IS ITT FIGHTING SHADOWS -- OR RAIDERS? A target of takeover rumors for a year, the world's biggest conglomerate is running scared. The view from inside this corporate siege reveals a hidden and ambiguous drama, with ITT seeing enemies everywhere and trying to force them into the open.
By Myron Magnet RESEARCH ASSOCIATE Andrew Evan Serwer

(FORTUNE Magazine) – ANTAGONISTS in takeover battles don't always look like armies marching onto an open field in glorious formation, drums beating and flags flying. Often they act more like dogs circling their prey in the woods at night, driving it back and forth between them, while the alarmed target, with teeth and claws of its own, can't be sure if the dark shapes it sees are shadows or substance. That's how Chairman Rand V. Araskog, 54, and the other officers of ITT must feel. For a year they have heard rumors of possible proxy fights or hostile tenders from Jay Pritzker, whose family controls Hyatt Hotels and Braniff, and Minneapolis investor Irwin Jacobs, a veteran corporate raider who owns nearly 5% of ITT stock. ITT's managers have seen actions that might confirm the rumors, but might not. Their official stance is that Pritzker, who owns over 2% of the company's stock, is a friendly investor and the company is not under siege. But in the words of a former high executive, decision-making for the past year has been ''panic-stricken.'' ITT's top managers know what Jacobs thinks of them. ''I've had it up to my neck with them,'' he says. ''Those guys are the biggest bunch of losers I ever met.'' What bewilders ITT is the Pritzker side of the equation -- and specifically, the ambiguity of Pritzker's connection with Jerry M. Seslowe, 39, who has taken actions and made statements that have given Pritzker an appearance of hostility to ITT. Seslowe was formerly head of a mergers and acquisitions unit of the Peat Marwick Mitchell accounting firm. He is now managing director of Resource Holdings Ltd., a small New York investment advisory firm, whose two limited partners are Pritzker's family company and Denver oil tycoon Philip Anschutz's corporation. Seslowe claims to have gotten Pritzker interested in ITT in the first place and to have acted as his lieutenant. All Pritzker will say is that Seslowe is ''a business associate and good friend'' for whom he has high respect. ''But he doesn't know my every thought,'' Pritzker told FORTUNE in a telephone conversation with Seslowe on the line. ''Do I jump when he says 'frog'? No.'' In April, Pritzker publicly disassociated himself from his friend when Seslowe called a big shareholder, referring to himself as a Pritzker representative and suggesting that the shareholder submit a proxy resolution to liquidate ITT. Understandably, ITT is confused. Says general counsel Howard J. Aibel, a soft-voiced, tough-minded corporate warrior: ''Seslowe is either scurrying around doing these things on his own, hoping his clients, including Pritzker, will benefit from the pressure being put on ITT, or he is a cat's-paw, doing ^ Pritzker's bidding but knowing that Pritzker will disown him if he's caught.'' Pritzker says, ''That is a terrible thing to say. He's not like that.'' ITT has sued Seslowe, charging him with illegally soliciting proxies and manipulating its stock by retailing to FORTUNE, the New York Times, and the Wall Street Journal assertions about efforts to take over ITT. The reference to FORTUNE was based on a News/Trends item in the last issue. Seslowe denies ITT's charges. In bringing to light the hidden and ambiguous drama of a corporation under this kind of pressure, FORTUNE interviewed at length ITT's top lawyers and public relations men, present and former ITT officials, shareholders large and small, security analysts, proxy solicitors, and others. FORTUNE also talked with Pritzker and Jacobs, and had long interviews with Seslowe. The tale Seslowe unfolds after theatrically closing the windows and blinds of his mid-Manhattan office is of a conflict long in the making. Convinced by the numbers that ITT's stock was undervalued at $40 or so a share, Seslowe says, he advised Pritzker and Anschutz in the fall of 1983 that the corporate leviathan, despite its $5 billion