For over 100 years, Hertz has been
one of the most recognizable names
in the car rental business.
♪ Let Hertz put you in the driver's seat ♪
Nobody has more of what it takes
to get you into a new LTD or other fine car faster.
♪ Hertz's superstar ♪
But just like their superstar spokesperson,
Hertz wold eventually come to a complete halt.
The short version is Corona virus hits,
nobody's traveling, and they went into bankruptcy.
The long version is, they were as badly prepared
for something like this as a company could possibly be.
It's almost every step of the way,
if you were to say here's what not to do for a company,
it almost feels like Hertz did exactly that.
It's just sort of one flameout after another,
one missed step after another.
Did they not understand how fragile this company was?
This is the story of how
a company prioritized shareholders over stability
and paid the price once catastrophe hit.
Coincidentally, the company that would become Hertz
was started in the middle of another pandemic.
In 1918, during the Spanish Influenza outbreak,
a businessman named Walter Jacobs
started a car rental business in Chicago
with just 12 Ford Model Ts.
Six years later, the company grew to 600 cars.
That's when John Hertz, then head of the Yellow Cab Company,
would be the first to acquire the company
and rename it to the Hertz DRIV-UR-SELF System.
After that, Hertz's ownership would exchange hands
quite a lot, from companies like General Motors,
RCA, and eventually Ford.
But during this time, the company saw a ton of growth.
The rise of Hertz in, in the 1930s, 40s, 50s, and beyond
coincides with the era of increased work traveling,
plane traveling, across the world.
Hertz, for example, in the early days,
it's able to put one of its car lots at a Chicago airport,
so that's really helpful for them.
They move into this area where people are going
to be getting off of planes and immediately want
to rent a car to drive to the hotel,
drive to their business meeting.
And they're also able to expand internationally as well.
It really kind of became the name in rental cars.
They really were the first company
to grow big time doing this.
And they were very popular with business customers,
so it was seen as aspirational brand for the guy getting
off the plane in his business suit with a briefcase
and hopping into a car after he left the Hertz counter.
I know it's a commodity business, but it's an iconic brand.
In the 1970s, Hertz would look
to advertise their speed of service.
And in order to do this,
they turned to a professional athlete who, at the time,
embodied speed.
They're giving him the chance!
Now there he goes!
O.J. Simpson has broken what seemed
to be an insurmountable barrier!
At the time, O.J. was an American hero.
He was this great form of football player.
He was an actor.
He was in some of the "Naked Gun" movies.
Nordberg!
Hiya, buddy!
Hey!
Doc says I should be on my feet
and as good as new in a week!
People absolutely loved the guy.
Hertz kind of got him at the peak of his popularity.
Others claim to be fast,
but nobody has more to do it faster,
more pros to execute the toughest performance standards.
Hertz's relationship with O.J. lasted
from 1975 to the mid-90s.
But while the company would continue
to advertise their speed and efficiency,
they would have new competition.
Enterprise, a privately-owned car rental company,
known more for their locations within cities,
began expanding into airports.
The whole Hertz-O.J. connection, much like O.J.'s life,
had this ignominious end where the same year that he was
in the highway chase in this white Ford Bronco, trying
to evade the police and figure out what he's going to do
while he's being chased in connection with the death
of Nicole Brown Simpson,
Hertz also lost their top position for, for market share
in the US to Enterprise.
So O.J.'s no longer this American hero.
Hertz is no longer the rental king.
And it all kind of happens all at once.
And the down slide for the company,
sort of in earnest, started right there.
Hertz may have lost the crown to Enterprise,
but by the mid-2000s, it was still bring in tidy profits
for their parent company, Ford.
Ford was a company in trouble to please its shareholders.
It really wanted to focus in on its core business,
which is of course cars.
And so then you get Ford selling Hertz
to this private equity group.
In 2005, the company would again change hands
to two private equity firms,
and Merrill Lynch and Co's buy-out unit,
for about $15 billion.
But losing Ford as an owner had a big impact
on a core part of Hertz's business,
where they got their vehicles.
They basically churn automobiles.
They buy cars.
They rent them for some period of time,
three months, six months.
They make money off of that.
And then they hope to sell them
for more than the resale value as in the market.
While owned by Ford,
Hertz would receive excess cars from its parent company
at a considerable discount.
