ITT's Big Conglomerate of Troubles

A corporation exists by public acceptance.

--ITT Annual Report for 1971

HARDLY any statement could have been more spectacularly mistimed.

When it was written several months ago, International Telephone and Telegraph seemed the beau ideal of corporate success: under the twelve-year reign of Chairman and President Harold Sydney Geneen, it had run up a dazzling profit-growth record by expanding into almost every conceivable business in some 80 countries round the world. But by the time the report was issued in March, ITT was enmeshed in a series of controversies that have seriously undermined its "public acceptance." Indeed, they have provided a case history of the perils of relationships--for both sides --between big multinational corporations and Government.

ITT has been hit by a public relations version of the domino effect: one charge against the company has led to an intensified examination by newsmen and politicians of just about everything the company is up to. The troubles began with the publication of the famous Dita Beard memo linking the company's offer to help bankroll this summer's Republican National Convention, through its Sheraton hotel chain, to the Government's settlement of a major antitrust suit against ITT. The settlement will force ITT to sell several companies but allows it to keep the big one it really wanted, Hartford Fire Insurance.

Next, newspaper reporters spotlighted the fact that some ITT officers had sold substantial blocks of stock shortly before announcement in mid-1971 of the settlement--an announcement that temporarily knocked down the stock price. Then the assault was heated to new intensity as Columnist Jack Anderson (TIME cover, April 3) published authentic-looking ITT memos describing a 1970 plan to prevent Marxist Salvador Allende from taking office as President of Chile by causing "economic collapse" in that country. And most recently, Democratic politicos have been decrying the fact that ITT has paid only relatively modest current federal and Canadian taxes --less than 25%--on its mammoth earnings.

Fuel for Critics. To be sure, ITT has not been proved guilty of any wrongdoing; for example, its methods of computing its taxes seem entirely legal. But in attempting to lay to rest the suspicions, Geneen and his aides have sometimes seemed like small boys caught stealing ripe apples. Testifying at Senate hearings, they have told confusing stories and committed some incredible gaffes. The most memorable, perhaps, was Vice President William R. Merriam's explanation of why he ordered ITT's Washington files fed into a paper shredder after publication of the Dita Beard memo. Democratic Senator Sam Ervin remarked that "you could not destroy that memo because you did not have it." Merriam's reply: "No, that is right, but there might have been a lot of others in there like that."

The whole performance has raised questions about the competence of some ITT executives, shaken the reputations of some Nixon Administration officials, and hurt the nation's political relations with certain foreign governments. In the U.S., the ITT controversy has dragged out the confirmation of Richard Kleindienst as Attorney General--because as Deputy Attorney General he approved the antitrust settlement--and handed Democrats an easy opportunity to portray the Nixon Administration as too readily swayed by giant corporations. More generally, it has reopened an old debate about whether business bigness, particularly conglomerate bigness, is bad. Business men around the U.S. complain that the ITT affair has hurt them, too, because it has blackened the image of business in general and given fresh fuel to its increasingly vocal critics. In Latin America, the ITT case has given gleeful leftists the opportunity to aim their attacks on imperialistic Yanqui business against an identifiable company rather than a fuzzy abstraction.

The ultimate effects on ITT itself are not yet clear. The company seems as powerful a multinational force as ever. It boasts more than 200 primary divisions and subsidiaries and countless sub-subsidiaries*on every continent, which among other things operate the hot line between Washington and Moscow, manufacture telephones in Australia, Brazil and Norway, and run the Hamilton mutual funds in the U.S. A consumer who became annoyed with ITT would have a difficult time boycotting it: he 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 frozen foods. He would have to turn his eyes away from the advertising posters on commuter trains and buses (ITT owns TDI, the company that rents space for the cards), and he could not have watched any televised reports of President Nixon's visit to China (ITT World Communications coordinated all the transmission). The wealthy and powerful who might wish to avoid contact with ITT would suffer a special privation: they would have to refuse listing in Who's Who; ITT owns that, too.

ITT seems vulnerable in some other ways. In the past, it has grown largely by acquisition. Between 1964 and mid-1971, it absorbed no fewer than 98 companies. The antitrust settlement now effectively bars ITT from acquiring any U.S. company with annual sales of $100 million or more, and the bad publicity that has lately befallen ITT might impose further limits. ITT has made almost all its past acquisitions in exchange for stock. The recent controversies have driven down the price of its shares from an early 1972 high of $64.50 to $55.75 last week, making it less attractive to the owners of any company Geneen might covet. The controversies will also make federal and state government officials supercautious in dealing with ITT executives who approach them for favorable tax, merger or regulatory decisions.

The furor over ITT is not likely to die down. Last week it took some new turns. In Washington, Presidential Assistant Peter Flanigan, Nixon's chief problem solver for businessmen, appeared at long last before the Senate Judiciary Committee to testify on his role in the consent decree that allowed ITT to keep Hartford Fire Insurance. His appearance averted a confrontation between the Senate and White House over "executive privilege"--the claimed right of presidential aides not to be summoned before Congress. But Flanigan declined to answer many questions, among them what meetings about the case he might have had with Kleindienst or ITT officials. He would only say that he had served as a "conduit" to get for the Justice Department an independent appraisal of the effects of an ITT-Hartford breakup, written by Richard Ramsden, a financial analyst. The committee then voted to end the six-week hearings on Kleindienst's nomination for Attorney General that have delved deeply into the consent decree. Kleindienst's confirmation now seems likely but not certain.

