Hertz to Acquire Donlen: An Interview With CEO Gary Rapperport
With record revenues and profits and nearly a half-century as a family-run business, Donlen Corporation agreed to sell to Hertz Global Holdings. Donlen will operate independently as a separate, wholly owned entity of The Hertz Corporation.
Overseen by Hertz CEO Mark Frissora (center, wearing a red tie) is Donlen's senior management team (l-r, holding bags): Tom Callahan, Dave Lodding, Carla Garfinkle, Dennis Straight, Michael Lewis, Gary Rappeport, Michael Manfred, and Barry Steel attended the ceremony held at Hertz's Global Headquarters in Park Ridge, N.J., marking the sale agreement of Donlen to Hertz Global Holdings.
The July 17 announcement that Hertz Global Holdings intends to purchase Donlen Corporation came as a surprise to many in the industry. The family-owned Donlen Corporation manages more than 144,000 vehicles in the United States, Canada, and Mexico for its 500 corporate clients.
In the past fiscal year, Donlen experienced record growth across every segment of its business. Earnings grew more than 15 percent compared to the prior year; in 2010, Donlen had gross revenues of $350 million. Donlen focuses on three fleet market segments: the 200 units and under market, 200-750-unit fleets, and 750 units and greater. Both its fleet-leasing and fleet-management businesses increased more than 10 percent due to growth in each of these segments, along with the signing of a growing number of high-profile fleets.
Automotive Fleet editor Mike Antich recently spoke with Donlen CEO Gary Rappeport about why his family chose now to sell the 46-year-old company, the advantages the sale brings to it and its clients, potential synergistic initiatives with Hertz, and the future of the company as a subsidiary of a global corporation.
Automotive Fleet: Why was Donlen Corporation sold to Hertz Global Holdings?
GARY RAPPEPORT: Much of this was driven around personal family reasons regarding health, estate, and taxes. We thought it was important to enter into this process while we had the time to select a great parent for the company. This was about addressing family estate issues; we knew if we waited, and if there were changes in the law, we would have to address them as a reaction, rather than something planned. It was important to my dad and me that the company was not sold to a competitor. Both of us have spent our lives building this company and it was important that the company have a legacy that continues.
AF: How will the sale of your company help your clients?
Rappeport: We defined with Hertz the parameters of how Donlen will continue to operate. Donlen will continue to run independently. Our people, who provide the services and manage the relationships for our clients, and the platform that our clients utilize for their transactions, reporting, and analytics are all going to remain the same.
Donlen, to a great extent, will be the same Donlen that it has been, with a very passionate commitment to customer service and technology. In addition, we think this sale will have minimal to no impact on our customers’ experience. And, there will also be a number of synergies which we believe are additive. These synergies have the opportunity to positively impact both our customers and our business.
AF: What would be examples of these synergies?
Rappeport: There are many potential synergies. Hertz has wanted to return to the fleet leasing and management business for a number of years. Many of its rental customers have been asking it to provide a longer-term leasing solution. Donlen gives Hertz the chance to have a full short- to long-cycle solution for its existing clients, broadening its value proposition.
Also, Hertz Equipment Rental Corp. (HERC), Hertz’s equipment rental business, has found that many of its equipment customers have been asking for a longer-term solution. Donlen’s recent venture in the equipment and truck leasing syndication business, which started up a little over a year ago, fits extremely well with Hertz’s short-term rental business. It would provide clients with a broader solution and improve the value proposition for both parties. This is a key part of a very high level of integration leveraging many of Hertz’s rental customers to enter into longer-term leasing arrangements. Plus, some of our leasing clients will be able to enter into rental arrangements with HERC, if they’re not already Hertz clients.
Another synergy we identified is in the area of remarketing. Hertz has additional retail-oriented remarketing channels and these channels give us the opportunity to improve the total resale proceeds. This will allow our customers to realize a greater gain by using a channel to which fleet management companies traditionally have not had access.
