Munger Dredges Up The Past

Mostly forgotten ITT Corporation was recently in the news, but not for reasons that one might expect. It seems that Charlie Munger, the irascible vice chairman of the gargantuan holding company Berkshire Hathaway, was comparing the now vilified Valeant Pharmaceuticals to ITT. But which ITT? ITT 1.0, ITT 2.0, or ITT 3.0? It was probably the old ITT (1.0), the one-time darling of the 1960s conglomerate craze.

ITT, originally founded about a hundred years ago as the stodgy international competitor to telephone giant AT&T, at one point owned hotels, trade schools, and insurance companies in addition to its core industrial operations. The company eventually imploded, breaking into three separate firms in 1995. Its insurance operations became The Hartford and the hotels became Starwood, while the remaining industrial company retained the name ITT.

Not satisfied to fail at being a conglomerate just once, ITT 2.0 fell under the sway of professional executives with dreams of new glory, and the company rapidly expanded. It went on a spending spree, capping its rise with acquisitions of EDO Corporation (2007; defense), International Motion Control (2007; automation), and Laing GmbH (2009; industrial pumps). Alas, it was not to last. In 2011 the firm broke up again into three separate firms. The defense operations became Exelis (later swallowed up by Harris), and the pumps business became Xylem. ITT’s industrial operations again retained the old name.

ITT 3.0 has been led since its inception by Denise Ramos, a career corporate treasurer and internal auditor from defunct gas and oil company Atlantic Richfield, with short stops in fast food and furniture before becoming CFO of ITT 2.0. With her sole accomplishment as CFO apparently spending about $50 million in an abortive, failed effort to install SAP’s accounting software across the entire company, she was named CEO subsequent to the three company split. It seems the number of executives eager to helm a company that still had about $800 million in asbestos liabilities hanging over it were in short supply.

Why did Munger compare ITT to Valient? Apparently the crime is one of inorganic growth–the tactic of increasing revenue and profits by buying other companies’ revenue and profits. But this is a tried and true formula on Wall Street to generate big M&A fees, and in the corner offices of CEOs worldwide seeking to pump up compensation packages. What’s different at Valient? Price increases! It seems the company’s twist when buying other drug companies’ revenues and profits is to jack up drug prices to patients in order to create even more revenues and profits.

Ramos can’t pull this price-gouging stunt with her industrial products customers, so she has had to be content with cutting costs. And the company isn’t in a position to acquire more revenue and profits like times of old. But before you lament Ramos’ plight, consider that a rising tide lifts all ships. ITT’s stock has been carried along with the bull market. The rise has been enough to paper over corporate mediocrity, making possible some lofty tangible and intangible perks. Like an eye-watering multi-million dollar annual paycheck, a board seat on industrial gases company Praxair, inclusion on various top business leadership lists, and awards from obscure associations.

Now if she could just get Charlie Munger to stop talking about the old ITT.

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