International Telephone & Telegraph Corporation

views updated

International Telephone & Telegraph Corporation

320 Park Avenue
New York, New York 10022
U.S.A.
(212) 752-6000

Public Company
Incorporated: January 31, 1968
Employees: 253,000
Sales: $7.600 billion
Market Value: $9.127 billion
Stock Index: New York London Paris Basle Bern
Frankfurt Tokyo Vienna Geneva Lausanne Brussels
Antwerp Zurich

The history of International Telephone and Telegraph is interwoven with the lives of two men, Col. Sosthenes Behn and Harold Geneen. Behn founded the company in 1920 with the intention of creating an international telephone system modeled after American Telephone and Telegraph. Geneen later took over the corporation and, believing that diversity facilitated growth, molded ITT into one of the world’s largest conglomerates. ITT remains one of the world’s largest diversified companies under the leadership of current chairman of the board Rand V. Araskog, but is on the verge of eliminating its most high profile operation, namely, telecommunications.

When Lt. Col. Louis Richard Sosthenes Behn and his brother Hernand founded ITT in 1920, they expected to take advantage of an industry market that barely existed outside of the United States. In 1920 the U.S. reported 64 phones per 1,000 inhabitants, while Germany was estimated to have 9 phones per 1,000 inhabitants, Britain 5 per 1,000 and France 3 per 1,000. At that time three companies, Siemens, Ericsson and AT&T, dominated what there was of the world market.

Although a small company, the Behns were well-positioned to compete in the growing international market. They had operated South Puerto Rico Telephone Company since 1905, and Cuban Telephone Company since 1916, and in both cases used ingenuity and skill to transform inefficient companies into well-run, profitable operations with good service records. Sosthenes Behn’s tour of duty with the American Expeditionary Force in World War I (where he gained the rank of Lieutenant Colonel) set in motion his vision for an international telephone system. Behn intended to achieve this international system via ITT, which he and his brother Hernand formed in 1920 as the holding company for their existing companies, and for those they would acquire.

The way ITT expanded into the European market provides an example of the way it would conduct business during most of the Behn era. The combined effects of good timing, well-placed connections and Sosthenes’ charm brought ITT the concession for telephone service in Spain in 1924. Timing was crucial due to the fact that before 1924 ITT’s securities were a questionable issue on Wall Street. However, the company’s consistent growth and steadily expanding earnings, coupled with the support of National City Bank, provided Wall Street analysts with a good reason to support ITT’s venture into the Spanish telephone market. Behn provided the rest by placing influential Spaniards on the board of ITT’s new company, CTNE, and charming the appropriate members of the Spanish government.

The Spanish concession, operated by CTNE, furnished ITT with an entrance into the European market, one that Behn wasted no time in expanding. Upset with the quality of equipment available to him, he began to search for an equipment manufacturing company to purchase. Timing and connections again helped ITT. In 1925 the U.S. government was pressuring AT&T to divest its overseas operations, which included International Western Electric Company, a European-based manufacturer of telephonic equipment. A National City banker arranged a meeting between Walter Gifford, chairman of bank customers at AT&T, and Sosthenes Behn, which resulted in the sale of the company to ITT on September 30, 1925, along with temporary use of some of AT&T’s patents.

After ITT acquired the Spanish concession and the International Western Electric Company, it entered a period of rapid growth. ITT became one of the most highly valued stocks in the bull market of the period, enabling it to acquire numerous companies, mostly in the telecommunications field. Behn’s dream for the international telephone system came closer to reality, and his reputation as a cosmopolitan and shrewd businessman increased.

ITT had become an international company holding manufacturing companies and operating concessions in France, Germany, Britain and much of Latin America. National citizens ran ITT’s subsidiaries in every country with a facility, while corporate headquarters in New York played a passive management role.

The search for additional companies continued, though Behn’s acquisition program placed ITT heavily in debt. The debt seemed manageable in the thriving world economy of the late 1920’s, and ITT continued to be a popular stock despite the fact that a recession would hurt the company.

Yet if a recession would hurt ITT, it is to be expected that the Depression nearly put it out of business. The debt accumulated during the 1920’s was only part of ITT’s problems, as the very nature of the company’s business exacerbated its financial difficulties.

