Ralph Allen, vice president for investor relations at ITT, is a veteran of the profession that he joined back in the 1960s when investor relations was in its infancy. He remembers walking out of the University Club in Manhattan back in the 1970s to see a clump of rainsoaked pickets protesting at the club hosting a meeting of the IRA. He had not known that the Investor Relations Association, of which he was later to be president, was such an explosive issue. But then the Irish version had much better brand recognition.
However, last year’s dismembering of the components of the former mighty ITT conglomerate was in its own way quite a bombshell. The biggest voluntary breakup of a corporation to date, it is already being emulated by AT&T and Hanson. There will doubtless be more until the pendulum of investor fashion swings back towards conglomerates. But for now, the markets that used to greet accretion of new businesses with added value, are heralding their dissolution as the means to invent hidden value.
Hidden or not, shareholders made some $5 bn out of the issue that gave them a share in each of the new companies to match. ‘We had 117 mn shares that had gone up $40 or $50 a share,’ exults Allen, confident that there is no better form of investor relations than providing big profits for investors.
Beginning as International Telephone and Telegraph, ITT had already reinvented itself in the 1980s by selling off its telecoms business in a move that was as shocking as General Motors ducking out of autos.
Then, in a process that was completed by the end of last year, ITT, like some bloated amoeba, fissioned into three. The core business – the legal successor – became ITT Industries with three divisions, Automotive, Fluid Technology and Defence & Electronics. The old Insurance business became ITT Hartford, and the ITT Corporation – the new ITT – took the hotels, gaming and entertainment businesses.
As part of this reorganisation, Ralph Allen himself moved from being vice president, investor relations for the old ITT conglomerate to fulfilling the IR role for ITT Industries, now run by chief executive D Travis Engen. Along the way, he was responsible for overseeing the IR programme needed to explain the breakup to investors, and for creating three new IR departments.
Allen began his personal odyssey as an accountant with Eastman Kodak, where he was co-opted to assist the IR manager, David Metz. In those days, he recalls, ‘The job was often done by someone who was not really trained in it, or was not even full time – an assistant treasurer or a semi-retired person in the treasury department, for instance.’
After succeeding Metz in 1969, Allen moved to ITT in 1980, just after Rand Erskog had taken over and begun to reinvent the business. At first he found difficulty making the move from a single consumer business to a conglomerate in which ‘the businesses had no particular direct relationship to one another except that they were considered attractive financially to the management, and at certain times to the investors.’
Indeed, ITT had moved a long way by then, from telephones into insurance, hotels and casinos. However, when two years ago they bought Madison Square Gardens in a partnership deal that actually involved very little money, skittery investors wiped $1 bn off its value in reaction. That was made up again quickly by more shrewd bargain hunters but it sent a forceful message that there were doubts about grab-bag buying.
‘So when the chairman mentioned reorganising the business in 1994, the markets reacted well. There was a substantial run up. And the word came back that they would react even better to a split,’ recalls Allen. In many cases that word was coming via the IR department and was duly reported back to the CEO, CFO and EVP. ‘My exposure to shareholders was regular – daily; and in the 1990s they are not bashful about telling you what’s on their mind.’
The board announced back in June that it would take the breakup suggestion to the shareholders; and by the end of January this year, when Allen spoke to Investor Relations magazine, the company was saying the last rites over the old ITT.
As the legal successor company, ITT Industries’ final quarterly statement included the numbers for the former conglomerate up to the 19 December divestiture. The change took some smoothing over with the financial press, since the total stated earnings for the old ITT were way beyond the wildest dreams of anything the successor company could hope for – with less than a third of the former business. ‘That was one of the difficulties we had,’ laments Allen. ‘The two companies we were divesting were both bigger than us.’
