Rob Cox: ITT’s ghost hangs over Silicon Valley
By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The number of entrepreneurs in Silicon Valley familiar with the work of Harold Geneen would hardly fill a 140-character tweet. After all, Geneen wasnât a technologist, the inventor of a new computing language or the founder of a seminal startup. He was the original M&A machine â the man whose deal-making 50 years ago turned ITTÂ into a multibillion-dollar conglomerate.
As tech giants like Apple, Amazon, Facebook, Alibaba, RakutenÂ and GoogleÂ mature and canvass the globe for businesses they can buy that are a few steps removed from their core activities, Geneenâs story is becoming more relevant. These titans of the internet age are embarking on diversification strategies not entirely dissimilar from those of Geneenâs ITT and its many followers, including LTV, Transamerica and Gulf+Western.
Just tick through some of the recent techland shopping excursions. Front of mind, thereâs Appleâs potential $3.2 billion pickup of Beats Electronics. It makes headphones not telephones and tablets, from which the company founded by the late Steve Jobs derived three-quarters of its revenue in itsÂ most recent quarter. Still, the company can make some sort of industrial case for Beats, given its streaming music service.
Thatâs less the case with Googleâs purchase of Titan Aerospace, a maker of high-altitude drones. The search giant run by Larry Page argues that both companies âshare a profound optimism about the potential for technology to improve the world.â According to Google: âItâs still early days, but atmospheric satellites could help bring internet access to millions of people, and help solve other problems, including disaster relief and environmental damage like deforestation.â
If that sounds far away from Googleâs core business of making money from advertising on the internet, shareholders can comfort themselves knowing the Titan team, which will operate independently, will collaborate with Googleâs so-called âProject Loonâ â you know, the division that is working on delivering internet access from balloons.
A further head-scratcher is that Google actually had to fight off Facebook for Titan. The social network instead must comfort itself with theÂ purchase of Oculus VR, a startup that makes virtual reality headgear for hardcore video game nerds. Mark Zuckerbergâs company paid $2 billion for the honor of owning a business that it would take Houdini-like contortions to even remotely link to Facebookâs core product.
Google and Facebook have ample company when it comes to sprawling strategy. Jeff BezosâÂ annual letter to Amazon shareholdersÂ is Exhibit A for a future Harvard Business School case study in either corporate mission creep or extraordinary ambition. Jack Maâs Alibaba isnât far off. To call Ma an e-commerce boss would be an extreme understatement. He also has a leading electronic payments business and even an asset management firm in his sphere. Pushing out in multiple directions is one way to reduce a companyâs vulnerability to disruption in the fast-moving world of technology.
Geneen, too, was a serial shopper in the late 1960s, acquiring nearly 50 companies, and transforming a telecoms firm into a sprawling group that included AvisÂ rental cars, homebuilder William Levitt & Sons, Continental Baking (eventual father of the Twinkie) and Pennsylvania Glass Sand. As Cary Reich recounted in âFinancier,â his biography of legendary banker Andre Meyer, âBy 1971, ITT was the ninth-largest industrial corporation in the United States, with $8.8 billion in revenues â and 75 percent of that total came from acquired companies.â
And like todayâs tech megastars, Geneen inspired followers. LTV went on a spree that took sales from $7 million to $2.8 billion in the decade to 1968, including 27 acquisitions. Charles Bludhornâs Gulf+Western entered the 1960s as a small-time manufacturer of car bumpers. Eighty acquisitions later, Bludhornâs empire included Hollywood studio Paramount Pictures, Madison Square Garden, Simon & Schuster and even New Jersey Zinc.
True, todayâs internet conglomerates arenât yet as rambling as ITT and its spawn. They still derive the bulk of their revenue from core businesses, from advertising at Google or Facebook to ecommerce at Amazon and Alibaba. But they are fully engaged in expansionary M&A that is, at best, tangentially related.
Yet the man who perhaps knew Geneen best, Felix Rohatyn, can help explain why his example is still instructive. As a young banker working for Meyer at Lazard, Rohatyn worked on most of Geneenâs deals, including his first, in 1961, for a small California electronics firm called Jennings Radio. Rohatyn still comes in to Lazardâs Rockefeller Center headquarters, where he advises Chief Executive Ken Jacobs.
âMost people never really fully understood why Harold Geneen was so intent on building up ITT through acquisitions. It was simple â the company feared that many of its best assets would be nationalized overseas,â Rohatyn says. Indeed, many of them were, whether amidst creeping socialism abroad in Cuba, Chile and elsewhere, or as the result of ITTâs well-documented meddling alongside the Central Intelligence Agency in the affairs of foreign governments â or both.
Shareholders were âgenerally supportiveâ of ITTâs acquisitions, remembers Rohatyn, in part because Geneen was buying companies that looked cheaper than ITT on the relevant valuation metrics. âOf course, frothy markets enabled these conglomerates to take hold. When that ended, not all of these companies came out the other end intact.â Thatâs a lesson for the internet-age followers of ITT as they, too, seek to diversify their businesses.