Many of these cars were known as program cars,
where the manufacturer would agree to buy back the car
at a certain rate of depreciation.
But once they were no longer part of the company,
Ford would often demand a higher price for each vehicle.
We were then forced
to buy cars under what was called our own risk.
And that completely changed the nature of fleet management
and the profit model in the rental car industry.
This is Maryann Keller.
She's an automotive industry analyst
and a former board member for Dollar Thrifty,
another car rental company that will become important
a little later on in Hertz's story.
Suddenly, you really had to buy cars carefully,
even to the color of the car.
Because you were really looking at not just what you paid
for the car, but what you were going to realize on that car
when it came out of service.
The new private equity firm would also kick off
another, ultimately fatal trend at Hertz,
taking on debt.
The Hertz transaction was valued at 15 billion.
But only 5.6 billion of that was paid in cash,
the rest was paid by saddling Hertz up with debt,
a trend that, over the next decade-and-a-half,
would continue.
One of the first things this private equity group did
was take out a $1 billion dividend.
And what that means is that they're able to use the returns
that are able to shareholders and make it look
like there're more profits coming from Hertz,
make it a more viable investment,
and it also allows them to take on debt
to do more mergers and acquisitions.
To navigate the company under this new,
private equity ownership, Hertz hired Mark Frissora
to be the 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 guy.
Frissora would go on
to have many successful years managing Hertz,
including through the financial crisis
where Hertz's stock would fall as low as $5.35 a share
before recovering to a high point
of over $100 a share under Frissora.
The stock price went up during Frissora's time
because of what, what, honestly,
we would call over promising
and essentially under delivering.
But the under delivering side, the market found out later.
At the time, it was just big promises
that the market believed.
So he's very, very focused on
the financials of the company
because this is what the shareholders care about.
But Mark Frissora, over his tenure of Hertz,
makes a lot of mistakes.
There was significant underinvestment in the business.
And what we mean by that is that there was underinvestment
in the fleet.
Usually car rental companies will refresh their fleet
almost every year.
And in Mark Frissora's time, there was a year or two
where they just delayed refreshing their fleet.
And what that did was that it lowered the depreciation rate
in their PNL, which means that they were over earning
in order to hit certain Wall Street targets.
Such accounting practices would prompt the SEC
to file complaints against Hertz and Frissora.
Because the first year that you own a car,
that's when you see the biggest depreciation.
And that depreciation, that lowered value in the car,
you have to put that into your financials as a cost.
So it looks bad, so instead of buying a bunch of new cars,
he just keeps the cars for longer
so he doesn't have that cost.
The SEC complaint against him also said that he had asked
some of his employees to make money appear
when it looked like his financials would miss estimates
for the various earnings.
Hertz and Frissora would eventually settle
with the SEC without admitting or denying any wrongdoing.
Hertz declined comment for the story
and Frissora didn't return a request for comment.
A spokesperson for the former CEO said previously that,
"Hertz's 2015 earnings restatements have no bearing
on the company's current financial situation,
and that Frissora didn't direct any improper accounting
or engage in any wrongdoing."
But the decision to keep cars in the fleet longer
did have an effect on its core customers.
Given the fact that hertz was the dominant player
in the corporate travel market,
that was a huge risk.
Because you don't put a traveling executive
in a car with 50,000 miles on it that squeaks and smells.
You just don't. And that's what he did.
The other thing that happened during Frissora
was they moved the headquarters from New Jersey to Florida.
And 85% of the staff, the corporate staff,
didn't show up, meaning that they didn't move
with the company.
They had to rehire a lot of people.
Hertz would find itself carrying a lot of debt
at this point, and a large portion of that coming
from its acquisition of the car rental brand Dollar Thrifty.
Now, he wanted to buy Dollar Thrifty for most of the time
that I was director.
It started when we had financial troubles in 2007-8,
when there was a collapse in the used-car market,
there was a collapse in the economy.
But negotiations didn't go well for Frissora.
It was chaos. It was chaos.
He had an opportunity to buy the company
at, I think, $54 a share.
We had been telling him
that unless he would increase the price,
he would not buy it.
He refused to listen to us.
Hertz's initial offer was rejected.
And it kicked off a bidding war with Avis Rent-A-Car.
At the same time, Dollar Thrifty was able to
successfully navigate the recession,
helping drive up its own price.
We knew that we were the last bite at the apple.