As a holding company ITT earned money through dividends and profits remitted by its subsidiaries, most of which were foreign. Most ITT clients were either governments or quasi-nationalized telephone operating companies. However, in the restrictive trade atmosphere of the early part of the Depression, many foreign nations refused to allow American-based ITT to repatriate earnings from its subsidiaries. ITT was therefore deprived of significant revenues and threatened with bankruptcy through much of the Depression, despite eliminating dividends to shareholders. To make matters worse, ITT lost a good manager when Hernand died in 1933.

At the beginning of World War II, in Argentina, Spain and elsewhere, ITT’s holdings were in danger of being taken from the company by governments sympathetic to Germany. Profits again became impossible to repatriate. Behn’s business acumen enabled him to sell some of ITT’s holdings (in Rumania, for instance) and helped avoid having others (particularly SEG and Lorenz in Germany) taken from the company at a time when foreign operations of other major American manufacturers were not treated as well. As much a factor in these matters was Behn’s penchant for employing mostly nationals, of whom the head of SEL had some influence with Hitler. Still, these events earned ITT the ire of many Americans, and after the war it was one of several companies accused of collusion with Hitler, an accusation that would linger long afterwards.

ITT’s difficulties in the Depression and World War II made Behn determined to reduce its dependence on its non-U.S. companies. Behn abandoned the international telephone system and established ITT’s new goal: to derive two-thirds of its revenues from American companies.

This was a goal that was difficult to achieve. ITT had consolidated some operations within the U.S. in response to the war, centered around the earlier acquisition of Federal Electric. Federal’s electronics-oriented and military contracts made it a significant revenue earner during the war, and Behn hoped the company could gain a portion of the postwar market for consumer electronics and durables. Such efforts were mixed at best and, as a result, Behn looked to merge ITT with one of several large U.S. companies, including Sylvania, Raytheon, ABC and RCA in order to realize his postwar goal of a company earnings distribution. None of the larger mergers materialized, but those that did, such as Coolerator and Capehart-Farnsworth, drained capital and performed poorly, keeping ITT’s stock low in a bull market.

Such domestic difficulties weakened ITT, and Behn’s position as leader. Although ITT was once again profitable, the dividend was not restored, and stockholders began to challenge Behn’s decisions. A boardroom battle for power occurred which Behn eventually lost, despite having reinstated the dividend in 1951. He remained chairman until he died in 1956, though his power was largely symbolic after 1953.

During this period of time the company’s emphasis was on overseas operations, although even the European subsidiaries were posting smaller than expected profits. Some observers commented that the three years spanning Behn’s death and Harold Geneen’s accession at ITT saw nothing more significant than a change of logo from IT&T to ITT.

If there was a lull in company growth and productivity, it ended in 1959 when Harold Sydney Geneen took over as head of ITT. Geneen’s management abilities had been showcased at such firms as American Can, Bell & Howell, Jones & Laughlin, and Raytheon, and at ITT he became almost a synonym for excellence in management. The Geneen method of “Management by Meetings” was popularized and widely imitated.

Geneen had drive, ambition, and seemingly endless energy. He also believed firmly that companies should aim at both short and long-term growth, not stability. These characteristics would help make ITT one of the world’s largest conglomerates, controlling Continental Baking, Sheraton Hotels, Avis and the Hartford Insurance group, to name a few of ITT’s major acquisitions. However, Geneen did not immediately initiate a program of expansion. He first reorganized the company with a management shake-up and thorough cost-cutting measures. In his first five years, over 30% of the company’s executives were replaced, though in keeping with ITT tradition few were fired. Instead, executives regarded as lacking the necessary skills were worked to the point where they would quit. As one said, “Nothing matters to him but the job—not the clock, not your personal life, nothing.” So many executives would come and go during the Geneen era that ITT was compared to a revolving door, and a Forbes magazine reporter gave it the title of Geneen University.

Geneen instituted his changes to redirect a corporation that, in his mind, left a question of “how long it would have gone on before it cracked wide open.” This was not an entirely accurate perception; ITT was a growing company, even if it fell short of its earnings potential. Part of the problem stemmed from the Behn legacy, including the almost complete lack of cohesion among subsidiaries. Geneen worked to correct this, and increased headquarters’ role in the affairs of subsidiaries through yearly meetings and required reports.

In 1963 ITT began to make a significant number of acquisitions, averaging one company a month. Geneen promoted the notion of a diversified company as a strong company, one able to weather downturns in a particular sector of the economy through its holdings in other sectors. Such strength made a diversified company the best vehicle for corporate growth, assets could be transferred to the appropriate divisions, and the company would be less dependent on individual clients as well as cyclical markets.