of assets and $14 billion in annual revenues, would make an ideal leveraged buyout candidate. It was a chance to pick up the world's largest conglomerate at a bargain-basement price. Says Seslowe, ''Phil Anschutz thought I was off the wall.'' Once he had convinced Anschutz and Pritzker, Seslowe met with ITT Executive Vice President DeRoy C. Thomas, to whom ex-chairman Harold S. Geneen had earlier introduced him in connection with an unrelated ITT acquisition. Would it be crazy, Seslowe asked Thomas, to consider a deal in which Pritzker, Anschutz, and ITT top management would take the company private at around $55 to $60 a share? Not at all, Seslowe recalls Thomas replying, and Thomas said he'd broach the topic to Araskog. How could ITT managers not be receptive, Seslowe reasoned: they'd win big from the deal. ITT general counsel Aibel says that Araskog's cut was to be $30 million. Aibel says the company rejected the offer ''out of hand.'' Why? Primarily, he says, because even to talk about it would spook the customers of ITT's European telephone companies, who need assurance that their foreign- based telephone service supplier is a stable, enduring institution. But there was more to it, according to Walter H. Helmerich III, a major ITT shareholder and chief executive of Helmerich & Payne, a Tulsa energy company. ''Araskog's a West Point man,'' he says, ''and he is terribly proud of his honor and honesty. He thinks of a leveraged buyout as a way that management takes advantage of an undervalued asset for its own advantage.'' (For more on whether leveraged buyouts are ethical, see Other Voices.) Pritzker has his own points of honor. One is that he doesn't mount hostile takeovers. ''Jay does not want to appear as a corporate raider, lumped in with the Jacobses and the Icahns,'' says Seslowe. In whatever Pritzker does, as his acquaintance, Loews Corp. Chairman Laurence A. Tisch, puts it, ''he'll make it like he's on the side of God.'' So there the matter sat, with Pritzker occasionally reiterating his interest. MEANWHILE, Araskog struggled to transform a museum of the investment and management ideas of the Sixties into a more nimble, modern, technology- centered company. The machine Harold Geneen had built, a grab bag of over 250 companies, had been run to produce ever-increasing quarterly profits with little regard for the long term. Now it was slowing down. For Araskog, who assumed command in 1979, refocusing the company and streamlining its many- layered management structure proved tough going. Araskog focused the company on an all-consuming push to develop and market System 12, an advanced computerized switching system for telephone central offices. Araskog shoveled profits from good businesses into System 12's insatiable maw -- this in a company whose huge debt, 64 cents for every dollar of shareholders' equity in 1983, also made it voracious for cash. Earnings per share in 1983 were 9% lower than in 1980 and in 1984 were 40% lower. When a hurricane of storm damage claims flattened the profits of Hartford Insurance Group -- ITT's major cash generator, already battered by the century's worst downturn in the property and casualty insurance business -- Araskog cut the quarterly dividend from 69 cents to 25 cents. In one day, July 11, the stock price plummeted from $31 to $21.125; the ITT public relations chief, Edward J. Gerrity, had a heart attack in his office; and both Pritzker and Anschutz started to buy. Irwin Jacobs also began buying, with no firm plan in mind. ''You look at what you think is undervalued,'' he says, ''and you let the situation command what develops.'' Other shareholders, however, weren't in such a hang-loose mood, especially since Araskog had spoken optimistically about the company's performance at the annual meeting only two months earlier. Outraged by the erosion of their investment and income, they believed either that Araskog had deliberately misled them at the annual meeting or he was caught unawares by the severity of ITT's cash crunch. If he really didn't know, they asked, had Geneen's legendary system of reporting and controls -- all geared to guaranteeing ''no surprises,'' as Geneen used to say -- broken down?

