How Hertz's Bankruptcy Could Have Been AvoidedJun 09, 2021
For more than 100 years, Hertz has
beenone of the most recognized names in the car rental business. ♪ Let Hertz put you behind the wheel ♪ No one has more than what it takes to get you into a new LTD or other great car faster. ♪ Hertz's Superstar ♪ But like his superstar spokesperson, Hertz would eventually come to a complete stop. The short version is that the Corona virus hits, no one travels and they declared
bankruptcy. The long version is that they were as ill-prepared for something like this as a company
couldbe. It's almost every step of the way, if you said this is what not to do for a company, it would almost seem like Hertz did exactly that.
It's just kind of blackout after blackout, one missed step after another. Did they not understand how fragile this company was? This is the story of how one company prioritized shareholders over stability and paid the price once catastrophe struck. Coincidentally, the company that would become Hertz was founded in the middle of another pandemic. In 1918, during the Spanish flu outbreak, an entrepreneur named Walter Jacobs started a car rental business in Chicago with just 12 Model T Fords. Six years later, the company grew to 600 cars. It was then that John Hertz, then head of Yellow Cab Company, would be the first to acquire the company and rename it Hertz DRIV-UR-SELF System.
After that, ownership of Hertz would change hands frequently, from companies like General Motors, RCA, and eventually Ford. But during this time, the company experienced tremendous growth. Hertz's rise in the 1930s, 1940s, 1950s and beyond coincides with the era of increased work travel and air travel around the world. Hertz, for example, in the early days was able to locate one of their car lots at a Chicago airport, which is really helpful for them. They move to this area where people are getting off planes and immediately want to rent a car to get to the hotel and go to their business meeting.
And they can also expand internationally. It really became the name for rental cars. They were really the first company to grow big doing this. And they were very popular with business customers, so it was considered an aspirational brand for the guy who got off the plane in his business suit and a briefcase and got into a car after leaving the Hertz counter. I know it's a commodity business, but it's an iconic brand. In the 1970s, Hertz would seek to advertise the speed of its service. And to do this they turned to a professional athlete who, at that time, embodied speed.
They are giving you the opportunity! Now here it goes! DO Simpson has broken what seemed like an insurmountable barrier! At that time, O.J. He was an American hero. He was a great form of football player. He was an actor. He was in some of the "Naked Gun" movies. Nordberg! Hi, friend! Hey! The doctor says he should be up and running again in a week! People absolutely loved the guy. Hertz brought him to the peak of his popularity. Others claim to be fast, but no one has more to make it faster, more professional to execute the strictest performance standards.
Hertz's relationship with O.J. It lasted from 1975 until the mid-90s. But while the company would continue to advertise its speed and efficiency, they would
havenew competition. Enterprise, a private car rental company best known for its locations within cities, began expanding into airports. The entire Hertz-O.J. This connection, like O.J.'s life, came to an ignominious end the same year he was on a highway chase in this white Ford Bronco, trying to evade the police and figure out what he was going to do while they pursued him in relation With the death of Nicole Brown Simpson, Hertz also lost its top position in market share in the US to Enterprise.
So O.J. He is no longer that American hero. Hertz is no longer the rental king. And everything happens at the same time. And the downfall of the company, more or less seriously, began right there. Hertz may
havelost the crown to Enterprise, but in the mid-2000s, he was still generating considerable profits for his parent company, Ford. Ford was a company that had trouble pleasing its shareholders. He really wanted to focus on his core business, which is, of course, cars. And then Ford sells Hertz to this private equity group. In 2005, the company would again change hands to two private equity firms and the acquisition unit of Merrill Lynch and Co, for about $15 billion.
But losing Ford as an owner had a big impact on a core part of Hertz's business, where they sourced their vehicles. They basically beat cars. They buy cars. They rent them for a period of time, three months, six months. They make money with it. And then they hope to sell them for more than the resale value on the market. Even if Hertz were owned by Ford, it would receive its parent company's excess vehicles at a significant discount. Many of these cars were known as program cars, where the manufacturer agreed to buy back the car at a certain depreciation rate.