We knew that we were running as profitably
as anybody in the business.
He could have had the company for something like,
I think, $54 a share.
And he eventually paid 87.50.
We were very profitable, very profitable.
Ultimately, Hertz would spend $2.6 billion
on the acquisition.
However, it would quickly also run into costly issues
with integration.
They had a really hard time integrating the two companies.
Things like they had two different computer systems.
They couldn't get the computer systems to talk
to each other.
If you're doing a buyout of a company,
if you're merging two companies,
this is a very simple thing,
it usually isn't 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 $16 billion worth of debt.
And what bothered me, obviously,
was the fact that we were being blamed for
what was likely to happen in terms of their earnings.
And so I spoke 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 subject with him?
Carl Icahn is very well known as this activist investor.
So when he likes a company, he'll come in
and change it for the better,
and make their stock price rise.
And that's how he makes his money
when he does things like this.
Carl Icahn has purchased roughly
an 8.48% stake in Hertz.
Carl Icahn pops up with a filing
saying he's taken a large stake
and seeking to make changes at the companies.
There's a lot going on there.
This is a classic acquisition for Icahn.
It's a company that has a great brand, it's well-known,
but kind of fallen on hard times.
And he thinks he can come in and fix it up.
He essentially forced Frissora out.
Hertz CEO and Chairman Mark Frissora
is stepping down from the company.
Rather than hire
the former Dollar Thrifty CEO, Scott Thompson,
to run the company, Icahn went with John Tague,
an ex COO of United Airlines.
Tague definitely inherited a company in a mess.
He has to deal with the SEC accusations against Hertz.
He has to deal with integrating the two companies.
And part of what he tried to do was to update the fleet,
because, again, the strategy of Hertz had been
to let some of these cars get old.
Hertz would find new, even more creative ways
to take on debt.
Often leasing cars through a subsidiary company
as asset backed securities.
But Hertz would also end up buying cheaper sedans
rather than the more popular SUVs,
and their customers noticed.
By 2017, John Tague would retire
and new CEO Kathryn Marinello would inherent
13.5 billion in debt.
When Marinello takes over she has a lot of problems
to deal with.
She's got this fleet of cars that people don't want.
And she's got an old reservation system
that wasn't working well.
So she spends a lot of money
in a very short amount of time to fix that system
and to upgrade the fleet of cars there,
and offer people what they really want.
She is doing the right things.
She's helping to reduce some of the debt.
She's getting customers back to Hertz.
The cars are starting to look better,
but there's a question of
could she ever have fixed Hertz in the state it was in
or did it just require more time?
But Hertz never got that time.
The deadly coronavirus, officially hitting the US.
As the world grapples with the deadly outbreak,
people have grown anxious about being in crowds
or traveling in confined spaces like airplanes.
So the pandemic hits and all the rental car companies
have these lots at airports and on main drags
all over the country, just packed with cars.
This is a big problem in a rental car business,
you just can't get rid of vehicles really quickly.
So we have nobody renting the cars,
so money isn't coming in.
And then you have to go to these bond holders,
who want to be paid 100% in full.
So that gets them in a place where they eventually
have to declare bankruptcy,
because they just didn't have enough cash on hand
to pay back the people who lent them all that debt.
Hertz's Chapter 11 petition
would show the company would have over $24 billion in debt
and only a billion of cash on hand.
Kathryn Marinello would resign as CEO
a week before filing bankruptcy.
And Carl Icahn would eventually sell
his entire stock in the company,
losing an estimated $1.6 billion.
Carl's got a lot of money, he's a legitimate billionaire,
but even for him that was a catastrophic loss.
It does seem like Hertz can survive this.
Maybe it will be a much smaller company
when it does survive this,
maybe the structure of Hertz, and the way its debt looks,
and the people who own Hertz will look very different,
but, again, remember there aren't that many
car rental agencies.
So it still has that brand recognition.
I think that hurts could have been turned around
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 anybody else.
You know, it's astonishing.
That's the Achilles heel.
If you look at what Frissora did and what Icahn did,
they did very different things to the company,
but the common thread with both of them
is they wanted really good quarterly results fast.
There is some, I think, sort of sense of irony
that they take on this marketing approach
that's just running as fast as they can,
and, by the end, Hertz has a ton of baggage
and tried to grow really fast
through some tactics that didn't end up serving it well.