Earlier last week, Ramsden had cut the ground out from under a key part of the Administration's explanation of why it had let ITT get away with a consent decree allowing it to keep Hartford. Ramsden's report went to Richard McLaren, former Justice Department antitrust chief, who said that it had convinced him that breaking up the merger would have shaken the stock market and hurt the U.S. economy. Ramsden testified last week that his report justified no such conclusions.-

Not surprisingly, ITT was also under siege in Chile. An angry President Allende announced that he would ask the Chilean Congress to nationalize the $222 million Chile Telephone Co., which is 70% owned by ITT, and possibly other ITT Chilean properties as well. He made no mention of compensation. Expropriation seems likely; no Chilean Congressman is now prepared to defend ITT. Thus the company seems to have little hope of recovering the $70 million that it deducted from 1971 profits to cover expected losses, even after insurance payments, on its Chilean investment. Counting that deduction, the company's net profits dropped from $362 million in 1970 to $337 million last year, though operating profits before the deduction rose to $407 million.

Monastic Order. Naturally, ITT could brush off that blow--but not gracefully. To company executives, any interruption in net growth, even if it is temporary and local, appears to strike at the essence of ITT. Geneen views his company not as a collection of plants and products, nor even as the management system on which ITT incessantly prides itself, but as a mystique. ITT men consider themselves an elite corps dedicated to a single cause: operating profits shall increase every quarter--a goal that ITT achieved for 50 consecutive quarters through the end of 1971. To that cause they are expected to sacrifice, ITTers. A Brussels host who gave a party for ITT European officials from New York last year got them to attend only by promising that he would be the sole non-ITT person there.

Does this high-pressure, inbred management system work? In terms of the figures that Geneen loves, it certainly seems to work splendidly. Between 1959 and 1971, ITT's revenues multiplied almost ten times, to $7.3 billion, and operating profits 14 times. (Earnings per share showed a much smaller rise because ITT has issued so much new stock to pay for acquisitions.) But in the recent intense re-examination of ITT, financial experts are beginning to ask some probing questions to which the figures disclose no answers.

One question is how ITT will fare after the 62-year-old Geneen retires. That will happen three years from now, unless Geneen exempts himself from a general company rule specifying retirement at 65. There is no clear successor. Some former ITT executives express the heretical thought that the company is too big and complex for anyone else to manage effectively. Certainly the organization contains the potential for turning into an unwieldy bureaucracy. The system that Geneen has crafted so carefully might well need someone with his extremely rare blend of drive, decisiveness and astonishing capacity to absorb figures.

Even now, there is some doubt whether the figures that Geneen is producing are all that precise as a guide to ITT's profitability. The company's earnings have benefited enormously from its acquisitions, particularly because ITT, like most conglomerates, uses the "pooling of interest" method of merger accounting. That allows a company that acquires another firm to count as its own all profits the acquired firm earns for the whole year, even if the acquisition is made late in the year. But how well have ITT's component companies done after they were acquired? That question is gaining importance now that ITT is legally prevented from buying up U.S. companies as freely as in the past.

The few figures available for companies after acquisition by ITT indicate that they have maintained strong profit-growth rates of about 10% a year. But it is impossible to determine how much of that resulted from changes that ITT made in their accounting systems as soon as it took them over. Whenever Geneen's company has faced a choice between two accounting methods, it has selected the one that enables it to report the highest immediate profits. Depreciation, interest costs, changes in pension plans, investment tax credits, foreign exchange losses, to name only a few items --all are treated in ways that minimize deductions from current profits or maximize additions to them.

High Risk. ITT has also chosen frequently to report as operating income gains from the sales of assets; a more conservative course would be to report such gains as nonoperating profit, or extraordinary income. An example is the $36 million that Hartford Fire Insurance earned last year by selling stocks from its investment portfolio. By counting the $36 million as operating profit, ITT inflated the picture of its operating success. All together, ITT last year reported as operating income more than $54 million in gains from sales of assets. Some expert accountants calculate that if ITT chose relatively conservative accounting procedures (such as, for example, those used by General Electric), its internal rate of profit growth might be substantially reduced. Slower growth would lead to a lower price for ITT stock--and less opportunity for making acquisitions on favorable terms.

If ITT's internal growth had been entirely satisfactory, it is hard to see why the company would have gone to the lengths it did to acquire Hartford. Of course, the insurance company was a highly desirable plum. Last year it posted revenues of $1.3 billion and profits of $ 105 million, or 26% of ITTs operating earnings. In addition, insurance companies generate enormous flows of cash, and usually hold in their portfolios stocks that are worth much more on the market than it had cost to buy them. The acquiring company can reap easy profits by selling these stocks at their higher market value. Still, ITT took a quite uncharacteristic risk in acquiring Hartford over the Justice Department's initial opposition.