Present and former ITT managers incline toward the latter explanation. A report prepared for ITT by a New York law firm in response to criticism found that officers did not intentionally mislead shareholders. The problem arose, says a former manager who sounds a common note, because Araskog ''flies off the handle and shoots the messenger when he doesn't like the news he's hearing.'' At regular management meetings in Brussels, chaired by Araskog, ''people presented what they had to say in a way that he'd like it,'' says this former executive, who was there.''Araskog probably had a set of numbers from around the world that added up to what he was saying at the annual meeting. I believe there was a lot of wishful thinking going on.'' An ITT spokesman said that Araskog wouldn't comment on this subject. Seslowe says that some disappointed shareholders knew of Pritzker's and Anschutz's big stake in ITT and friendship with him. These stockholders approached him in the fall of 1984 looking for help in recouping their losses. Seslowe suggested that they try to put on the proxy statement for the May 1985 annual meeting a proposal to consider liquidation of the company. They asked how to do that, and Seslowe sent them a package that included a photocopy of the law on shareholder proposals and a form letter requesting ITT to put the proposal on the ballot. Here things become murkier. Seslowe says he received anonymous envelopes of documents that seemingly could have come only from within ITT. The envelopes included anguished letters to top management from shareholders smarting from the dividend cut and a short list of dissident ITT shareholders. One eloquent letter was from Richard E. Dieterich, who had sold his company to ITT. Hoping he could learn how ITT looked from the inside, Seslowe says, he phoned Dieterich and agreed to send him the form letter. Dieterich turned the materials over to ITT -- out of friendship, the company claims. A Pritzker spokesman later denied to a reporter that Seslowe was acting in Pritzker's behalf in contacting Dieterich. At the same time, says Seslowe, an associate in his office proposed sending other shareholders the form-letter packets on her own. If you do it, Seslowe says he remembers saying, don't put it on a Resource Holdings letterhead. Seslowe says his associate sent out five to ten form-letter packets, under a cover letter signed Fellow Shareholder. The letter said that the anonymous writer, along with associates, controlled lots of ITT stock. It suggested that the recipient propose a resolution on the proxy to liquidate the company, because the writer hadn't held the stock for the year necessary to propose such an action. From ITT management's point of view, things looked different. When five recipients sent the form letter to ITT, the company's officers believed themselves victims of a concerted effort to slide around the securities laws' requirements for filing proxy resolutions. Says Aibel, the company's general counsel, ''We sat down and visited with each of the proponents.'' Doing the visiting were corporate secretary John J. Navin and Allan Altman of Dressel & Altman, a New York law firm specializing in litigation and investigative work. This is standard ITT practice, says Aibel, since shareholder proposals often come from people with special interests. ''We have not found that proxy proposals are really a significant aspect of so-called corporate democracy,'' he says. In this case, he says, ''John's whole purpose was to charm them out of the proposal, and tact and charm are what are called for, not heaviness.'' Still, there was another purpose: to trace the source of the proposals. And further, says Aibel, the letter senders would get the message ''that this was not a regular type of situation and that the securities laws were involved.'' Some shareholders felt threatened by these visits, and all withdrew their liquidation proposals, save for one disgruntled ex-employee, whose proposal the SEC later allowed ITT to drop. The five letters were the tip of the iceberg, says Aibel. Shortly after they arrived, he asserts, ITT discovered that 20 or so more stockholders had received Fellow Shareholder's letters. Each recipient's name had been included on a short list of dissident ITT shareholders. ITT assumed that Fellow Shareholder got the list from someone in the company but could not determine from whom. Two weeks after the date on Fellow Shareholder's letter, though, ITT suspended its powerful public relations head, Ned Gerrity, amid press ( reports that the action was connected to an internal investigation of leaks of information to the press and to shareholders. Gerrity, who left the company with a generous settlement, declined to be interviewed. THE LETTERS' PURPOSE, Aibel says, was not to get the company liquidated but to churn the stock -- ''to publicize this proposal and get the whisper crowd going, the press going, and seeking to churn for their own purposes without any real prospect that the thing would get adopted.'' Seslowe counters that he lost money on ITT stock last year. Still, ITT's lawsuit alleges that the letters were part of Seslowe's unlawful scheme to manipulate the stock price. ITT alleges that the Fellow Shareholder letters were misleading and should have been filed with the SEC, since they were sent to more than ten people. During all the activity last winter, Seslowe was visiting Europe. He was unsuccessfully seeking