ITT was almost unrecognizable at the Army’s annual conference in Washington earlier this month. Sure, the defense contractor had its usual array of electronics equipment on display and its executives circulating. ¶But it also had a new name (Exelis), a new color scheme (orange) and even a new tag line (“The power of ingenuity”) as part of its separation from parent company ITT, a move first announced early this year. ¶ That parent split itself into three parts, with the defense business becoming ITT Exelis. The breakup is just the latest reconfiguration for a company with a long history of bulking up and slimming down. ITT’s decision is part of a larger story going on as the defense industry remakes itself. ¶
In the 1990s, contractors tended to merge with one another in an effort to survive shrinking defense spending. This time around, Pentagon acquisition chief Ashton Carter has made it clear that the Defense Department doesn’t want to see consolidation among the big contractors, as competition helps the department get the best price.
(Evy Mages/For Capital Business) - David F. Melcher, ITT Exelis’s president and chief executive, in his McLean office.
(Jeffrey MacMillan/For Capital Business) - Enhanced night vision googles made by ITT Exelis on display at the Association for the U.S. Army’s convention earlier this month.
Investors now are pressing companies to slim down and break into pieces.
“Frankly, I think what investors want for these companies will ultimately be detrimental to their survivability,” said Loren Thompson, a defense industry consultant with the Lexington Institute. “What you see in a Northrop Grumman or a Lockheed Martin is an entity that is so big ... that it can roll with whatever punch the customer throws.”
Contractors and industry advocates continue to warn of tougher times ahead. Just last week, the Aerospace Industries Association cautioned that defense cuts of $1 trillion over 10 years could jeopardize more than 1 million jobs, while Lockheed officials said their future forecasts remain hard to predict as the government wrestles with debt reduction plans.
In reponse to the uncertain times, many defense firms are taking a look at their organizations. New York-based defense contractor L-3 Communications earlier this year spun off its locally-based government services business into a new public company called Engility. At the time, Michael T. Strianese, L-3’s chairman, president and chief executive, said the services business had become a lower-margin business where price wins a contract — a model inconsistent with L-3’s focus on high-tech sectors.
Other companies also have removed lower-performing businesses; Falls Church-based Northrop Grumman, for instance, cleaved off its shipbuilding unit earlier this year.
ITT started in 1920 as International Telephone & Telegraph. The company made some early acquisitions but hit a turning point in 1960, when it embarked on a 17-year buying binge.
ITT picked up more than 350 companies, including Hartford Insurance, Avis Rent-a-Car, Wonder Bread maker Continental Baking and Sheraton Hotel, and in one month it acquired 20 companies. Harold Geneen, ITT’s chief at the time, believed strongly in growth and created a multinational conglomerate that at one point had 2,000 working units.