In May 1970, when the Justice Department's suit to break up the merger was still very much alive, ITT issued 2 1.7 million shares of preferred stock in order to pay for the company. It is committed to pay almost $49 million in dividends yearly on that stock to the former owners of Hartford. If it had been forced to give up the insurance company, ITT would have had to go on paying those dividends without having Hartford's earnings to cover them. That would have been a heavy drain on the cash Geneen would have had available to reinvest in ITT's other businesses. Possibly ITT could have arranged a sale of Hartford in some way that would have enabled it to get rid of the new preferred stock--and the need to pay dividends--but that would have been a long and difficult process.

At any rate, ITT executives decided to make an all-out effort to keep the Hartford antitrust case from even coming to trial. Geneen and ITT Director Felix Rohatyn, a partner in the investment banking house of Lazard Freres, sought out every available Administration official--Flanigan, Kleindienst and former Attorney General John Mitchell among them--to complain in private meetings about the Administration's antitrust policy. They succeeded, but at enormous cost to ITT's public image. That cost points to the most glaring flaw in Geneen's philosophy and system of management. It can easily produce the kind of surprise that all ITT's figures cannot warn against: the shock of discovering that there is an outside world filled with people to whom continuous increases in ITT profits do not necessarily seem the summum bonum.

ITT does not altogether lack political acumen. In both Europe and Latin America, it has wisely had its companies staffed--although usually not owned --by local citizens. Geneen leaves the local managers fairly free to set their own policies so long as their profit figures satisfy him. Says Frank Pepermans, a former Ford Motor executive who is managing director of ITT's Belgian telephone-manufacturing subsidiary: "At Ford, all policies were made in Dearborn. At ITT, I am not a Belgian working for an American company. I am a Belgian running one of Belgium's most important companies." In Latin America, ITT's profile before the Chile blowup was so low that Orlando Saenz, head of the Chilean equivalent of the National Association of Manufacturers, says, "I have a telephone in my house and it usually works. Until recently, that was all I knew of ITT."

Unrelated Help. ITT also appreciates the value of having important public figures on its side. The parent company's board includes John McCone, former head of the CIA, and Eugene Black, onetime chief of the World Bank. Paul-Henri Spaak, three times Prime Minister of Belgium, is a director of ITT's Belgian subsidiary. His prestige helped mightily in winning permission for ITT to put up a skyscraper European headquarters in Brussels, despite local protests that it would fracture the Brussels skyline.

When seeking a favorable government decision, ITT often agrees to provide some unrelated economic benefit. In Peru, it agreed to build an $8,000,000 hotel and a factory in order to get a favorable settlement of the government's attempt to take over the ITT-owned telephone subsidiary.

In the U.S., ITT's takeover of Hartford Fire Insurance required the permission of Connecticut's insurance commissioner. William Cotter, who then held the job, initially disapproved. Later some politicians in Hartford expressed a desire to get ITT to help with the city's urban renewal. Cotter brought them together with Geneen, Rohatyn and himself in May 1970--and the next day approved the acquisition of Hartford Fire. ITT has subsequently built a Sheraton Hotel in Hartford.

Profits and Values. When they are blocked by government action, however, ITT executives can show a startling insensitivity to public opinion. A few years ago, the Argentine government wanted to tie into a satellite-communications network, in which ITT would have had a minor interest or none at all, instead of continuing to rely on cable communications, a major field of ITT interest. James R. McNitt, president of ITT World Communications in Argentina, issued a statement: "The Latin American countries, as well as the African countries--with the sole exception of South Africa--seem to prefer satellite communications. They are wrong." His remarks outraged racially proud Argentines, who thought that he was lumping them with Black Africans while ITT classed itself with South Africans. Such bloopers cause some Argentine officials to grumble about "estos estttpidos de la ITT" (these stupid ITT people). Argentina eventually tied into a satellite system in which ITT has little share.

Both strains--a desire for political influence and an insensitivity to the "real world" outside--came together in ITT dealings in Washington about the Hartford merger. Geneen and his aides all seem to have had no idea that their private meetings with Administration leaders could give the appearance of a political fix. As for their commitment to help finance the Republican Convention through the Sheraton chain, that may have been merely a promotional venture for new hotels, as Geneen and his associates contend. Surely they could not have thought that they could buy the Justice Department. But there is good reason to believe that the commitment also represented an attempt to add a bit more weight to ITT's case--in sublime innocence of the gross impropriety of any such idea.

That is the sort of naivete that U.S. business can no longer afford. ITT has clearly been a leader in the consuming drive for higher profits. But Geneen's direction has not yet fitted it to an age in which all corporations must give great weight to broader values.

-One business manual lists 284 subsidiaries of ITT subsidiaries, but others are untabulated, and there are also subsidiaries of subsidiaries of subsidiaries, or sub-sub-subs. -Columnist Joseph Kraft nevertheless insisted last week that the Administration genuinely feared in the spring of 1971, when the economy and a number of overstretched Wall Street brokerage houses were in trouble, that an ITT-Hartford breakup would have hurt the economy badly enough to damage President Nixon's political stature.

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