Hertz: A greedy path to Bankruptcy

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

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Id: wcUxlFpDgOU

Length: 11min 41sec (701 seconds)

Published: Fri Jun 19 2020