Nuggets from Why Successful Leasing Companies Exited the Marketplace.
The Perfect storm was a book made into a movie starring George Clooney where the skipper takes his fishing boat out into a storm that unprecedented. They go beyond the grasp of the boat, led by one person who is determined,
with a crew or board of directors who have little control nor knowledge and their catch ( credit ) begin to sour and basically they are caught in the Perfect Storm and perish.
The analogy is perfect for what has recently happened in
the leasing industry, and this study by the Equipment Leasing
and Finance Foundation of several of the major companies
gives information that may help us not repeat history.
John Deane, Managing Principal, Alta Group, says it best, It is important to recognize the study for what it is---a post mortem analysis to be used as a learning tool for the industry. In completing the study and analysis, Alta had the benefit of hindsight. The managements of the Perfect Storms victims were not so fortunate.
There were seven major casual themes for why these companies exited the industry:
---flawed business models
---management issues, and
---divergence from core competencies
Choice Nuggets from this report in chronological order (follows the report):
One of these changes will be a renewed focus of value, for it is a focus on value that will determine the winners and victims of the next Perfect Storm.
Managements belief that aggressive growth rates could be sustained indefinitely led to many of the decisions creating The Perfect Storm.\
:...significant credit losses were the trigger for FINOVAs demise.
Key factors noted included negative working capital ( inadequate cash from operations,) significant declines in retained earnings ( mounting or continuing losses), an inability to raise additional
equity ( liquidity crisis/flight to quality), and debt maximization ( high leverage.).
Management held stock ownership positions in many of the target
companies. Management ownership in Comdisco, for instance,
was both significant and widespread. Comdisco embarked on a strategy
to transform itself into a sector that commanded higher price/earning
multiples. Since higher multiples create direct pecuniary consequences
for management, it is possible that management self-interest played
a role in the direction this company was taken.
Some companies chose growth as the vehicle for increasing shareholder value. LSI sought growth both in the number of its vendor relationships and in the international market, while FINOVA and LINC chose to grow internally and through acquisitions. SierraCities.com and UniCapital, on the other hand, relied on acquisitions for their growth.
T&W focused on rapid organic growth and, by using funds, raised through its IPO, portfolio acquisitions. As one T&W interviewee put it, imagine suddenly finding yourself with millions and millions of dollars to plow back in the business and couple that with the grow or die mantra of the rapid industry consolidation that was taking place in the late 1990s. They went on a buying spree...
LINC, BankVest, SierraCities.com, T&W, and UniCapital all relied on gain-on-sale accounting to drive their earnings. Although acceptable under GAAP, total reliance on gain-on-sale accounting represents a flawed business model. This model is unsustainable, as it forces a company into a cycle of ever-increasing volume expectations. Due to the flight to quality in the capital markets, particularly after the Asian financial and Russian debt crises of 1998, these companies were forced to rely on bank lines.
Because of the reliance on this flawed business model, they faced dramatic increases in borrowing costs and the slashing of margins and returns. The fallout from this tactic hastened the departure of these companies from the industry.
Relaxing and/or ignoring credit controls. Nothing can be said to justify this tactic
as being reasonable, yet it was utilized by several of the companies. BankVest
employed relaxed credit parameters as a market tactic. This approach was a conscious decision, as opposed to a breakdown in control and governance. in several other instances, credit quality deteriorated as a result of lack of control due to high growth, but this not a tactic.
Rapid growth, for instance, was a contributing factor for exiting the industry
in 70% of the companies studied.
The results of Altas interviews and analyses indicated a potential failure
on the part of several Boards of Directors to exercise their fiduciary duty of control and governance. Interviewees also raised questions as to how the problems that were developing in some of the companies could be missed by the external auditors.
Management simply did not have the skills and leadership ability to contend with rapid changes. As one executive remarked, For the most part, I think these
were good people trying to do the right thing. It is jus that their reach
exceeded their grasp.
Seven of the ten lessors in the study experienced rapid to very rapid growth
during the several years preceding their exit from the industry. Growth, for
purposes of this study, means the volume of new business generation. Rapid
growth refers to growth in excess of 25% per annum.
In some cases, growth was a central point in the lessors strategy. In others, growth was a byproduct of the lessors move into new markets or industries.
In yet others, growth was a management tactic to address declining margins. Whatever the reason for the rapid growth, its existence often contributed materially to the companys exit form the industry by exacerbating other issues.
Page 28 beings with Lessons Learned.
At lease 50% of the companies involved in the Perfect Storm became victims because substantive portions of their business cycle were inadequately managed.
The strength and adequacy of senior management was a factor in 60% of the cases studied. These factors ranged from management experience that was not relational to the environment of the lessor, to situations where too much reliance was placed on too few executive managers, to situations where executive managers did not have, or did not require, sufficient support from second line managers.
Leverage works to the companys advantage when things go well, but it magnifies and accelerates problems when they do not. As a result, much like a supertanker whose course has been set, these companies found themselves unable to turn quickly enough to avoid The Perfect Storm.
The captain of the Andrea Gail, was looking for the big catch. In doing so, he took his boat and crew into waters outside his experience. Although there were more fish there, he increased the risks in a business already fraught with risk. Furthermore, he ignored the warning sings of impending trouble, thinking he could
work his way through what turned out to be a dire situation.
The Perfect Storm in the equipment leasing and finance industry has many parallels with that of the movie. Many of these lessors, looking for the big catch, entered businesses outside their core competencies. Others created additional risks beyond those systemic to the industry. And, many ignored the warning signs when they came, hoping to work their way through the situation.
The combination of these factors with a cold front of inadequate infrastructure, a hurricane of external events, and a great Lakes gale of poor controls brought the seas crashing down upon them. In the end, Captain Tynes reach, like many of those in this study, exceeded his grasp.
Value is the key to continued financial health and viability. Equipment leasing
and finance companies of the future must:
Create value to survive.
Add value to keep customers.
Prove value to attract capital.
The Equipment Leasing and Finance Foundation commissioned this study to examine the true view of what happened and why previously successful companies exited the marketplace during the past two years. Each company's story is unique but the ends are similar. This study looks at company business models and strategy, core strengths, capital structure, capital raising strategy, growth strategy, management experience, corporate infrastructure and accounting principals. Discover what are the lessons learned from these companies. The study identifies patterns and trends that will help industry leaders make decisions for their companies.
If you have Adobe Acrobat Reader, you may download
the entire report. It is well worth reading, at least twice.
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