HILTON HAS ROOM FOR ITT

Stephen Bollenbach, the high-flying CEO of Hilton Hotels Corp., is strictly a bird of his word. Bollenbach told TIME last summer that he was looking to make significant additions to Hilton’s hotel holdings. Last week he found what he was looking for–more than 130,000 rooms. Those lodgings happen to do business under the banner of Sheraton, which happens to be owned by ITT Corp. and run by Rand Araskog, a man not keen on having his corporate masterwork painted over. That’s why Hilton’s $55-a-share, $6.5 billion offer for ITT, whose holdings also include the Caesars World chain of casinos and Madison Square Garden, is becoming the kind of delicious dogfight that Wall Street loves.

Bollenbach, 54, is one of the sharpest pencils in corporate America, a veteran hotelier who joined Hilton last year after a stint at Walt Disney Co., where he helped engineer the Mouse’s $19 billion buyout of Capital Cities/ABC. Araskog, 65, has lots of starch in his sheets. A West Pointer who once served in the National Security Agency, he has a perfect record in fending off corporate raiders.

When Bollenbach fled the executive loony bin at Disney for Hilton last year, he quickly developed a new strategy for the well-known but mediocre company. In lodging, he wanted to expand Hilton’s traditional presence in the full-service-hotel sector in the U.S. and abroad. In gaming, he saw Hilton as a buyer in an industry that was consolidating. To finance acquisitions, he would take advantage of low interest rates and Hilton’s strong balance sheet.

ITT Corp. fits Bollenbach’s bill perfectly. “Sheraton,” he says, “has something that very few other people have: a large number of big hotels.” His timing is pretty good too. Deluxe hotels are far cheaper to buy than to build, particularly in major cities such as New York and Chicago, which have added few big inns since an industry-wide slump ended in 1994. At the same time, the profits of hoteliers jumped 28% last year.

The Hilton/ITT combination would create the world’s largest hotel-and-gaming company, with more than 650 hotels and 30 casinos from Las Vegas to Turkey to Uruguay. (Combined revenues: $8.5 billion, with ITT accounting for 77% of the total.) “This should be the merger of the century in the hotel-and-gaming industry,” says Bjorn Hanson, chairman of the hospitality-industry practice at Coopers & Lybrand, an accounting and consulting firm.

If Bollenbach prevails, that is. Araskog greeted the offer with public silence and began privately assembling a defense team. He has run ITT since 1979 and seems primed for a big battle. “Sheraton would rather take over Hilton than be taken over by it,” says Morris Lasky, ceo of Lodging Unlimited, a hotel-management and consulting firm. Lasky likened Hilton and ITT to “two titans that will go nose to nose.” Just the prospect of such a fight sent ITT stock up a whopping $14.75 a share, to $58.50, the day Hilton launched its offer. (ITT shares closed Friday at $57.25, while Hilton stock ended at $28.50, up $2.75 for the week.) “The best thing for shareholders,” Hanson says, “is that a deal doesn’t happen in a nice, friendly way for a while.”

There seems little danger of a smile and a handshake anytime soon. Experts say ITT’s defense options include acquiring a major outfit such as the Mirage hotel-and-casino company and thereby becoming too big for Hilton to swallow. Or ITT could try to foil Bollenbach by selling out to a friendly white knight. One buzzed-about candidate: Loews Corp., the $20 billion conglomerate whose holdings include hotel, insurance and tobacco companies.

Bollenbach’s offer clearly put his opposite in an uncomfortable corner. Araskog has vowed that raising the price of ITT stock is his top priority. After dismantling the vast, unwieldy and sometimes wacky conglomerate that his predecessor Harold Geneen had assembled (ITT once baked bread, rented cars, built radar and wrote life-insurance policies), Araskog set out to make ITT a more focused outfit, a very 1990s mantra. He duly split ITT into three pieces in 1995, spinning off the Hartford Life Insurance Co. and a clutch of manufacturers while keeping the ITT name for the lodging and casino companies.

But Araskog’s strategy for the piece he still runs backfired when ITT stock, which reached a high of $68 last June, plunged to the mid-$40 range by the end of the year. Part of the drop reflected the impact of lower-than-expected third-quarter profits. Reason: ITT remains a bit of an unwieldy conglomerate–for instance, its holdings still include telephone-directory publishers, a vestige of its days as a phone company–and its businesses are currently eating capital at the expense of profit.

Bollenbach first proposed a buyout to Araskog last fall, only to be summarily rejected. Because he was completing Hilton’s $3 billion purchase of Bally Entertainment, a major casino company, Bollenbach let the ITT matter simmer until last Monday, when he telephoned Araskog with his $6.5 billion offer. Mr. A. was unavailable, so Bollenbach tried to reach Mr. B., Robert Bowman, ITT’s president. No dice. So Bollenbach faxed the bid from Hilton’s Beverly Hills headquarters to ITT’s Manhattan offices.

If Hilton does land ITT, Bollenbach would swiftly shake up the company. Some Sheraton hotels would become Hiltons; the rest would be handed to Henry Silverman, whose HFS Inc. is already the world’s largest franchiser of hotels, with such brands as Howard Johnson and Ramada under its corporate belt. Says Bollenbach of Silverman: “He can do more with Sheraton than anyone else.”

In Las Vegas and Atlantic City, Bollenbach would doubtless scrap ITT’s expensive plans to build hotels and casinos with Planet Hollywood. Hilton would focus instead on its own expansion plans, which include a Las Vegas gambling spa with a Paris theme, complete with a 50-story replica of the Eiffel Tower.

One holding that Bollenbach would almost certainly sell is ITT’s 50% stake in Madison Square Garden in New York City, which includes hockey’s New York Rangers and basketball’s New York Knicks. “You’ve got to be in some kind of fantasy if you think there is any cross-value between Madison Square Garden and the hotel-and-gaming businesses,” Bollenbach says.

But Bollenbach is in a buying mood, and even if Hilton does swallow ITT, the company’s appetite for new acquisitions will remain undiminished. Hilton has been quietly buying up the debt of Claridge Hotel & Casino Corp., a struggling gaming firm. “We’re going to stick to our strategy,” Bollenbach says. Which means? “More deals coming up.”

–Reported by Valerie Marchant/New York and Cathy Booth/Los Angeles