Preparing for the move was even more taxing, not least since until almost the last moment there was some doubt about the tax position. In the end the IRS agreed to treat it as a tax-free distribution. ‘But if it hadn’t, the implication would have been a tax liability of a billion and half dollars. So that was essential. We were proposing to make a dividend of the two new companies to the people who already owned us. When the process began, the stock was trading in the low to mid-70s. By the time the proposal was made public and the professionals had begun to put a price on it, it was variously felt that it would from $120 – $130.’
But everything at this point still hung on the ruling from the IRS, which needed to be convinced that the whole exercise wasn’t just a complex tax dodge. An added irony was introduced by the Federal government’s period of non-activity: ‘We were getting ready for the roadshow and had to get a fact book together very fast. In fact, while we were on the road the IRS was closed by the budget shutdown. So our ruling was delayed.’
The IRS may have caused problems, but there was little difficulty convincing existing shareholders of the merits of the breakup at the special meeting held in September. ’95 per cent voted for it,’ Allen reports. ‘And many of those who didn’t were clearly confused, since it was so obviously a good thing,’ – provided the IRS played ball, of course.
The new slimmed down ITT Industries for which Allen has IR responsibility has one professional and one and a half clerical staff. That’s a reduction from the old company’s two professionals and two clerical staff working with him, but there was plenty of time to prepare for the split.
Indeed, in August last year the three quasi-companies set up shadow IR departments: Anne Tarbell, then assistant director for IR, moved to the new ITT Corporation, as it was to become; Steve Minihan, with whom Allen used to liaise for information, became IRO for ITT Hartford; and Allen stayed with ITT Industries with his assistant Theodore Economou.
As a practical matter the three shadow IR departments had to move in mysterious ways – a sort of unholy trinity, the same but not identical. They arranged their separate roadshows to coincide in time but not in space: ‘We didn’t want to turn up in the same city at the same time, competing,’ comments Allen. And each company-to-be had its own investment bank: Morgan Stanley for Industries; Goldman Sachs for Hartford; and Bear Sterns for the new ITT Corp.
The three teams were responsible for explaining the big picture as well as the minutiae of establishing three separate identities in place of one. Those minutiae included, for example, the worry about whether the three successor companies would make the S&P 500. Failure to stay in the index could have caused a major exodus, since the 8 -10 per cent of indexers would unload their holdings. To everyone’s relief, the day after the split on December 15 S&P announced that all three were in – good news for them if not for the two companies that fell off the bottom of the list.
Other problems might be more mundane but they make their own demands, nevertheless. For instance, in the post-divestment phase the two new companies needed new NYSE listings, and all had to have new initials and logos – not to mention stock certificates – printed. Allen notes that since these had to be engraved – as opposed to being run up on a Macintosh – the lead time was 60 days for the engraving alone.
ITT Industries’ roadshow began in Europe, with the first port of call being in Frankfurt where, Allen confesses, the company took the opportunity to throw in some PR for the automotive and fluid line businesses before moving on to Edinburgh, Glasgow and London. London received most of the attention, since it accounts for the bulk of the 6 per cent of ITT Industries held by Europeans. After that the tour party moved back to the homeland, beginning of course in New York.
Employees represented another key audience, since their 401(K) pension plans account for 7 per cent of the holdings; and there was also an Esop that needed winding up. The staff were concerned about their jobs as well as their savings and the company used video and even e-mail messages to communicate with them and help reassure them on both fronts.
Burston Marsteller prepare a video for use on the roadshow. Called Not the Roadshow, it was a punchy MTV-style seven-minute tape whose purpose was principally to identify the products made by the new company. Generally, outside advisers were kept to a minimum and really only got involved where technical help was needed. ‘We did not have an in-house video unit,’ Allen explains, which was why external assistance was necessary for that.
But Allen says it was not required for the IR effort: ‘I’ve been doing this for longer than most of them, so I didn’t need help,’ he says, without any undue modesty. Notwithstanding the role of the investment bankers, Allen says IR officers should involve themselves closely, especially in the roadshow arrangements. He reckons IROs are often better able to identify the appropriate investors.
