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11/22/2002

The ITT Story, Part II

We now move along in our story on International Telephone &
Telegraph, ITT, to the 1960s and the era of CEO Harold Geneen.
The period was defined by the conglomerates, or the
“conglomerators.” There had been other eras in American
business history where mergers were prevalent, such as the early
1900s and the 1920s, with the theory being that the vagaries of
the business cycle could be mitigated through diversification into
various market sectors. Those that did well in slowdowns, for
example, would offset the businesses doing poorly and vice
versa.

Writing in the New York Times Magazine, October 27, 1968,
reporter Harvey Segal spelled out the problems of investing in
the conglomerates of his day, companies like Ling-Temco-
Vought (LTV), Litton and ITT, all of which sold investors on the
synergies of the new corporate relationships, even as the
businesses themselves had little in common.

“The more decentralized the conglomerate becomes, the more it
resembles a mutual fund or a pension trust account in a bank.
Neither play active roles in the management of companies in
which they hold stock.

“Synergism implies greater efficiency in the production of goods
and services, but it is doubtful whether such considerations
weigh heavily in merger decisions. Yet there is no doubting the
fact that managements which pursue aggressive merger policies
can persuade investors to pay more for their stock. Thus, it is to
the stock market rather than the production line that one must
look for an explanation of the conglomerate corporation

“Conglomerate entrepreneurs must raise the price-earnings
ratios of their stock if they are to expand, for unless it’s loaded
with cash, the rising conglomerate must depend on loans to
acquire new companies. The higher the price of its common
stock, the more it can borrow by pledging stock as collateral or
the more it can raise by selling bonds that are convertible into
common stock at a prearranged price. Where the merger is
consummated through the exchange of stock, the higher the
market price of the conglomerate’s stock, the fewer shares it
must give up in exchange and the smaller the dilution in the
earnings per share

“It’s not necessary for conglomerators actually to demonstrate
that they can diminish risks and raise earnings per share through
diversification. The mere intention to embark on the path of
conglomeration may be sufficient to raise expectations.”

[Source: “The New York Times Century of Business”]

Isn’t it amazing that the more things change, the more they stay
the same? Haven’t you all seen this kind of argument in just the
past few years with the likes of a Tyco, and haven’t we borne
witness to the hype, when the fundamentals didn’t warrant it?
But I digress.

Let’s talk about Harold Geneen. Geneen was an ex-pat Britain, a
former Raytheon executive and stern taskmaster, who joined ITT
in 1959. He had started out as a runner on the New York Stock
Exchange and was a witness to the Crash in 1929. Geneen was
sharp with his figures and knew the ins and outs of the
accounting side of the conglomerate game, but, more
importantly, he knew the role that Wall Street could play in
investor sentiment towards his company. He once said:

“We built an organization around functions, not products. We
formed a group of very savvy people to make acquisitions. At
the peak of our expansion we were buying an average of a
company a week. In all, we bought more than 300 companies.”

Time magazine, commenting on ITT in 1972, noted that a
consumer not happy with the company and who wanted to
escape its grasp “could not rent an Avis car, buy a Levitt house,
sleep in a Sheraton hotel, park in an APCOA garage, use Scott’s
fertilizer or seed, eat Wonder Bread or Morton’s frozen
foods he could not have watched any televised reports of
President Nixon’s visit to China he would have had to refuse
listing in Who’s Who; ITT owns that too.” [Charles Geisst,
“Monopolies in America”]

But as ITT, and its share price grew, so did scrutiny. In 1969
investment banker Felix Rohatyn (a member of ITT’s board and
a partner at Lazard Freres) testified that of 68 mergers arranged
by his firm, 27 of the companies had at least one Lazard partner
on its board of directors. Again, sound familiar?

Another issue that ITT and other conglomerates faced was the
principle of “reciprocity,” a process forbidden by antitrust laws.
In a nutshell, ITT and its employees were “encouraged” to do
business with other ITT subsidiaries. Avis suppliers were
encouraged to rent Avis cars, ITT employees were told to buy
their insurance from the Hartford, etc.

