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Hertz: A greedy path to Bankruptcy - YouTube
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sliding calm /youtube chances are you've
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heard the news but in case you haven't
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Hertz
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one of the biggest rental companies in
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the world has filed for chapter 11
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bankruptcy taking into consideration
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Hertz this sheer size alone the
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consequences of this event will ripple
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throughout yes twenty twenty dealt a
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fatal blow but you'll see that it wasn't
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the only reason in fact many of the
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wounds were self-inflicted
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plus we'll dive into the bankruptcy
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itself and try to shed light on the
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ethics behind these processes in this
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episode of company forensics let's see
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why Hertz went bankrupt
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[Music]
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go from the start we go back to 1918
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that's right a hundred and two years ago
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and that's how old this company is
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originally known as rent-a-car Inc
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it was the brainchild of Walter L Jacobs
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who started his venture with a dozen
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Model T Fords within five years his
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company had a fleet of six hundred
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vehicles and turned in 1 million dollars
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in revenue and these were fantastic
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numbers for 1923 and then this caught
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the attention of John Hurt's
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who owned a truck and coach company he
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purchased rent-a-car and named it hurts
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drive yourself system but get this he
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kept Jacobs as president Jacobs even
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remained as president after General
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Motors became interested in the
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successful venture and purchased it in
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1926 GM went into an aggressive
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expansion plan which included airports
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such as Chicago Midway as well as
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opening in Canada and after World War
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two their first European location in
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France but John Hurt's wasn't done in
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1953 he repurchased the brand through
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another of his successful companies and
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created what we know now as the Hertz
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corporation then he purchased a truck
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leasing company with 4,000 trucks so by
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1954 Hertz corporation had 15,000 plus
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trucks and 12,000 plus cars in 1967
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Hertz sold the corporation again this
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time to Radio Corporation of America
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which held on to it for almost 20 years
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in 85 UAL corporation purchased it for
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590 million dollars only to sell it two
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years later for 1.3 billion dollars to
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Park Ridge just a detail Partridge was
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owned and operated by Ford Motor Company
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and Hertz worked well for Ford in some
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years the rental business became up to
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10% of Ford's profits before tax under
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Ford's ownership Hertz grew even more
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2002 it even became the first
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international rental company to open in
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China a very lucrative market but though
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it had been lucrative for some years
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Hertz was a bit of a headache
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for Ford as they faced tough times of
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their own so it changed hands once again
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and I really want you to remember
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particular deal in 2005 Ford sold Hertz
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to a private equity group composed of
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very big names including Mary Lynch for
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five point six billion dollars which is
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not pocket change at all it was under
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this new ownership that in 2012 after 2
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years of back-and-forth bidding Hertz
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purchased dollar 54 2.3 billion and this
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gave Hertz 10,000 plus locations and
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presents in 150 countries total and if
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you've watched this show before you know
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how some of these big acquisitions end
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up going market standards and firsts but
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before we go into that let's talk about
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what made Hertz special they were good
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at what they did they created membership
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programs on the spot delivery and led
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the industry with innovations such as
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Sirius XM radio in 2000 car-sharing 2007
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and photographic testing to ensure the
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state of rentals think of it as a
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before-and-after from when you rent and
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when you returned the car Hertz lost an
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average of a hundred and seventy million
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dollars a year in damages to its rentals
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there was also a culture around Hertz
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since the 60s it made alliances with
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different brands to provide specialty
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cars Jaguar XKE Corvettes and modified
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shelby mustangs then they had a green
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collection with hybrids such as the
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camry and the prius making hertz one of
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the first rentals to venture into this
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sector
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this made Hertz stand out and grow a lot
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by 2014 Hertz had over half a million
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cars in the US alone including specialty
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cars hybrids and luxury vehicles a very
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expensive fragile
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business when you have half a million
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cars chances are you are not paying cash
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up front for them but rather you lease
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most of them and you also leave
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locations in places such as airports or
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hotels then you have to factor in fleet
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maintenance and the vehicles
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depreciation so this isn't a cheap
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business not even close Hertz did what
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many rental companies do they use their
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own fleet to leverage credit in order to
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maintain it with the profit coming from
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the operation Hertz paid off the debt or
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at least they tried to and in recent
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years the company was just barely coming
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up with payments the reason competition
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from other rentals from uber and lyft
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and global financial stability her
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big problem was that they're dead
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reached around 18 billion dollars but
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Hertz knew the risks in their 2014
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report to the SEC remember this when
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it's fun Hertz corporation recognized
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that their financial model relied mostly
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on acid fronted dead a debt that
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depended on the vehicles value this
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means that of the car value plummets
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lenders can adjust loan to better care
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for themselves basically if cars are
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worthless the lenders dish out less so
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relying on Fleet value works as long as
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all the factors are in order it's like a
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house of cards and what were the risks
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well many but one stands out especially
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right now check out this bit of the SEC
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report risks related to our business our
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car rental business which provides the
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majority of our revenues is particularly
