ITT Dismantles Its Empire, Ending the Age of Conglomerates
The breakup of ITT (ITT) announced on Wednesday is yet more proof that the conglomerate model makes little sense in today's business world.
The 91-year old company was once the leading industrial conglomerate, the product of hundreds of leveraged buyouts in the 1960s and '70s. That strategy of growth came to an end as interest rates began rising steeply in the '70s.
The long, slow unwinding of the empire that former ITT Chairman Harold Geneen built is pretty much complete now. In the final act, it's now breaking itself into three pieces, including a water-equipment business with an estimated $3.6 billion in revenue, a defense business with $5.8 billion in revenue, and a new ITT aerospace, transportation and industrial business with $2.1 billion in revenue. The company had already gone through a three-way breakup in 1995, merging with Starwood in the process.
It's now a long way from the company that once threw its weight around the world, doing business with companies linked to regimes such as Nazi Germany and Augusto Pinochet's Chile.
Breaking Up Is Easy to Do
Other once-widely diversified companies have followed along a similar path. Even GE (GE) is streamlining its portfolio by selling a majority stake in NBC Universal to cable giant Comcast (CMCSA). Food company Sara Lee (SLE) is considering a breakup, if it isn't sold first. Fortune Brands (FO), which owns a wide range of businesses from Jim Beam Whisky to Moen water faucets, recently went down the road to a breakup. And steel company Timken (TKR) may follow.
In recent years, Tyco (TYC) split into separate electronics and health care companies, and tool companies Danaher (DHR) and Cooper (CBE) spun off units and put them into a joint venture. Telecom equipment maker Motorola (MOT) just separated its infrastructure and handset businesses.
The diversification theory behind the conglomerate is fairly simple: As one business unit loses steam in, another is supposed to pick up the slack. It works out nicely -- in theory. One of the problems with ITT is that U.S. government defense spending is on the wane. Instead of keeping ITT together in hopes that revenue from water pumps and other business will offset the decline in defense, ITT CEO Steven R. Loranger says it makes more sense to unlock value by restructuring.
Why? "All three companies will be better aligned with their respective customers bases," Loranger explained.
Activist Shareholders Won't Hear of It
That may seem obvious now, but it goes against the grain of everything ITT's management espoused for decades.How is it that a business model that was once all but taken for granted as a path to profit is now so out of favor? Much of the answer lies in changes in the investor base.
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Hedge funds and other shareholder activists are rising in number and in influence, challenging management at every opportunity. It's no longer enough for a company to assert that its portfolio of businesses produces synergy. Those synergies have to be demonstrated, or the company is vulnerable to takeover.
Many of the great conglomerates were simply financial rollups -- an attempt to maintain growth through acquisition. That strategy can't last forever. Just take a look at what happened to WorldCom.
The drive to grow via acquisition led to some pretty bizarre business portfolios, such as Fortune Brand's whisky-and-faucet combination. There was no way to defend such structures from the challenges of hedge funds, buyout shops and other activists.
Where Are the Profits Coming From?
And during an era when highly focused startups from Microsoft (MSFT) to Amazon (AMZN) and Google (GOOG) to Facebook dominate the market, conglomerates can't compete for capital.
The investor base has changed as well. Some 9,000 hedge funds are on the scene now, many with very disciplined strategies. Such funds didn't exist 30 or 40 years ago, and they're not likely to buy a company for its aerospace business and hope against hope that profits from the water division keep flowing.
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