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

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