The ITW Pause
The byproduct of 50 or 60 acquisitions a year is the fact that we didn’t really integrate any of them.
The acquirer who stopped
Illinois Tool Works made 600 acquisitions over 25 years. Then, in 2012, Scott Santi became CEO and stopped.
Not slowed. Stopped. For seven years, ITW made almost no acquisitions. The most prolific acquirer in American industry went cold turkey.
Santi’s logic was simple: “The byproduct of 50 or 60 acquisitions a year is the fact that we didn’t really integrate any of them.” ITW had 800 divisions. The complexity was choking the operating model. Margins had stagnated at 16%. The machine that built the company had become the thing holding it back.
The pause worked. Operating margins went from 15.9% to 26.8%. Return on invested capital doubled from 14.5% to 31.2%. Market cap tripled from $23 billion to $74 billion. ITW proved that the value was already inside — it just needed extraction.
The 80/20 model
ITW’s operating system predates Santi. The 80/20 principle — 20% of customers and products generate 80% of profits — is standard Pareto analysis. What ITW did differently was make it operational.
Most companies use 80/20 for customer segmentation. ITW applies it front-to-back: manufacturing, sourcing, product development, sales. Dedicated production lines handle only three or four products. Long runs, minimal changeovers, relentless simplification.
The details are proprietary. ITW treats the specific methodology as a trade secret. But the results are visible: 19,600 patents with R&D spending below peers, gross margins that hold across cycles, operating leverage that compounds.
Mark Leonard studied ITW when building Constellation Software. In his 2015 shareholder letter, he called John Nichols’ tenure “the most relevant period in ITW’s history for CSI.” Nichols, who ran ITW from 1982 to 1995, grew revenues from $369 million to $4.2 billion using extreme decentralisation and disciplined acquisition. Leonard copied the playbook.
Two eras
John Nichols built ITW through acquisition and autonomy. He forced managers to make their own decisions. His successor James Farrell noted: “It was a great way to teach executives to think on their own, as opposed to being a robot.”
Under Nichols and his successors, ITW acquired relentlessly — 50 to 60 deals per year at the peak. The portfolio sprawled across fasteners, welding equipment, food service machinery, automotive components, construction products. Eight hundred divisions, minimal integration, maximum entrepreneurialism.
Scott Santi inherited this machine and diagnosed its problem. The acquisitions had created complexity without accountability. Divisions operated independently but subscale. The 80/20 model that worked at the business unit level wasn’t being applied to the portfolio.
Santi’s Enterprise Strategy was ruthless simplification: reduce 800 divisions to 83, divest $5 billion in revenue, cut $750 million in less profitable product lines. Apply 80/20 to everything, including which businesses deserved to exist.
The transformation
The numbers tell the story:
Operating margin: 15.9% (2012) → 26.8% (2024) ROIC: 14.5% → 31.2% Market cap: $23B → $74B Total shareholder return: 454% vs 282% for the S&P 500
Santi: “This is not about reinventing the company. This is about repositioning the company.”
The philosophy remained constant — decentralisation, 80/20, autonomous business units. What changed was discipline. Fewer divisions meant each one was large enough to matter and small enough to manage. Portfolio simplification meant capital went to winners, not to keeping subscale businesses alive.
The trade-off was organic growth. ITW targeted GDP plus 2%. In the early years of the transformation, organic growth lagged: 0.6%, then negative, then slowly improving. Margins succeeded spectacularly. Growth remained the work in progress.
The return
In 2019, ITW started acquiring again — selectively. One to three deals per year, $100 million to $500 million each. The pause was never meant to be permanent. It was meant to prove the operating model could stand on its own.
Santi: “There is no question in my mind that acquisitions remain a core component of our long-term growth potential. We can add a nice additional 1% to 2% to our overall growth rate over time.”
The discipline now is different. ITW acquires to strengthen existing divisions, not to create new ones. The 80/20 lens applies to deals as much as to customers: which acquisitions will drive disproportionate value?
Sixty-two consecutive years of dividend increases. A company founded in 1912, transformed in 2012, still compounding. The pause proved that serial acquirers can stop acquiring and still win — if the operating model underneath is strong enough to carry the weight.
Connects to Library: Process Power · Scale Economies · Optionality
See also: The Constellation Model — Mark Leonard studied ITW’s John Nichols era when building CSI. The Danaher System — Different operating system, similar decentralisation roots.