Charles Geisst writes in his “Monopolies in America” that at one
level this sort of practice was good business, but at another it
turned into bullying. “Do business with me or else, or be
prepared for the consequences.” Geisst adds, “In a well-
publicized incident in the 1970s, the head of a Madison Avenue
ad agency that handled a soft drink account fired one of her
staffers after the person was found drinking a rival’s product in
the office.” We all have experienced instances similar to this.
Former Prudential-Bache Securities chief, George Ball, used to
go ballistic if Dr. Pepper wasn’t the soft drink of choice at
conferences and affairs, due to an investment banking
relationship between Pru and the good doctor, if I recall
correctly. [I worked at Pru, briefly, in 1989 due to a merger of
the brokerage operations of Thomson McKinnon Securities and
Prudential.]

Increasingly there were questions about accounting and political
power as well. Regarding the latter, in the early 1970s ITT
played a role in the plot to assassinate new Marxist leader
Salvador Allende of Chile. Allende came into power and
immediately nationalized the copper industry, making a victim of
U.S. stalwart Anaconda Copper, and with ITT fearing similar
treatment with its telecommunications holdings in the country,
ITT actively worked back channels to have Allende’s
government overthrown. When Allende was snuffed out, ITT’s
reputation was tarnished, to say the least, and it helped usher in
the feeling that the power of the U.S. multinational had gotten
way out of hand. They were seen as “quasi states” without any
government control over behavior.

A few years earlier, a surprisingly aggressive Nixon
Administration (which may have had its own hand in the Allende
affair) began accusing the conglomerates with antitrust
violations. Attorney General John Mitchell proposed in 1969
that potential mergers between any two companies that were
among the 200 largest manufacturing corporations had to be
formally reviewed by the Justice Department.

The problem with the ITT’s of the world was that they were
assembling disparate companies under one umbrella, and didn’t
necessarily violate antitrust rules as they existed on the books.
But SEC chairman Manuel Cohen called the conglomerates “one
of the very serious problems that is facing the American
industrial capital structure,” [Charles Geisst, “Wall Street: A
History] comparing the era in question to that of the 1920s
merger scene within the public utilities sector.

Attorney General Mitchell appointed a very aggressive lawyer,
Richard McLaren of the Antitrust Division, to open an action
against ITT and its proposed takeover of Hartford Insurance Co.
This was at the height of ITT’s influence, having become one of
the ten largest companies in America, with 400,000 employees in
over 70 countries.

But McLaren suddenly changed tactics, allowing the Hartford
acquisition to go through in return for ITT blowing out some
smaller companies it owned, while ITT agreed that any future
move to acquire an organization valued at more than $100
million would first meet with Justice Department approval. It
was later revealed that ITT had donated $400,000 to the
Republican Party, with the obvious tie-in that the Republicans
were contemplating holding their 1972 convention in San Diego,
where an ITT subsidiary, Sheraton, was the largest operator.
After this news came out, the embarrassed Republicans moved
on to Miami.

Author Geisst points out that though no definitive link between
campaign contributions and the antitrust matter was ever proved,
documents did reveal the extent of Nixon’s views on the topic.
One tape, made at the White House in 1971, had Nixon talking to
Richard Kleindienst, then designated to succeed John Mitchell as
attorney general. “I do not want McLaren to run around
prosecuting people, raising hell about conglomerates, stirring
things up at this point. Now you keep him the hell out of
that or either he resigns. I’d rather have him out anyway. I
don’t like the son of a bitch.”

But the antitrust movement quickly died down with the new
focus on Watergate, though by the mid-1970s, many of the
conglomerates were selling off operations anyway, either
because they simply weren’t contributing to the bottom line or
because of previous Justice Department rulings. Meanwhile, ITT
was divesting itself of Avis and Canteen Co. (a large vending
company), among others, amid increasing questions about it’s
accounting, as well as its unethical business practices. Regarding
the former, ITT may have been overstating earnings by anywhere
from 40-70% due to the way it valued its acquisitions.

As for Geneen, himself, he was actually one of the lower paid
CEOs, receiving a salary of only $250,000, which while still
hefty for the time was nowhere near that of his competitors.
Geneen was counting on a rising share price for the source of his
wealth, but those dreams succumbed to the vicious bear market
of 1973-74.

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

Wall Street History will return next week.