Allen explains ITT’s method for selecting investors to invite to one-on-ones. ‘Roughly speaking, you take the shareholder list in order of size, excluding the indexers. You’re then left with the ones you want – a few dozen.’ And he adds that in the course of the roadshow, ‘We identified several institutions that didn’t have a position with us before but did afterwards.’
Overall, Allen shows every sign of satisfaction with the turn of the corporate wheel. It may have been some challenge both to mastermind the IR programme for the period leading up to the breakup and to establish a new regime for the three separate businesses. But he is content with his new role, noting that conducting IR for the amorphous spread of activities under the old conglomerate umbrella presented some real difficulties and demands. ‘For example, in the past insurance analysts would come to me for information about Hartford, just for comparisons and background, but they weren’t at all interested in our stock, which was handled by conglomerate analysts.’ Now he benefits from both the continuity and the refreshment of novelty. ‘Unlike the other components, we still count as diversified, so we have the same analysts as before. It’s just that now we are more focused.’
Allen’s enthusiasm for the tighter focus is refracted in his eagerness to tell of the prospects and products of his newly refined responsibility. Whether more or fewer cars are being produced, those that are coming off the production lines contain more and more features made by ITT, he explains.
‘You’ll have six mirrors for the front seats alone (made by ITT). And really upscale cars now have adjustable rear seats.’ That’s to say nothing of the wipers on the rear, and on the headlamps, the doorlocks and the actuators.The growth potential is enormous: ‘Features like antilock brakes that began in upscale versions are increasingly common in other vehicles, and traction control is becoming more standard on the drive wheels. ASMS (Automotive Stability Management System) is a step further. We’re delivering the first commercial models which will be available on the 3 Series BMW.’
That may be starting to sound like sales talk but there are wider grounds for Allen’s enthusiasm. Instead of selling abstract numbers and projections, he now has tangible commodities that investors can relate to, trends that they can see and touch every time they change a car. His message to investors might be that if you stick with ITT Industries’ stock, you’ll be in a position to buy better cars more often.
What the analysts think
Phua Young: Looking at what Ralph Allen and his colleagues have had to do, Lehman Brothers’ Phua Young says: ‘I wouldn’t want to be in his shoes. It was a mammoth task. Everyone was waiting on the IRS decision, and no one had any control over the outcome. The longer inves-tors wait, the more nervous they get.’
Young says the IR response represented ‘a good job in focusing investors’ attentions on what kind of confidence the management had. What was outstanding was that there was nothing to say. They did a really good job keeping everyone happy without having anything to add, holding hands and keeping calm on a very tight schedule as everyone waited anxiously for the IRS ruling.’
Young saw the November roadshow as another reassuring sign that the management team was confident of the outcome, and describes the personnel choices of the shadow IR departments as ‘logical.’
And now? ‘It’s a smaller company, but it’s still a big one, and I don’t think Allen’s job is any easier. The company is being tracked as mixed by some analysts, and automotive by others – and auto stocks are not generally the apples of investors’ eyes. But Ralph is doing a lot of hard work,’ he concludes.
Ted Wheeler: J P Morgan’s Ted Wheeler also compliments ITT’s IR team. ‘They performed very well, especially given the magnitude of the event. After all, something on this scale doesn’t happen very often – in fact it hasn’t happened before.’
Wheeler notes that the evidence of the IR achievement lies in the stock price charts. ‘The stock did not gyrate very wildly. It did go up, but that was because of the underlying value of the companies involved. Investors relied on the stream of information coming from the company to make their decisions.’
Wheeler suggests that the long advance warning of the split helped to accustom investors to the idea and allowed Allen and his colleagues to provide the reassuring information that they clearly wanted to hear. ‘In fact,’ he ruminates, ‘the whole situation is unique. Even the other companies splitting up, like AT&T, have parts that aren’t too attractive, but all of ITT’s businesses were on an improvement trend, since the ones that weren’t had already been sold. For the new companies, they introduced people who would be there afterwards so they could maintain continuity of relations with and information to investors. It will be easier for them in future because of that.’.