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susceptible evel's of airline passenger
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travel and reductions in air travel
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could materially adversely impact our
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financial condition results of operation
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liquidity and cash flows the past now
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that we understand the fragility of it
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all we might say oh that's why 2020
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killed hurts let's go back to 2005 in
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that big acquisition the private equity
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group purchased Hertz for five point six
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billion in cash but they also had to
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take around ten million dollars in debt
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so what did the new owners do as soon as
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they purchased Hertz they took out a 1
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billion dollar dividend almost
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immediately because why not take for
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example CEO Mark Fraser who shook the
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company to the core he laid off
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employees and cut costs all around which
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made sense when you're facing debt and
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then he received a nineteen point two
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million dollar compensation package for
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it should you take them when your
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company is knee-deep in debt mmm no then
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there's the 2012 merger the idea was to
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buyout competition and expand operations
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therefore having more income makes sense
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but it meant another two point three
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billion dollars to the tap also there
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were some conditions for Hertz to be
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able to by dollar thrifty they first had
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to sell one of their company's advantage
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they did but four months later advantage
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went bankrupt antitrust experts
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investigated the southern bankruptcy and
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found it to be a failure on all sides
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including authorities like the Federal
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Trade Commission which was questioned
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for
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proving the deal in the first place the
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company's had two different computer
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systems that couldn't be integrated
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heard strut to join the dollar Hertz and
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thrifty physical occasions in airports
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but to do so meant more investment
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dollar and fifty allowed the tires on
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their cars to wear out thinner than
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Hertz did so to standardize the fleet
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Hertz had to invest thirty million
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dollars just entire replacement the
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murder was supposed to save Hertz 100
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million dollars but ended up costing
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them 70 million by the end of 2012 hers
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had twenty point two billion dollars in
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debt he kept cars for longer than usual
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so the depreciation curve was softened
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in the accounting books the older cars
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would go into the budget fleets like
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dollar thrifty and Firefly
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but this backfired because consumers and
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authorities alike to notice that SEC
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report we spoke up well in 2014 Hertz
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was charged with fraud and force aura
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was fired but he wasn't found guilty
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Hertz had to settle with the SEC for 16
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million so then they sued for Sora and
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another three managers and right there
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and then a guy named Carl Icahn comes in
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the good and the bad all in one weekend
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was a very successful businessman but he
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is known as a predator of sorts a
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corporate raider he takes advantage of
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flailing companies buys them then strips
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them bare of assets then sells the
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scraps so when it can hurt in 2014 that
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hurts was a good brand in need of
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authority it was right up his alley and
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he jumped in
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he bought a total of 39 percent of the
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company and three seats on the board for
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2.3 billion
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he placed John take a former United
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Airlines CEO as CEO when there was a
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better candidate Scott Thompson the form
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of Dollar CEO with plenty of experience
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in the business and take just didn't do
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right he renewed the fleet with sedans
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when the market was shifting towards
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SUVs customers fled so ikan pushed to
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raise prices after all the rental cart
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business is pretty much in oligarchy and
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he believed Avis and enterprise that the
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his competitors would follow suit but
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they didn't instead they stole hurts his
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customers with lower prices the market
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was shifting more towards SUVs so fewer
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people bought sedans sedans lost their
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value faster in 2017 take
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left and in came Katherine Maranello she
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shrunk the fleet shifted to SUVs and
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made good progress the company had nine
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quarters of earnings and possible
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recovery was in sight and then 20/20
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came along bankruptcy and reality debt
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was just too high and Hertz failed to
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make payments on their leasing
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operations but before the clearing
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bankrupt Hertz asked for a government
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bailout which was rejected one big
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reason was econ himself was worth 18
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billion dollars so they had to file
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under Chapter 11 Maranello jumped ship
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and in came Paul stone and let's talk
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about this stone guy why would anyone
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want to that job well he made seven
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hundred thousand dollars in a single day
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as part of a retention program to keep
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executives from leaving
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in total hurts his executives received
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sixteen point two million dollars sweet
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deal meanwhile if you have seen our show
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before you know what chapter 11 means
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reorganizing and shedding to make a
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profit again at the moment 20,000 people
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and Counting have lost their jobs then
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there are the cars in the US Hertz had
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more than 500,000 cars and they will
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sell many of those for bottom dollar
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right now the used cart market is over
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stocked in with very low demand so other
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companies dealerships and even
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manufacturers are affected you see
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manufacturers like GM and Nissan Motors
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don't get much profit from selling to
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car rentals they sold in volume which
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meant a lot of quick cash now everything
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is paralyzed and projections mentioned a
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possible recovery for 2022
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so yes 2020 did help in trampling hurts
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even econ usually a predator lost
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billions but the company might have
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survived if it had taken another path
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perhaps one of less greed thanks a lot
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for watching be sure to subscribe to
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stay tune with our weekly company
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forensics episode see you next week
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[Music]
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