That same year Geneen began to emphasize U.S. operations over European ones, wanting 55% of ITT’s revenues to come from U.S. subsidiaries. Several factors influenced this decision: France and Britain began advocating the nationalization of certain ITT subsidiaries, Fidel Castro expropriated Cuban Telephone, and competition intensified in the European telecommunications market.

Emphasizing U.S. operations explains ITT’s increased number of acquisitions, for its traditional method of growth-by-acquisition would be the key to an increase in domestic revenues. However, ITT made its move into the U.S. market at the same time as a number of other companies, part of a merger trend that due to its size and complexity caused a large amount of consumer distrust. In a decade that would become increasingly anti-big business, so to speak, multinationals and especially conglomerates became targets of frequent attacks in the nation’s press, fueled by books such as Up the Corporation. Some people thought that ITT symbolized what was wrong with big business.

Success made the company a convenient target. Geneen’s cost-cutting measures and his complementary acquisition program helped ITT meet his first five-year goal, namely, to double earnings and income. In this way ITT became a billion-dollar corporation in 1962, and by 1969 it had quadrupled in size. However, questionable actions both abroad and in the U.S. damaged ITT’s reputation as a well-run company.

The year 1968 was a milestone year for ITT. In 1968, 55% of corporate earnings came from U.S. subsidiaries, thanks to several large acquisitions, among them Sheraton Hotels, Levitt Homes, Rayonier, Pennsylvania Glass Sand and Continental Baking. Yet 1968 also saw the first of a series of setbacks for ITT, as it lost its bid to acquire ABC when the U.S. Justice Department challenged the takeover on antitrust grounds.

The Justice Department made several more moves against ITT, which culminated in its litigation attempting to prevent its takeover of Hartford Fire Insurance in 1970. ITT agreed to divest assets equal to those of Hartford’s, but far more damaging was the negative publicity that resulted from the two confrontations with the Justice Department.

ITT’s image with the U.S. public was further damaged in 1971. In that year ITT was accused of bribing Republican officials into locating the 1968 Republican National Convention at the Harbor Beach Sheraton in San Diego, and also of interfering in the affairs of a foreign government (by opposing Salvador Allende in Chile).

These incidents alone would have cast a shadow over Geneen’s final years as head of ITT. Except the acquisitions that put ITT’s earnings proportions at 55% domestic and 45% foreign also blemished Geneen’s reputation for managerial brilliance. Only the Pennsylvania Glass Sand Company would become an immediate source of profits for ITT, and the purchase of Levitt Homes would eventually prove a disaster.

In 1978 Geneen, 67, stepped down from the chairmanship of ITT, although he remained on the board until 1983. His immediate successor did not remain long and was soon replaced with the little known Rand Vincent Araskog. Araskog was promoted from within ITT and was expected to be Geneen’s pawn. This proved a misconception. Araskog began to sell pieces of Geneen’s empire to gain the cash which was needed to reduce the huge debts acquired during ITT’s takeover phase and also to fund new research and development. Araskog maintained ITT’s divisional structure (which Geneen had modeled after Albert Sloan’s General Motors) of National Resources, Diversified Services, Telecommunications and Electronics, Engineered Products, and Consumer Products and Services, with emphasis on financial services and telecommunications.

Araskog thought that ITT’s System 12 telephone switching exchange would sell well in the U.S. telephone market, as it had in Europe. However, despite a one billion-dollar investment, System 12 proved difficult to adapt from the European to the American system, and in 1986 ITT discarded conversion plans and entered negotiations to sell its telecommunications division to a French telecommunications company under government control.

Should the sale materialize ITT will undergo a fundamental change. Telecommunications provides a quarter ot ITT’s revenues. The company could shift emphasis to the financial services division, its best performer, and it is conceivable that ITT could do what American Can did, that is, sell its high profile business and concentrate on financial services, thus providing its shareholders with the higher investment returns that many request. Then again, should the sale not materialize, Araskog’s moves to reduce debt and sell certain assets should help ITT to remain competitive in its chosen field.

Principal Subsidiaries

ITT Corp.; ITT Holdings Inc.; International Standard Electric Corp.; ITT Communications and Information Services, Inc.; Hartford Fire Insurance Co.; ITT Credit Corp.; ITT Consumer Services Corp.; ITT Financial Corp.; Kellogg Credit Corp.