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, "Its 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.

Brian Trumbore

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.