Who's Afraid Of Big Bad ITT?
There was a time, not so long ago, when intelligent people trembled in terror of the giant corporations that seemed to be taking over the planet. These monsters had, writers such as John Kenneth Galbraith warned, grown so big that nothing except an equally monstrous government could control them. And the biggest, scariest and most sinister of those monsters was a company known by three frightening initials: ITT. By the year 2000, it was predicted, the company would be one of just 300 conglomerates that would utterly dominate the global economy.
Instead, two weeks ago, ITT took the final steps toward dismantling itself. All that will remain of this allegedly indestructible colossus will be a rather small corporation focused on one single line of business: the publishing of foreign-language phonebooks. Phonebooks! It's a sad end for this once awe-inspiring firm, but it drives home a truth that should never be forgotten: There is no such thing as corporate power. No matter how rich, no matter how large, every corporation is an abject slave to the whims of its customers. Should it ever cease to serve them, it will die.
ITT -- or International Telephone & Telegraph, as it was originally known -- was assembled in the 1920s by a Danish immigrant to the U.S. He collected a ramshackle set of dinky Caribbean and Latin American telephone companies, and then attempted to glorify his not-too-stable enterprise with a name intended to equate his flimsy business with mighty AT&T, American Telephone & Telegraph.
By the late 1950s, ITT was in desperate trouble. Its board hired a gifted young accountant, Harold Geneen, to remake the company. Geneen believed that management was a statistical science. There was, in his view, no difference between a phone company and a bakery. "Management," he liked to say, "is management."
And so over the next 12 years, he embarked on one of the great corporate buying sprees in U.S. financial history. He bought the Sheraton hotel chain, the Diner's Club credit card, the Avis rental car company, the Hartford insurance company, and Continental Bakeries, manufacturers of the Twinkie, to name only a few of the dozens of firms he purchased. Geneen thrust ITT into the very first rank of American business, when measured by total revenues. And he promised to find some "synergy" that would transform this weird collection of assets into a dynamic, ultra-profitable global
conglomerate. Along the way, he frightened liberal-minded people half to death.
President Richard Nixon's attorney general, John Mitchell, attacked ITT in a 1969 speech. "The danger that super-concentration poses to our economic, political and social structure cannot be overestimated." That same year, the U.S. Federal Trade Commission warned that ITT and companies like it "pose a serious threat to America's democratic and social institutions by creating a degree of centralized private decision-making that is incompatible with a free-enterprise system."Michigan Senator Phil Hart -- one of the most powerful and respected men in Congress -- convened hearings into the menace created by a company so big and so powerful that none of the ordinary rules of economics applied to it.
They were all wasting their time. ITT's grab-bag corporate strategy was a threat to nobody except ITT's investors. ITT was in fact never a very profitable company (it turns out that the sort of person who is good at managing a bakery is very seldom good at running a telecommunications company). Because ITT was failing to increase its earnings, it sought to generate the appearance of earnings growth by buying up other people's earnings. To pay for these acquisitions, the company took on immense loads of debt. The scheme lasted only as long as the sizzling stock market of the 1960s. Once the market slumped in 1973, the ricketiness of ITT's business was exposed.
Over the next 20 years, stock-market pressures forced ITT's managers to sell off Geneen's acquisitions one by one. By 1997, the hotels were the only good business left. Faced with a takeover attempt, ITT's management set up the hotels as a separate business, and jumped over to it -- abandoning the original ITT and its pitiful phonebooks. That's bad news for ITT's investors. But a useful lesson for anyone inclined to believe in corporate bogeymen.
Originally published in The Financial Post