International Telephone And Telegraph Corporation Business Information, Profile, and History

History of International Telephone And Telegraph Corporation

Once known primarily as a telecommunications company, the International Telephone and Telegraph Corporation (ITT) has interests in financial and business services, the manufacture of automotive and defense products, and hotels. ITT's history is interwoven with the lives of three men: Col. Sosthenes Behn, Harold Geneen, and Rand V. Araskog. 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. Araskog, who inherited a sprawling, debt-ridden giant, whittled ITT down and divested its namesake telecommunications interests.

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 nine phones per 1,000 inhabitants, Britain five per 1,000 and France three per 1,000. At that time, three companies, Siemens, Ericsson, and AT&T, dominated what there was of the world market.

Although theirs was 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 they 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 provided 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, chairperson 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 1920s, 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, the Great Depression nearly put it out of business. The debt accumulated during the 1920s 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 Behn 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 goal was difficult to achieve. ITT had consolidated some operations within the United States in response to the war, centered around the earlier acquisition of Federal Electric. Federal's electronics 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, the American Broadcasting Co. (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 chairperson until he died in 1956, though his power was largely symbolic after 1953.

During this 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. He first reorganized ITT with a management shake-up and thorough cost-cutting measures. In his first five years, over 30 percent 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 executive remarked, "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, evoked the question "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.

His purchases emphasized U.S. operations over European ones, with an aspiration that 55 percent of ITT's revenues come from U.S. subsidiaries. When he set out, the ratio was 60⁄40 in favor of international operations. Several factors influenced his decision, including French and British advocacy of nationalization of certain ITT subsidiaries, Fidel Castro's expropriation of ITT's Cuban Telephone, and intensifying competition in the European telecommunications market.

Geneen achieved his objective through the frenetic acquisition of 350 companies from 1959 to 1979. In the early 1960s, acquisitions averaged one per month. Purchases included: Avis, Inc. (car rentals); Continental Baking Co. (Wonder bread, Twinkies); Sheraton Corp. of America (hotels); Grinnell Corp. (vending machines, foodservice); Bobbs-Merrill (publishing); Levitt Homes (suburban residential construction); Eason Oil Company (heating oil); W. Atlee Burpee Co. (seeds); Pennsylvania Glass Sand Co., and many others. 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. Under Geneen, ITT's revenues increased from $800 million to $22 billion, and the conglomerate became the fourth largest employer in America with 368,000 employees on its payrolls.

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, 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.

Questionable actions in the United States and abroad did nothing to allay those perceptions. The first of a stunning series of setbacks came in 1968, when the conglomerate lost its bid to acquire the American Broadcasting Co. when the U.S. Justice Department challenged the takeover on antitrust grounds. The Justice Department made several more moves against ITT, including litigation attempting to prevent its takeover of Hartford Fire Insurance in 1970. ITT agreed to divest assets equal to those of Hartford's--including Avis, Levitt, Canteen, and Grinnell--and pledged not to acquire any companies with assets over $100 million until 1981. Much negative publicity arose from these confrontations with the Justice Department.

ITT's image with the U.S. public was further damaged in 1971. That year, ITT was accused of bribing Republican officials into locating the 1968 Republican National Convention at the Harbor Beach Sheraton in San Diego. At the same time, Chilean officials accused ITT of interfering in that country's elections. The corporation allegedly hoped to prevent election of a leftist president who threatened to nationalize ITT's business interests there.

These incidents alone would have cast a shadow over Geneen's final years as head of ITT. But to make matters worse, of his hundreds of acquisitions, only the Pennsylvania Glass Sand Company was an immediate source of profits for ITT. Additionally, the purchase of Levitt Homes would eventually prove a disaster. Writing in 1992 for Business Horizons, Danny Miller compared Geneen's managerial style to Icarus of Greek mythology--both characters' greatest assets led to their demise.

In 1978, Geneen, aged 67, stepped down from the chair 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 a West Point graduate who had worked at Honeywell before joining ITT in 1968. The new leader was promoted from within ITT and was expected to be Geneen's pawn, but this proved a misconception. At first, Araskog boldly declared that ITT would return to its telecommunications roots and compete directly with AT&T in the domestic market. But economic realities, including the massive debt racked up during Geneen's tenure, soon thwarted that plan. In 1979, ITT had over $4 billion in debt--more than 40 percent of its capitalization. Instead, Araskog embarked on what Financial World later called "a gigantic corporate garage sale the likes of which the world will probably never see again."

From 1979 to 1983, Araskog sold off businesses worth $200 million each year and used the proceeds to pay down ITT's debt. By the end of 1984, the company had divested 69 subsidiaries totaling nearly $2 billion. Araskog did his job so well, in fact, that his slimmed-down, cash-rich corporation became one of the first high-stakes takeover targets of the 1980s. While fighting off hostile overtures from three corporate raiders--Jay A. Pritzker, Philip Anschutz, and Irwin Jacobs--Araskog continued to liquidate ITT's holdings, selling over 100 subsidiaries by 1986. The CEO's focus on retaining a profitable core of market leaders in insurance, finance, and automotive and industrial engineering conspicuously left out ITT's historical base: telecommunications. In 1986, after long negotiations, Araskog sold a majority stake in ITT's overseas telecommunications business to Cie Générale d'Electricité (which later became Alcatel Alsthom Compagnie Générale d'Electricité) for $2 billion to form a joint venture, Alcatel N.V. Abandoning the U.S. portion of the business precluded a $105 million write-off that year.

By the end of the decade, ITT's debt was below 30 percent of capital, and Araskog was credited with paring the company down to a profitable core. The CEO was paid generously ("lavishly," in Business Week's 1994 estimation) for his achievements: over $5 million in salary alone in 1989. But Wall Street seemed not to appreciate the changes at ITT. The corporation's stock trailed Standard & Poor's 500 index by 36 percent from 1979 to the end of 1991. Institutional investors, especially the California Public Employees' Retirement System (CalPERS) revolted against ITT when, in 1990, Araskog's salary doubled to $11.4 million in spite of a 20 percent decline in the corporation's stock price and a 30 percent drop in income from operations. Under fire from CalPERS, Araskog and ITT's board agreed to tie executive compensation to stock performance.

From 1992 to 1994, ITT's stock price rose 46 percent, to nearly 85 cents a share, driven in part by new asset sales. In 1992, the company sold off its 37 percent interest in Alcatel to its partner for $3.6 billion. Late in 1993, Araskog announced the pending spin-off of forest products subsidiary ITT Rayonier Inc. to shareholders. Araskog's pending retirement (in 1996, at age 65) and the resurgence in divestments combined to fuel speculation that the CEO might break ITT up into three independent companies. Araskog did nothing to dispel those rumors. In fact, Business Week quoted him calling that option "not outlandish," and the company announced that it was exploring the possibility early in 1994.

Principal Subsidiaries: ITT Hartford; ITT Financial Corporation; ITT Communications and Information Services, Inc.; ITT Automotive Inc.; ITT Defense & Electronics, Inc.; ITT Fluid Technology Corporation; ITT Sheraton Corporation.