a partner to help Pritzker and Anschutz buy ITT by making a public cash offer to the board -- thus bypassing Araskog -- subject to the board's friendly approval. At the same time, Irwin Jacobs met with M. Cabell Woodward Jr., the company's chief financial officer, to suggest that ITT consider splitting itself into several units that would be spun off to shareholders. The purpose would be to realize the full value of each unit, to eliminate some of ITT's cumbersome management structure, and to avoid betting the whole company on System 12. According to Aibel, Jacobs said that ITT need only announce it was considering the action; it didn't have to do it. ''Clearly a message: 'Announce something that drives or juices the stock again,' '' says ITT public relations director James P. Gallagher. Replies Jacobs, ''That's an outright lie.'' Later, Jacobs says, he phoned Pritzker to ask him to join forces. Pritzker declined. As the dispute dragged on, Seslowe says, Pritzker got gradually more irritated. He felt stockholders were getting a bad deal. Even with the stock trading in the 20s, Pritzker says, he might well have been willing to pay up to $40 a share. His belief, Seslowe says, was that ''the shareholders are being screwed by bad management and management has resorted to a systematic intimidation and bullying of shareholders.'' All these subterranean pressures erupted in the spring, starting with the ITT annual meeting in Savannah on May 16. In public the well-known drama was Jacobs's standing up to ask Araskog, in a detailed speech, to consider his plan that the company break itself into several publicly traded units. Araskog replied that he couldn't consider the plan because he couldn't allocate the corporate debt without unfairly harming one or another of the units, and because holders of the telecommunications unit would end up with assets mostly overseas -- the situation Geneen had begun ITT's diversification to remedy. The private drama started at a VIP cocktail party the night before. Araskog told Walter Helmerich that he was disappointed at having the Pritzker and Anschutz proxy votes withheld from management. ''I said, 'Why don't you let me try to persuade these guys to change their vote?' '' Helmerich recalls. '' 'And as that will show good faith on their part, why don't you then agree to meet with them, if I can get them to do it?' I thought that he agreed to it.'' When the annual meeting began the next morning, Helmerich was at a pay phone outside in the lobby, on a conference call with Pritzker and Anschutz, still trying to persuade them to change their votes. He told them they could expect Araskog to call within the next day or two to discuss a meeting. Helmerich doesn't recall mention of any specific agenda but says, ''You don't get together with a guy with several million shares without talking about anything he wants to talk about.'' Fifteen minutes into the annual meeting, Pritzker and Anschutz agreed to change their votes, and after some trouble convincing the highly visible security guards to let him in, Helmerich sent a note to Araskog at the podium informing him of the change. Through aides, Araskog hotly asserts that he had no inkling of efforts to change votes until he read Helmerich's note, which he found mystifying. Where Araskog and Helmerich agree is that not long after the annual meeting Helmerich urged Araskog to call Pritzker to keep up the relationship because Pritzker was upset. Pritzker was more than upset. He was incensed. Assured he had a bargain, he'd performed his part and waited for the phone call that didn't come. On top of that, he was annoyed that Araskog didn't defend his honor when a gadfly asked at the annual meeting whether ITT intended to pay off Pritzker as a greenmailer. Pritzker complained bitterly to Helmerich. As a result, Araskog did call a day or two later than Helmerich had said he would, but the conversation was anticlimactic. Araskog thanked Pritzker for voting for management even though it was an overwhelming vote anyway and denied that he'd told Helmerich that he'd call in exchange for a vote switch. An ITT source says that when Pritzker asked Araskog for an apology over the greenmail issue, Araskog replied, ''You've got Seslowe preselling my company in Europe and doing illegal proxy solicitation, and you want me to apologize? You must be nuts.'' After that, according to Seslowe, Pritzker began to contemplate a proxy fight. Few people at ITT seem to have taken the offers by Pritzker and Jacobs seriously. One board member, Alvin Friedman, a director of the Dillon Read investment banking firm, did urge the board to study Jacobs's liquidation proposal. He got little support, and Araskog asked him to resign, which he did. At this point Pritzker began to talk to people about the possibility of a proxy fight and sounded out candidates for a possible blue ribbon slate of directors. But many of those he approached declined. Seslowe says Pritzker is now waiting to see what Irwin Jacobs, who has been rattling his sword loudly, will do. At ITT hearts are still pounding. BOX: INVESTOR'S SNAPSHOT ITT SALES (LATEST FOUR QUARTERS) $12.6 BILLION CHANGE FROM YEAR EARLIER UP 1% NET PROFIT $427.0 MILLION CHANGE DOWN 16% RETURN ON COMMON STOCKHOLDERS' EQUITY 7% FIVE-YEAR AVERAGE 11% RECENT SHARE PRICE $34.50 PRICE/EARNINGS MULTIPLE 12 TOTAL RETURN TO INVESTORS (12 MONTHS TO 10/11) 17% < PRINCIPAL MARKET NYSE Explanatory notes: page 194