Car sharing is another area of synergy between our companies. Hertz has made significant investments in a technology called Hertz On Demand. We believe some of our van pool fleets and other pool fleets will find this technology to be a wonderful solution to allow them to reduce the number of assets within their fleets, manage them more efficiently, and reduce overall costs.
Becoming part of the Hertz global brand is important to us. Hertz does business across Europe, Asia, and South America and is very excited with Donlen’s ability to help it provide lease offerings in areas outside the U.S.
There are ways that Hertz and Donlen together can bring products to market that perhaps would not have done separately. For instance, being able to “White Paper” a new product that may be a combination of a rental and leasing product to provide solutions for clients who need extended longer-term rentals or short-term leases.
AF: As a global company, Hertz has a major footprint in Europe and elsewhere in the world. Would opportunities to develop a fleet leasing or various fleet management products outside of North America be marketed as Donlen or Hertz products?
Rappeport: Those discussions are extremely preliminary right now. We haven’t advanced to the point of determining when we would consider something like this, let alone how it would look and what would be the strategy.
AF: in the area of vehicle acquisitions, Hertz buys a much larger volume of vehicles than Donlen. Will the relationship with Hertz assist Donlen clients by giving greater leverage in buying vehicles?
Rappeport: Yes, most definitively. In fact, Hertz has identified up to $20-million dollars of possible synergies primarily in the fleet area around purchasing, maintenance, operating performance, and disposal. The important thing to emphasize is that Hertz has said, and I quote: “It is naturally important to emphasize that we don’t see any meaningful savings from labor and don’t envision relocating Donlen headquarters.”
That was also echoed in an interview that Hertz’s leadership team did in Crain’s Chicago Business newspaper, where they said no job cuts or management changes are anticipated as a result of the deal.
The synergies will be more in the purchasing power and greater ability to leverage Hertz’s deep global relationships to further drive cost out of our process without reducing headcount.
AF: Do you envision an impact on duplicate departments, such as HR, accounting, etc.?
Rappeport: Interestingly enough, there is very little overlap within the two organizations. Donlen is a very tightly run business with limited excess personnel. We don’t anticipate, certainly initially, a focus on looking at overlap. Over time, I would imagine areas in which we do have overlap; we will need to determine the best way to address them.
However, even in areas perceived to have overlap, there is only modest overlap, if any. Purchasing is a good example. While Hertz purchases a significant number of vehicles, most of our purchasing is complex purchasing, where we take a truck or a van and upfit it or develop specs for specialty engineering. This is something Hertz does not do in the rental business today.
AF: You have a corporate rental program available to your clients. With the new ownership, will that ultimately become exclusively Hertz or will clients have an option?
Rappeport: That decision won’t be made until the actual merger takes place at the end of August, which is the tentative date of completion.
AF: Could you elaborate further about Donlen’s truck/equipment syndication business? How did this business first originate within Donlen, where does it currently stand, and what are the synergies going forward between Hertz and Donlen in growing this business?
Rappeport: About a year ago, Donlen brought on a truck equipment business that was based more on a syndication model than a traditional leasing model.
In a syndication model, you originate a lease and then that lease is sold off to a group of investors, many times banks who have an appetite for the asset and the associated tax benefits. The lease is structured so that we, Donlen, remain the lessor of title and continue to service the asset. However, we do not allocate capital and are able to leverage lower rates due to the rate buydown that the tax benefits has for the investor.
This is a high growth area for us. It is one we are extremely excited about. Mike Lewis, who came from First Fleet, is running this business for us.
Even just out of the gate, we have had tremendous success. We see this business pairing up incredibly well with Hertz Equipment Rental or HERC business, and it gives us the opportunity to offer rental customers a longer-term solution and grow this business dramatically.
AF: How do you see Donlen going to market in the future? Will it be ‘Donlen’ or will it be ‘Donlen, a subsidiary of Hertz’?
Rappeport: Final plans are still being determined on branding; however, we have been told the intention is to definitively keep the Donlen brand and to leverage the goodwill and equity we have developed over the years with that brand.