Appendix VI: Hertz Corp. Case Study
Overview: The Hertz buyout is one of the largest private equity deals. It drew criticism in the media and from union members, after the company’s new owners paid themselves $1.3 billion in dividends not long after the transaction closed and ultimately financed the payments by selling stock to the public. The company has realized hundreds of millions of dollars in improved financial results annually, but also has cut thousands of jobs as it has sought to make operations more efficient. Figure 7 provides an overview of the LBO transaction, including a time line of key events. Background: Hertz says it is the world’s largest general use car rental company, with approximately 8,100 locations in about 145 countries. Hertz also operates an equipment rental company with about 380 locations worldwide, although car rentals accounted for 80 percent of 2007 revenues. Ford Motor Co. had purchased an ownership stake in Hertz in 1987 and purchased the company outright in 1994. CD&R executives said that the firm emphasizes making operational improvements in companies it acquires. The firm has long had an interest in multilocation service businesses, they said, as evidenced by investments including Kinko’s and ServiceMaster. The Carlyle Group is one of the biggest private equity firms and says it has demonstrated expertise in the automotive and transportation sectors. Its investments include Dunkin’ Brands, AMC Entertainment, Inc., and Grand Vehicle Works, which provides products and services to truck fleets and recreational vehicle users. Merrill Lynch Global Private Equity is the private equity arm of Merrill Lynch & Co. The acquisition: In 2000, CD&R began exploring acquisition targets in the car rental industry. It analyzed a number of firms before targeting Hertz because of its industry-leading position. In addition to having strong brand recognition, Hertz was the leader in airport rentals, and its equipment rental division provided diversification. CD&R also had an interest in “corporate orphans,” that is, units of large corporations that are not part of the company’s core operations, and thus may not receive sufficient management attention. CD&R viewed Hertz as such an orphan, with significant room for improvement as a result. Beginning in 2002, CD&R regularly approached Ford about acquiring Hertz, CD&R executives said. They explained that Ford was skeptical about CD&R’s GAO-08-885 Private Equity
ability to finance the acquisition and operation of Hertz, which is capitalintensive due to its large holdings of cars and equipment. By 2005, Ford was experiencing difficulty in its core auto manufacturing business and decided to divest Hertz. Ford took a two-track approach to doing that, simultaneously pursuing an initial public offering (IPO) of Hertz, as well as a bidding process for the outright sale of the company. Given the size of the potential deal, CD&R needed partners, executives said. Like many other private equity firms, CD&R has restrictions on how much it can invest in a single entity and buying Hertz on its own would have meant exceeding this “concentration” limit. Thus, CD&R partnered with two other firms—the Carlyle Group and Merrill Lynch Global Private Equity. Carlyle officials said they too had been interested in Hertz for some time and were attracted by the strong brand and orphan status. The two firms agreed to a partnership, with CD&R as the lead firm with operational control. Both firms had worked previously with Merrill Lynch’s private equity fund, and they invited the company to join the two firms. In September 2005, after several rounds of bidding, Ford agreed to sell Hertz to the consortium. CD&R executives described the bidding process as difficult and competitive, with two other groups of leading private equity firms participating. Ford’s investment bankers managed the process and pitted the competing bidders not only against each other but also against the prospect...
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