Hertz to Acquire Donlen: An Interview with CEO Gary Rappeport
By Mike Antich
Donlen's CEO Gary Rappeport.
The July 17 announcement that Hertz Global Holdings purchased 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, the 200-750-unit fleets, and the 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's 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 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. This is what drove our decision.
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 their rental customers have been asking them 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 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: One of the synergies you touched upon was the global opportunities. As a global company, Hertz has a major footprint in Europe and elsewhere in the world. If there are opportunities to develop a fleet leasing or various fleet management products outside of North America, would they be marketed as Donlen products 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: One synergy you didn’t mention was 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 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.
AF: How was the sale announcement received by your client base?
Rappeport: It was received exceptionally well. One of the messages we took to our clients that we thought was really important was that we never considered a competitor or private equity company as a buyer.
Because of our commitment to our employees, to our customers, and to the platform we have built here for well over 25 years, we never would have considered any alternative that would be destructive to any of those three areas.
We talked about how Donlen would continue to run independently, with many new additive advantages.
Our customers, across the board, were pleased to hear that the Donlen they know is not going to change. But now we will have greater purchasing power, greater capabilities to leverage other remarketing channels, and new synergies to create innovative products that will benefit them. We received great reception from all of our customers.
AF: Were there any common themes in the questions posed to you by clients?
Rappeport: One of the first we heard was “Will Donlen leadership and management and staff stay the same?” Our answer to that is yes.
One of the reasons Hertz acquired Donlen was for its leadership team. The entire leadership team, including me, will stay in our roles along with the staff up and down the organization. That was an area our clients were very concerned about and were very pleased to hear our reply.
The other common question asked was whether customers will continue to be able to use FleetWeb, our industry platform for customer-facing transaction management, analytics, and reporting. We explained that not only were our clients going to continue to use FleetWeb, but also that Hertz was giving consideration to moving some of its assets over to our platform to better support their management reporting. Our clients were very pleased to hear that, too.
Our clients also told us they wanted Donlen to continue to be Donlen. That was the theme we heard repeatedly and that was the commitment we gave them. The Donlen a year from now will look a lot like the Donlen of today, except it will have new added capabilities that we gain from this acquisition.
AF: This isn’t Hertz’s first venture in the fleet leasing business. They were in the business before, and then divested it in a sale to U.S. Leasing, the parent company of U.S. Fleet Leasing. When Hertz was a player in the fleet leasing business, they were primarily focused on the small fleet market. Do you foresee a desire to continue that strategy?
Rappeport: Once again, we have not yet had an opportunity to really determine market strategies and how we can leverage, if at all, some of Hertz’s local offices. Today, Donlen is focused on three market segments: the 200 and under, the 200-750, and the 750 and greater. A significant number of Hertz’s current corporate customers fall in our mid and large segment. We believe there are opportunities for us to gradually expand our focus on the small fleet segment.
AF: Once the sale is consummated will you report to Hertz Chairman and CEO Mark Frissora?
Rappeport: That is correct. I will also be on the Hertz executive leadership team and report directly to Mark.
AF: Hertz said you would be with the company definitely a year and hopefully longer. Do you see yourself transitioning out of the company? How do you envision your future at Donlen?
Rappeport: I made a clear commitment to stay in my role for at least a year. I am very excited about the opportunity to help manage this integration and ensure that it has limited impact on our employees and customers. That will be my primary focus for the next 12 months; ensuring the integration goes well and that we leverage as many synergies as we can and help coordinate with Hertz the prioritization of those synergies.
At the end of a year, my plans are to continue to play a key role.
AF: So you want to stay in the business and you are not looking to turn the page to begin a new chapter in your life doing something else?
Rappeport: I clearly would value the chance to stay involved in this business on a long-term basis, while having the opportunity to spend more time with charitable activities.
AF: During your career, you grew Donlen to become a first-tier fleet management company. Is there any forlornness about selling or do you see this as an opportunity to take the company to the next level?
Rappeport: I had an employee come to me the other day and say, “Gee, it’s our 46th year, and it’s a shame we didn’t wait to do this. We would have had our 50th anniversary in four more years.” I said, “No, we are still going to have our 50th anniversary. Maybe the shareholder certificates will have a different name on them, but Donlen is still going to be Donlen. We are going to have a 50th anniversary and many beyond that.”
Clearly, this isn’t the end of the book. It is for us the start of a new chapter and a chapter that may be the most exciting ever. We have an opportunity to grow the business and do things with our parent company that many of our competitors aren’t able to do, such as with rental, equipment, and potentially on the car share side.
We have really positive feelings knowing we found a great parent with a great global brand, who is going to let us run independently. Hertz is going to respect our employee culture and our commitment to our clients, yet bring many new capabilities to us which we would have never have had without this partnership. This will allow us to grow our business to another level.
AF: What are your dad’s (Don Rappeport) feelings as the founder of the company? What are his feelings in terms of the sale of the company?
Rappeport: He is very excited about what we were able to accomplish here both for the family and for the business, allowing Donlen to continue and flourish and leave a lasting legacy. Both of us placed continuity for our employees as the most important goal and we feel great about the outcome.
He is also very excited about the opportunity to start a Family Foundation and through sizable gifting make big differences in the lives of many people.
AF: The announcement of the sale was made to your employees on Monday, July 18. How was it received?
Rappeport: We actually had a series of staggered announcements that we made to our employees.
We had a group we brought into the circle early on. This small group was involved throughout the process.
We assembled a larger group of managers who we told on the preceding Friday night and then the relationship managers on Sunday morning. We had an all-employee meeting on Monday, which was the official date of the announcement. What was important to us was to be very thoughtful in how we communicated with our employees so they would be comfortable in knowing their jobs were secure and that the platform we use to run the business will be the same one as it was before the sale.