But once they were no longer part of the company, Ford often demanded a higher price for each vehicle. Then we were forced to buy cars at what was called our own risk. And that completely changed the nature of fleet management and the profit model in the car rental industry. This is Maryann Keller. She is an automotive industry analyst and former board member of Dollar Thrifty, another car rental company that will become important a little later in Hertz's history. Suddenly, you had to buy cars very carefully, even in the color of the car. Because you were really not only looking at what you paid for the car, but also what you were going to get with that car when it went out of service.
The new private equity firm would also start another, ultimately fatal, trend at Hertz: debt. The Hertz transaction was valued at 15 billion. But only $5.6 billion of that amount was paid in cash, the rest was paid by indebting Hertz, a trend that, over the next decade and a half, would continue. One of the first things this private equity group did was withdraw a $1 billion dividend. And what that means is that they can use the returns that shareholders can get and make it look like Hertz is generating more profits, make it a more viable investment, and also allow them to take on debt to do more M&A.
To navigate the company under this new private equity ownership, Hertz hired Mark Frissora as its new CEO. Frissora is a pretty charismatic guy. He was an acquirer. He was a negotiator. He's a bit of a character. He's also a deal-maker. Frissora would have many successful years running Hertz, including during the financial crisis in which Hertz stock would fall as low as $5.35 per share before recovering to a peak of over $100 per share under Frissora. The stock price rose during Frissora's time due to what we would honestly call over-promising and essentially under-promising. But the market later discovered the non-delivery side.
At that time, the market only believed in big promises. So it's very, very focused on the company's finances because that's what shareholders care about. But Mark Frissora, during his tenure at Hertz, makes a lot of mistakes. There was significant underinvestment in the business. And what we mean by this is that there was insufficient investment in the fleet. Normally car rental companies renew their fleet almost every year. And in Mark Frissora's time, there was a year or two where they simply delayed renewing their fleet. And what that did was reduce the depreciation rate on their PNL, meaning they were earning too much to meet certain Wall Street targets.
These accounting practices would lead the SEC to file complaints against Hertz and Frissora. Because the first year you have a car is when you see the most depreciation. And that depreciation, that reduction in the value of the car, you have to include it in your finances as a cost. Then it looks bad, so instead of buying a bunch of new cars, you just keep them longer so you don't have that cost. The SEC complaint against him also said that he had asked some of his employees to make money when it appeared his finances would fall short of earnings estimates.
Hertz and Frissora would eventually settle with the SEC without admitting or denying any wrongdoing. Hertz declined to comment for the story and Frissora did not respond to a request for comment. A spokesperson for the former CEO previously said that "Hertz's 2015 earnings restatements have no bearing on the company's current financial condition, and that Frissora did not conduct any improper accounting or engage in any wrongdoing." But the decision to keep the cars in the fleet longer did have an effect on its main customers. Since Hertz was the dominant player in the corporate travel market, that was a huge risk.
Because you don't get involved with an executive who travels in a car with 50,000 miles on it that squeaks and smells bad. You just don't do it. And that's what he did. The other thing that happened during Frissora was that they moved the headquarters from New Jersey to Florida. And 85% of the staff, the corporate staff, didn't show up, meaning they didn't move with the company. They had to rehire a lot of people. Hertz would find itself with a lot of debt right now, and a big chunk of it would come from its acquisition of car rental brand Dollar Thrifty.
Now I wanted to buy Dollar Thrifty for most of the time I was a manager. It all started when we had financial problems in 2007-2008, when there was a collapse in the used car market, there was a collapse in the economy. But the negotiations did not go well for Frissora. It was chaos. It was chaos. He had the opportunity to buy the company at, I think, $54 a share. We had
beentelling him that unless the price increased, I wouldn't buy it. He refused to listen to us. Hertz's initial offer was rejected. And he sparked a bidding war with Avis Rent-A-Car.
At the same time, Dollar Thrifty was able to successfully weather the recession, which helped boost its own price. We knew we were the last bite of the apple. We knew we were running as profitably as anyone in the business. He
couldhave acquired the company for something like, I think, $54 a share. And finally he paid 87.50. We were very profitable, very profitable. Ultimately, Hertz would spend $2.6 billion on the acquisition. However, costly integration problems would also quickly be encountered. It was very difficult for them to integrate the two companies. Things like they have two different computer systems. They couldn't get the computer systems to talk to each other.
