After being on the market for 16 months ITT, one of the largest global switch manufacturers, has found a buyer for its switch business. The successful acquirer is a private equity firm. This week’s article will take a look at why this switch business was put up for sale and the future it may have.

ITT Announces the Switch Business is for Sale

In a December 2005 press release Steve Loranger, Chairman, President and Chief Executive Officer of ITT Industries, said the company had concluded a strategic review of the businesses within its electronic components segment.

“After careful analysis and consideration, we have decided to begin the process of divesting our switches business, which includes the design and production of keypads, dome arrays, interface controls and switches, and in 2005 is expected to generate revenue of approximately $350 million,” Loranger said.  “While the switches business does not fit within our long-term strategy, we will continue to improve and manage the business to create value until we complete a disposition. The company will take a special charge of $200 - $275 million in the fourth quarter 2005 primarily related to a non-cash asset impairment charge in the switches business.”

In a quarterly SEC financial statement ITT stated, “The switches component of the electronic components segment recorded an impairment charge of $214.4 million in the fourth quarter of 2005. The estimated fair value of switches was computed principally based upon the present value of future cash flows, historical results and comparative market data.

The asset impairment charge was a reflection of the lower than expected profitability of the products produced and sold by ITT’s switch business, possibly the result of a highly competitive global market and underutilized manufacturing capacity.

Shortly after this announcement ITT stated that they expected to announce a potential buyer by the end of 2006.

An Opportunity for Industry Consolidation

At $350 million in revenue the ITT switch business, as described above, is one of the largest and most recognized switch and switch related businesses in the world. Would this sale lead to industry consolidation? Something that could help to reduce the number of switch manufacturers as more manufacturers enters the market place from Asia. Given the size of ITT’s switch business there are a limited number of existing switch manufacturers that could have appetite for the entire group.

Several large global switch manufacturers did take a look at the ITT switch business but none continued to be the successful suitor.

ITT Announces the Switch Business has A Buyer

In a May 9th press release ITT announced that it has signed a definitive agreement with Littlejohn & Co. LLC, a private equity firm based in Greenwich, Conn., for the sale of its switches business for an undisclosed amount.

"This transaction is consistent with ITT's corporate strategy to concentrate on its core businesses, which include water and wastewater solutions, advanced defense electronics and systems, and motion and flow control products," said Steve Loranger, Chairman, President and Chief Executive Officer of ITT Corporation. "The sale also provides Littlejohn & Co. with a well-positioned, world-class supplier of components that complements an already successful portfolio of businesses."

Angus Littlejohn, Chairman and Chief Executive Officer of Littlejohn & Co., said, "The ITT Switches business is a solid and profitable business, which over the past decade has built a skilled global workforce, excellent product portfolio, great customer base, and today has strong positions in the markets they serve. We believe that as an independent organization the company will be even better positioned to take advantage of opportunities and to continue building a world-class components business in partnership with the management and employees of the Switches business."

Both parties expect to finalize the transaction in mid-2007, subject to customary closing conditions and regulatory approvals.

More About Littlejohn & Co. LLC

Littlejohn & Co. LLC is a private equity firm that specializes in turning around businesses. According to their Web site, “The firm makes control equity investments in mid-size companies, typically those with revenues in the range of $150 million to $800 million, which would benefit from a fundamental change in strategic direction, substantial improvements in operating infrastructure or a financial restructuring. In general, these tend to be companies that are performing below industry benchmarks or have inconsistent earnings.”

Littlejohn typically invests $50 to $100 million per transaction and does two or three transactions per year, as stated on their Web site.

Their current portfolio has seven companies in it. Their list of completed transaction companies that have been bought and sold includes 20 companies that were held for a period of two to eight years. None of the companies in their current portfolio or completed list are electrical or electronic component makers. The closest is an electronic ballast manufacturer serving the commercial lighting industry.

What Does the Future Hold for the Ex-ITT Switch Business

One likely change will be the name. Perhaps the C&K brand will be revived as the moniker for this newly-independent company.

It is hard to know what changes Littlejohn has in mind. Part of ITT the switch business went through several restructurings to reduce cost and improve profitability after the company took a $200 million dollar impairment charge. This must have had some positive effect since Mr. Littlejohn states that the business is profitable.

The company was not acquired by another switch or electronic component manufacture, so there will not be any forced reconciliation of sales teams or distributors.

Unless Littlejohn makes a major change in how it operates, this switch business will be for sale again in the next two to eight years.