Brian Trumbore



AddThis Feed Button

 

-11/22/2002-      
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Wall Street History

11/22/2002

The ITT Story, Part II

We now move along in our story on International Telephone &
Telegraph, ITT, to the 1960s and the era of CEO Harold Geneen.
The period was defined by the conglomerates, or the
“conglomerators.” There had been other eras in American
business history where mergers were prevalent, such as the early
1900s and the 1920s, with the theory being that the vagaries of
the business cycle could be mitigated through diversification into
various market sectors. Those that did well in slowdowns, for
example, would offset the businesses doing poorly and vice
versa.

Writing in the New York Times Magazine, October 27, 1968,
reporter Harvey Segal spelled out the problems of investing in
the conglomerates of his day, companies like Ling-Temco-
Vought (LTV), Litton and ITT, all of which sold investors on the
synergies of the new corporate relationships, even as the
businesses themselves had little in common.

“The more decentralized the conglomerate becomes, the more it
resembles a mutual fund or a pension trust account in a bank.
Neither play active roles in the management of companies in
which they hold stock.

“Synergism implies greater efficiency in the production of goods
and services, but it is doubtful whether such considerations
weigh heavily in merger decisions. Yet there is no doubting the
fact that managements which pursue aggressive merger policies
can persuade investors to pay more for their stock. Thus, it is to
the stock market rather than the production line that one must
look for an explanation of the conglomerate corporation

“Conglomerate entrepreneurs must raise the price-earnings
ratios of their stock if they are to expand, for unless it’s loaded
with cash, the rising conglomerate must depend on loans to
acquire new companies. The higher the price of its common
stock, the more it can borrow by pledging stock as collateral or
the more it can raise by selling bonds that are convertible into
common stock at a prearranged price. Where the merger is
consummated through the exchange of stock, the higher the
market price of the conglomerate’s stock, the fewer shares it
must give up in exchange and the smaller the dilution in the
earnings per share

“It’s not necessary for conglomerators actually to demonstrate
that they can diminish risks and raise earnings per share through
diversification. The mere intention to embark on the path of
conglomeration may be sufficient to raise expectations.”

[Source: “The New York Times Century of Business”]

Isn’t it amazing that the more things change, the more they stay
the same? Haven’t you all seen this kind of argument in just the
past few years with the likes of a Tyco, and haven’t we borne
witness to the hype, when the fundamentals didn’t warrant it?
But I digress.

Let’s talk about Harold Geneen. Geneen was an ex-pat Britain, a
former Raytheon executive and stern taskmaster, who joined ITT
in 1959. He had started out as a runner on the New York Stock
Exchange and was a witness to the Crash in 1929. Geneen was
sharp with his figures and knew the ins and outs of the
accounting side of the conglomerate game, but, more
importantly, he knew the role that Wall Street could play in
investor sentiment towards his company. He once said:

“We built an organization around functions, not products. We
formed a group of very savvy people to make acquisitions. At
the peak of our expansion we were buying an average of a
company a week. In all, we bought more than 300 companies.”

Time magazine, commenting on ITT in 1972, noted that a
consumer not happy with the company and who wanted to
escape its grasp “could not rent an Avis car, buy a Levitt house,
sleep in a Sheraton hotel, park in an APCOA garage, use Scott’s
fertilizer or seed, eat Wonder Bread or Morton’s frozen
foods he could not have watched any televised reports of
President Nixon’s visit to China he would have had to refuse
listing in Who’s Who; ITT owns that too.” [Charles Geisst,
“Monopolies in America”]

But as ITT, and its share price grew, so did scrutiny. In 1969
investment banker Felix Rohatyn (a member of ITT’s board and
a partner at Lazard Freres) testified that of 68 mergers arranged
by his firm, 27 of the companies had at least one Lazard partner
on its board of directors. Again, sound familiar?

Another issue that ITT and other conglomerates faced was the
principle of “reciprocity,” a process forbidden by antitrust laws.
In a nutshell, ITT and its employees were “encouraged” to do
business with other ITT subsidiaries. Avis suppliers were
encouraged to rent Avis cars, ITT employees were told to buy
their insurance from the Hartford, etc.

