“Multinational companies have achieved over the last twenty years,, with the opening up of international communication, a position of sudden dominance: they have found a vacuum and filled it. Their skills and technology have brought new benefits….but they have also produced an imbalance between their centralized drive and the fragmented and confused state of the countries and communities with which they deal.”
Anthony Sampson, The Sovereign State of ITT, 1973, Stein and Day, New York
ITT was founded in 1920 by Sosthenes Behn and his brother Hernan Behn. The company created many U.S. telephone and telegraph assets. It went on to acquire the Puerto Rico Telephone company, Cuban-American Telephone and Telegraph Company, and it consolidated Spanish Telecoms into what is now Telefonica.
In the mid 20s it acquired a number of European telephone service and equipment companies in Belgium, UK, Hungary, France, Austria, Germany, Sweden and elsewhere in Europe; as well as telephone companies in Brazil, Chile and Argentina. ITT was the largest multinational company (MNC) in its heyday and a core telephone and telegraph service and equipment manufacturing organization.
Before and following WWII a period of nationalism enveloped these assets. Many countries nationalized foreign telephone companies. Though Behn struggled vigorously and deviously to hold on to these assets, the day of foreign telephone ownership was over (It has since returned!). Behn was succeeded by Harold Geneen to steer the ITT MNC ship in new waters.
From 1960 to 1977 Geneen diversified ITT and acquired more than 350 companies. The collection of companies included Sheraton hotels, Avis Rent-a-Car, Hartford Insurance, Continental Baking, and many other enterprises. During his tenure, Geneen grew ITT from a mid-size business with annual sales of $760 million to a large MNC with $17 billion in annual sales (57.8 billion in 2012 U.S. dollars).
To put this revenue growth in perspective, ITT’s 1977 revenues were equivalent in 2012 U.S. dollars to the revenue in 2012 of Coca Cola, Cisco, Intel and Google. Had it grown at its 1977 growth rate, all things being equal, it would probably have exceeded AT&T’s 2012 revenues of $126 billion.
But all this are not equal. The nationalization of many of its key foreign assets, the forced divestures of several key companies in anti-trust agreements during the 60s and 70s and the spinoffs of the 1990s and 2000s vastly reduced the scale of the company.
Notwithstanding the brilliant leadership of Behn and Geneen, ITT lost its steam eventually for political reasons of nationalization, war, and U.S. post-war anti-trust policy. After Geneen’s tenure from the 80s forward, further divestures and spinoffs of its non-manufacturing assets in telecommunications, hotels and defense and water technology assets reduced this once conglomerate Goliath to a minor defense, aerospace and oil and energy manufacturing company with 2012 annual revenues of $2.2 billion. What are we to learn from this metamorphosis?
History
The first thing we learn is that for all of the contemporary concern about the oppressive scale of today’s MNCs and the management dysfunction of conglomerates, there is nothing new about these phenomena. Multinationals go way back to the East India Company in 1600, which was also a conglomerate trading company in India cotton and fabrics, Chinese silk and tea, and notoriously in opium. Even in ITT’s early days when it was gathering telephone companies around the world, Ford and General Motors were acquiring auto companies in Europe and trading to Latin America and Asia.
Multinational Companies and Foreign Affairs
ITT exhibited in glaring manner the conflict between companies and national governments. Behn spent the greatest part of his time making deals with foreign leaders to first build or acquire and modernize decrepit telephone companies and make them efficient and profitable enterprises; and then battle hostile regimes for nationalized compensation. The assets he built were tempting treasures to generation of nationalist leaders who seized his assets for some compensation or no compensation at all, and transferred ownership to government bodies or to friends of the regime.
Telecommunications is a national public infrastructure and there is no guarantee of the survival of foreign ownership. The foreign defense of host country assets inevitably led ITT to protect their assets by taking political sides; usually, the losing side as in the case of ITT in Cuba, Chile, Brazil, Argentina, and even Germany and Nazi occupied Europe during the war.
There is an inherent political instability in multinational organization. Google’s exit from China, Turkey’s stoppage of Twitter, and numerous current cases of national crackdowns of foreign own Internet services sustain this vulnerability to the present day and into the future.