If you're buying a company, if you're merging two companies, this is a very simple thing, usually it's not a big headache, but in this case it was. According to two people familiar with the matter, the merger that was supposed to save Hertz $100 million a year ended up costing them $70 million in the first year. And, in 2014, the company would find itself with debt worth $16 billion. And what bothered me, obviously, was the fact that they were blaming us for what was probably going to happen in terms of their profits. Then I talked to a friend of mine who had contacts in the Icahn organization.
And I said, do you think we should have dinner with him and just raise this issue with him? Carl Icahn is well known as this activist investor. So when he likes a company, he comes and changes it for the better, and makes his stock price go up. And that's how he makes money when he does things like this. Carl Icahn has acquired approximately an 8.48% stake in Hertz. Carl Icahn appears with a presentation saying that he has acquired a large stake and is looking to make changes in the companies. There's a lot going on there. This is a classic acquisition for Icahn.
It is a company that has a great brand, is well known, but is going through difficult times. And he thinks he can come and fix it. He basically forced Frissora out. Hertz CEO and President Mark Frissora is leaving the company. Instead of hiring former Dollar Thrifty CEO Scott Thompson to run the company, Icahn opted for John Tague, former United Airlines chief operating officer. Tague definitely inherited a company in a mess. He has to deal with the SEC allegations against Hertz. He has to take care of the integration of the two companies. And part of what he tried to do was update the fleet because, again, Hertz's strategy had been to let some of these cars age.
Hertz would find new and even more creative ways to borrow. Cars are often leased through a subsidiary as asset-backed securities. But Hertz would also end up buying cheaper sedans instead of the more popular SUVs, and its customers took notice. By 2017, John Tague would retire and the new CEO, Kathryn Marinello, would be $13.5 billion in debt.When Marinello takes over, he has a lot of problems to deal with. He has a fleet of cars that people don't want. And he has an old reservation system that didn't work well. So he spends a lot of money in a very short time to fix that system and improve the car fleet there, and give people what he really wants.
She is doing the right things. She is helping to reduce some of the debt. She's keeping customers coming back to Hertz. The cars are starting to look better, but it begs the question: could she ever have fixed Hertz in the state she was in or did it just take more time? But Hertz never got that time. The deadly coronavirus officially coming to the US As the world grapples with the deadly outbreak, people have become anxious about being in crowds or traveling in confined spaces like airplanes. Then the pandemic hits and all the car rental companies have these lots at airports and on main streets all over the country, full of cars.
This is a big problem in the car rental business, it is simply not possible to get rid of vehicles very quickly. So we don't have anyone renting the cars, so there's no money coming in. And then we have to go to these bondholders, who want to be paid 100% in full. That puts them in a place where they eventually have to declare
bankruptcy, because they simply didn't have enough cash on hand to pay the people who lent them all that debt. Hertz's Chapter 11 petition would show the company would have more than $24 billion in debt and only $1 billion in cash on hand.
Kathryn Marinello would resign as CEO a week before she filed for bankruptcy. And Carl Icahn would end up selling all his shares in the company, losing approximately $1.6 billion. Carl has a lot of money, he's a legitimate billionaire, but even for him that was a catastrophic loss. It looks like Hertz can survive this. Maybe it will be a much smaller company when it survives this, maybe Hertz's structure and the way its debt is viewed, and the people who own Hertz will be very different, but again, remember there aren't that many cars. rental agencies. So you still have that brand recognition.
I think the injuries could have been resolved with different management. Management that was really interested in building a solid business and getting rid of some of that corporate debt that they had, because that made them more vulnerable than anyone else. You know, it's amazing. That is the Achilles heel. If you look at what Frissora did and what Icahn did, they did very different things for the company, but the common thread they both had was that they wanted really good quarterly results and fast. I think there's kind of an irony in the fact that they take this marketing approach that just works as fast as they can and in the end Hertz has a lot of baggage and tried to grow very quickly through some tactics that didn't end up working. good.
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