An Incredible Shrinking Giant

By Charles P. Alexander.

In the 1960s and 1970s, ITT was the most voracious of a new breed of corporate giants that came to be known as conglomerates. Under the leadership of Harold Geneen, Wall Street's original Pac-Man, ITT gobbled up more than 275 companies; at one time the corporation produced everything from hydroelectric turbines to Twinkies. At its 1980 peak, ITT had annual revenues of more than $18 billion and was the 13th largest U.S. corporation. But as the company became more and more bloated, its debt surged, while profits and the value of its stock sagged.

After taking over from Geneen in 1980, Chairman Rand Araskog tentatively began to shed some of the conglomerate's less profitable divisions; last week he announced that ITT was going on the corporate equivalent of a crash diet. In the coming months, it plans to sell more than a dozen subsidiaries with assets of $1.7 billion. That will be a 12% slash in the company's current assets of $14.1 billion. Officials disclosed only a partial list of the units for sale. They include Eason Oil, the Bobbs-Merrill publishing house and O.M. Scott & Sons, which makes Turf Builder lawn fertilizer. ITT also intends to sell a minority interest in its Sheraton hotel chain. The company will keep Hartford Insurance and most of its holdings in the telecommunications and defense industries.

ITT's divestiture plan is the most dramatic evidence so far that the golden days of corporate empire building are fading. Several other conglomerates are pursuing similar slim-down programs. Since 1983, Gulf & Western Industries has unloaded 46 companies, including its sugar and hotel businesses. In 1984, Avco got out of real estate and stopped making industrial lasers and farm equipment. R.J. Reynolds last year decided to focus once again on consumer products such as cigarettes and soft drinks and sold its shipping and energy businesses.

One reason for the spin-off spree is that many conglomerates have taken a beating in the stock market. Investors are increasingly disillusioned with the notion that a single management can successfully handle a grab bag of companies. Observes Norman Berg, a professor at Harvard Business School: "In the 1960s and 1970s, the stock market favored growth by acquisition. Now the liquidation value of companies is thought to be greater than the sum of their parts."

ITT, in particular, is under attack by Irwin Jacobs, a Minneapolis investor whose threats to take over companies and then dismantle them have earned him the nickname "Irv the Liquidator." Jacobs has bought an estimated 2% of ITT's stock and wants to break up the company. The stock now sells for only about $32 per share, and analysts estimate that stockholders could get up to $60 per share if all the parts of ITT were sold separately. Says Jacobs: "ITT's management has created such a monster of overhead in its operations that something's got to happen."

That "monster" was largely the creation of Geneen, who became ITT's president in 1959 and chairman in 1964. He took what was basically a telecommunications company and transformed it into a vast empire that Author Anthony Sampson dubbed the Sovereign State of ITT. Says Felix Rohatyn, who as an investment banker with Lazard Freres helped put ITT together: "Under Harold Geneen, ITT was a company that essentially knew no limits. He thought anything was manageable." The result was a corporation that in 1979 had 370,000 employees in more than 100 countries. Among its multitude of ventures, ITT is currently manufacturing radar in Los Angeles, television sets in West Germany, shock absorbers in The Netherlands and radios in Zimbabwe, and is helping Egypt to rebuild Cairo's water-treatment system. ITT last year dropped its original name, International Telephone & Telegraph, because it gives no hint of the company's scope.

The decision to streamline ITT was a long time coming, partly because Geneen was a long time going. He turned 65 in 1975 but was reluctant to retire. Staying on as chairman, he installed an heir apparent, Lyman Hamilton, as % chief executive officer in 1978. But after Hamilton started planning a big reorganization, Geneen sacked him.

When Geneen finally turned over the chairmanship to Araskog in 1980, he kept a seat on the board of directors. Says Robert Sobel, author of ITT, a 1982 history of the company: "Araskog wanted to sell a lot of companies at the outset, but Geneen seemed to think that selling anything that he originally purchased represented a slap in the face." Some Wall Streeters believe it was not until Geneen left the board in May 1983 that Araskog, a West Point graduate who grew up on a Minnesota farm, could assume full command. The clearest signal that he was committed to major divestitures came last August, when ITT sold Continental Baking, which makes Wonder bread and Twinkies, to Ralston Purina for $475 million.

By that time, ITT was already mired in a slump. Profits were an estimated $462 million in 1984, down from a 1980 peak of $894 million. One reason for the poor performance was that the company's $8 billion debt, largely a legacy of the Geneen years, generated an annual interest bill of more than $600 million. In addition, ITT received a large portion of its revenues in foreign currencies. Profits were depressed because these currencies weakened against the dollar.

Araskog shocked Wall Street in July by slashing ITT's quarterly dividends by 64%, from 69 cents to 25 cents per share. ITT's stock price, which reached 47 3/4 in 1983, was at 31 3/8 before last week's divestiture announcement. Investors seemed unimpressed by the plan, and the stock closed the week at 31 3/4.

To get ITT back on a growth path, Araskog has launched a major offensive in the U.S. telecommunications and office-equipment markets. The company has long been a major supplier of sophisticated telecommunications gear in Western Europe but was effectively shut out of the American market until last year's breakup of AT&T. Now ITT hopes to sell an advanced switchboard, known as System 12, to some of the new regional Bell companies. However, it faces formidable competition from several firms, including AT&T, GTE and Northern Telecom. In the office-equipment field, ITT has come out with a personal computer, but it is an undistinguished entry that has not done well in competition with IBM.

Wall Street is wary about how ITT will fare in the future. Says Laurence Baker, who follows the company for the E.F. Hutton investment firm: "If they're going to show growth, they're going to have to fight for it." -

With reporting by Adam Zagorin/New York