Harold Geneen confronted this problem of politically vulnerable core industries like telecommunications by diversifying ITT into multiple industries that were less sensitive to national ambition and security. He ventured into insurance, hotels, car rentals and dozens of other industries to balance the political toxicity of telecommunications. He transformed ITT from a core industrial and service Company into a conglomerate, spanning score of industries.
Efforts today to protect the global openness of the Internet by internationalizing its control through the United Nations simply moves the fate of MNC IT companies from national political venues to international political venues. Multinational communications companies are as much political animals as they are technical, marketing and financial animals. Governments want the economic benefits of the Internet and other technology investment, but are politically watchful of their operations and predatory towards their revenues and assets.
Since MNC organization is the principal generator national and global GDP, companies must be politically managed. One of the major shortcomings of business education for young executives is the lack of political education and diplomatic training. Where to invest and where not to invest, as well as how to manage international assets, is a matter of vigilant concern and political skill.
Anti-Trust
It is in the nature of MNCs to grow globally by acquisition and merger. By their sheer scale and financial power, MNCs concentrate industry. They absorb or crush midsize and small business. They even crush each other, from one nation to the next.
Every government has to foster its economic growth for the employment and prosperity of its people. AS MNCs develop new markets and new manufacturing and service efficiencies, jobs in old markets decline. MNC concentration is a continuing threat to political leaders who must face the employment expectations of their growing population. Since small and mid-size business is the greatest employer, politicians are ever careful to keep these avenues of employment open. They do this through anti-trust regulation to constrain the growth of MNCs and give room for small and mid-size business to breath.
ITT was attacked by government anti-trust regulators and politicians and demonstrates that even conglomeration is not sufficient protection from home government or host government intervention. ITT had already owned several insurance companies in the U.S and UK when it went after the acquisition of Hartford Insurance, a mighty company. Anti-trust was in the air and members of Congress and Presidents put forward their message to the people that the national government would protect domestic enterprises and jobs from giant conglomerates that gobble up companies and lay off workers. ITT’s effort to acquire Hartford was not a case of industry domination, but rather of the devastating effects of management efficiency on employment by reducing cost for greater profit to shareholders.
After two years of battle Geneen gained Hartford by divesting several big companies like Cannon and Grinnell and agreeing never to acquire a company for more than 100 million dollars. This was a fateful end of ITT’s mammoth growth. Just as Geneen’s conglomeration changed the culture and management of ITT’s telephone empire, so too did the anti-trust barrier to large acquisition change the culture and management of ITT after Geneen.
ITT turned to spin-offs as the next generator of wealth creation for its shareholders. They would hold trade off shares in many spin off companies.The fact that ITT is much smaller today does not mean that its long standing shareholders have lost money. Their wealth grows with the ITT shares they exchanged for shares in new stock companies.
Geneen, like Behn before him, argued that anti-trust barriers were not appropriate in a global world of business. Any national anti-trust effort to constrain the size of its own giants puts these companies at a global disadvantage against other country giants that are not so constrained. Anti-trust made sense when economies were national. But does it make sense in a global economy of free trade?
This battle is being played out today at regional levels with EU barriers to Apple, Google and Microsoft. China has to get U.S. approval for Canadian mining acquisitions that have U.S. shareholders.
The Rise of Asia
The final striking impression of the history of ITT until the retirement of Harold Geneen is that for all of its foreign expansion, Asia was never in the picture. Japan was an emerging economic power, but its door of investment was closed to outsiders.
Geneen retired in 1977, five years after Nixon’s meeting with Mao. In less than 40 years since Deng Xiaoping’s opening of China to world production and trade, the industrial and financial global landscape of MNCs and conglomerates has changed. Asia and China are now in the driving seat.
The exciting question today is the rise of Asian MNCs and Asian conglomerates. How will the West politically handle the ascendency of Asian offshore direct investment (ODI)in Western markets, not to mention western MNC competition in of shore markets? How will the Chinese government and other Asian governments handle the domestic employment impacts of State-owned and private MNC concentrations and efficiencies? Chinese companies at home and abroad will need the political acumen of managers like Behn and Geneen to deal with the political impact of their foreign operations and anti-trust threats to their expansion at home and abroad.