, thereby
picking up a piece of the French market. But Sosthenes was just
getting started.
In 1925, ITT acquired Mexico’s largest telecom, Empresa de
Telefonos and the following year it bought All American Cables,
which operated phone lines from the U.S. to most of Latin
America. The president of All American was John Merrill, who
had been at the company since 1884 and knew all the national
leaders most intimately. Merrill then introduced them to Behn,
which you can imagine was quite helpful. You can also imagine
how fascinating these times must have been in South America.
Some of the characters Behn was dealing with were on the
autocratic side.
Over the course of 1927 and 1928, Behn further consolidated his
holdings south of the border, acquiring a half dozen other
telecoms, so that by the end of the 1920s, ITT was one of the two
most powerful utilities on the continent, the other being
American and Foreign Power (A&FP).
ITT and A&FP worked closely on many ventures, with Behn
(conflict of interest alert!) serving on A&FP’s board. Wall
Street’s investment banking community was heavily involved as
well and by 1929, Corporate America, overall, had about $1
billion in investments in foreign utility companies, some 4 times
the level of just five years earlier. [In the case of Latin America,
contrast this growth with the current contraction in the region,
which is killing its economies.]
By 1930, then, ITT was becoming a real player not just in Latin
America, but worldwide, as well. In the words of historian
Charles Geisst, “It’s influence overseas was pervasive and its
power envied and feared by some.” Behn, however, let ambition
and avarice get the best of him as the decade of the 30s
progressed and ITT did its part to give the U.S. a bad name in
some overseas capitals, often meddling in the domestic politics
of host countries for economic gain. There is even the
undeniable fact that Sosthenes Behn worked closely with both
the Nazis and Franco’s Spain, not just in designing phone and
radio systems, but, in the case of the Third Reich, supplying
some technology that was used in Hitler’s bombs. Of course ITT
wasn’t the only U.S.-based company to have unsavory ties
during this era, but it was unforgivable that Behn’s organization
was still cutting deals at the same time the U.S. was at war with
Germany.
This becomes a natural breakpoint before we resume the ITT
story and the Harold Geneen era of the 1960s/70s, but before
doing so, and to digress from the subject matter, in researching
this piece I came across the following observations from Robert
Sobel in his book “The Pursuit of Wealth.” It’s simple history
from 50 years ago that needs to be noted today in light of the
recent election results in the U.S. and the hope, among some
investors, that the tax treatment of corporate dividends will be
changed.
Back in 1948, for example, many stocks were purchased with
dividends in mind. Sobel writes, “Those who bought and held
utility stocks were concerned with yields. Since bonds had a
prior claim over common stocks, all things being equal, the latter
would have to offer a higher yield to attract attention; the greater
the risk, the greater should be the reward.”
Sobel concludes:
“By this reasoning, corporate bonds should yield more than
government issues, and corporate stocks more than bonds. This
concept was popularized by Benjamin Graham and David Dodd
in their classic ‘Security Analysis,’ first published in 1934. ‘The
prime purpose of a business corporation is to pay dividends to its
owners. A successful company is one that can pay dividends
regularly and presumably increase the rate of return as time goes
on. It also follows that the price paid for an investment in
common stock would be determined chiefly by the amount of the
dividend.’”
In light of today’s low, or non-existent, dividend environment,
picture that in 1950 the yield on the Dow Industrials averaged
6.9%, at a time when long-term U.S. Treasuries averaged 2.3%
and AAA-rated corporates offered 2.7%. But as market volume
reveals, the vast majority of Americans simply ignored Wall
Street in those days. Volume on the New York Stock Exchange
in 1948, for example, was all of 302 million shares for the
entire year. In 1949 it reached a low of 272 million. [If you
aren’t too familiar with current trading patterns, volume on
the NYSE averages about 1.4-1.5 ‘billion’ shares each day!]
Sources:
“The Pursuit of Wealth,” Robert Sobel
“The Great Boom,” Robert Sobel
“Wall Street: A History,” Charles Geisst
“Monopolies in America,” Charles Geisst
“The New York Times Century of Business,” Floyd Norris and
Christine Bockelmann
*Yes, two books each from Sobel and Geisst.
Due to travel, Part II, the Harold Geneen era, will be November
22.
Brian Trumbore
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