Charles Geisst writes in his “Monopolies in America” that at one
level this sort of practice was good business, but at another it
turned into bullying. “Do business with me or else, or be
prepared for the consequences.” Geisst adds, “In a well-
publicized incident in the 1970s, the head of a Madison Avenue
ad agency that handled a soft drink account fired one of her
staffers after the person was found drinking a rival’s product in
the office.” We all have experienced instances similar to this.
Former Prudential-Bache Securities chief, George Ball, used to
go ballistic if Dr. Pepper wasn’t the soft drink of choice at
conferences and affairs, due to an investment banking
relationship between Pru and the good doctor, if I recall
correctly. [I worked at Pru, briefly, in 1989 due to a merger of
the brokerage operations of Thomson McKinnon Securities and
Prudential.]

Increasingly there were questions about accounting and political
power as well. Regarding the latter, in the early 1970s ITT
played a role in the plot to assassinate new Marxist leader
Salvador Allende of Chile. Allende came into power and
immediately nationalized the copper industry, making a victim of
U.S. stalwart Anaconda Copper, and with ITT fearing similar
treatment with its telecommunications holdings in the country,
ITT actively worked back channels to have Allende’s
government overthrown. When Allende was snuffed out, ITT’s
reputation was tarnished, to say the least, and it helped usher in
the feeling that the power of the U.S. multinational had gotten
way out of hand. They were seen as “quasi states” without any
government control over behavior.

A few years earlier, a surprisingly aggressive Nixon
Administration (which may have had its own hand in the Allende
affair) began accusing the conglomerates with antitrust
violations. Attorney General John Mitchell proposed in 1969
that potential mergers between any two companies that were
among the 200 largest manufacturing corporations had to be
formally reviewed by the Justice Department.

The problem with the ITT’s of the world was that they were
assembling disparate companies under one umbrella, and didn’t
necessarily violate antitrust rules as they existed on the books.
But SEC chairman Manuel Cohen called the conglomerates “one
of the very serious problems that is facing the American
industrial capital structure,” [Charles Geisst, “Wall Street: A
History] comparing the era in question to that of the 1920s
merger scene within the public utilities sector.

Attorney General Mitchell appointed a very aggressive lawyer,
Richard McLaren of the Antitrust Division, to open an action
against ITT and its proposed takeover of Hartford Insurance Co.
This was at the height of ITT’s influence, having become one of
the ten largest companies in America, with 400,000 employees in
over 70 countries.

But McLaren suddenly changed tactics, allowing the Hartford
acquisition to go through in return for ITT blowing out some
smaller companies it owned, while ITT agreed that any future
move to acquire an organization valued at more than $100
million would first meet with Justice Department approval. It
was later revealed that ITT had donated $400,000 to the
Republican Party, with the obvious tie-in that the Republicans
were contemplating holding their 1972 convention in San Diego,
where an ITT subsidiary, Sheraton, was the largest operator.
After this news came out, the embarrassed Republicans moved
on to Miami.

Author Geisst points out that though no definitive link between
campaign contributions and the antitrust matter was ever proved,
documents did reveal the extent of Nixon’s views on the topic.
One tape, made at the White House in 1971, had Nixon talking to
Richard Kleindienst, then designated to succeed John Mitchell as
attorney general. “I do not want McLaren to run around
prosecuting people, raising hell about conglomerates, stirring
things up at this point. Now you keep him the hell out of
that or either he resigns. I’d rather have him out anyway. I
don’t like the son of a bitch.”

But the antitrust movement quickly died down with the new
focus on Watergate, though by the mid-1970s, many of the
conglomerates were selling off operations anyway, either
because they simply weren’t contributing to the bottom line or
because of previous Justice Department rulings. Meanwhile, ITT
was divesting itself of Avis and Canteen Co. (a large vending
company), among others, amid increasing questions about it’s
accounting, as well as its unethical business practices. Regarding
the former, ITT may have been overstating earnings by anywhere
from 40-70% due to the way it valued its acquisitions.

As for Geneen, himself, he was actually one of the lower paid
CEOs, receiving a salary of only $250,000, which while still
hefty for the time was nowhere near that of his competitors.
Geneen was counting on a rising share price for the source of his
wealth, but those dreams succumbed to the vicious bear market
of 1973-74.

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

Wall Street History will return next week.

Brian Trumbore