GE Capital Buys McCullagh Leasing For $450 Million

On Jan. 30, 1990, GE Capital completed the stock purchase acquisition of McCullagh Leasing's U.S. operations from the Bank of New England for approximately $350 million. GE Capital received approval from U.S. regulatory agencies to purchase McCullagh Leasing earlier in January. As of press time, regulatory approval was still pending for GE Capital to acquire McCullagh Leasing, Ltd., the bank's Canadian operation. The purchase price for McCullagh Leasing, Ltd. has been agreed to be approximately $100 million. The total stock purchase acquisition for McCullagh's U.S. and Canadian operations was $450 million.

McCullagh's U.S. operation will continue to operate as a separate entity, headquartered in Roseville, Ml. Jim Culotta will continue in his current position as president and chief operating officer, reporting directly to Jim Rogers, GE Capital Fleet Services' president.

As a division of GE Capital Fleet Services and through its network of full-service regional offices, McCullagh Leasing will focus its business efforts on providing custom services on a national basis.

By mid-February, 1990, GE Capital expects to receive approval from the Canadian government (as required by the Canadian Investment Act and the Canadian Competition Act) to acquire McCullagh Leasing, Ltd., the lessor's 42-year-old Canadian vehicle leasing operation. McCullagh Leasing, Ltd. will be combined with GE Capital's existing operation in Toronto, Canada.

The Bidding Begins

According to published reports, the Bank of New England's decision to sell its equipment and vehicle leasing operations was a strategic move to refocus its resources to regional retail banking in the New England area - its core business.

The Bank of New England began to consider divestment of its equipment and vehicle leasing operations in the first quarter of 1989. The initial discussions focused on locating a joint venture partner. Ultimately, these discussions evolved into the decision to sell BancNewEngland Leasing Group (the bank's equipment lessor) and its affiliate McCullagh Leasing which had been acquired on April 1, 1987 from Commercial Credit Corp.

According to industry reports, a letter of intent to acquire the bank's equipment leasing portfolio (which initially included McCullagh Leasing) was issued by the Bank of Tokyo, but after later deliberation the Japanese bank decided it was not interested in entering the vehicle leasing business. Unrelated to the Bank of Tokyo discussions, GE Capital made an unsolicited telephone call in the summer of 1989 to the Bank of New England inquiring if McCullagh Leasing was for sale. What prompted GE Capital's telephone call were published reports that the Bank of New England was planning to revise its business strategy and concentrate its efforts in the regional retail banking business. GE Capital was referred by the Bank of New England to Goldman Sachs, a New York City-based investment banker, which informed GE Capital that the bank's entire equipment leasing portfolio (including McCullagh Leasing) was under negotiation for possible purchase by the Bank of Tokyo. Shortly afterwards, the Bank of Tokyo decided that McCullagh Leasing was not a "strategic fit" with its business strategy, in October, 1989, Goldman Sachs informed GE Capital (along with other companies) that the bank had decided to put McCullagh up for sale, separate from the bank's equipment leasing operation. Several companies besides GE Capital bid on McCullagh and entered the due diligence process. In December, 1989, GE Capital representatives flew to Roseville, MI to discuss the possibility of an acquisition with McCullagh President Culotta and his senior management. "At this point, the deal escalated because the Bank of New England wanted to get a binding agreement as quickly as possible," says Rogers. A letter of intent to acquire McCullagh Leasing was signed by GE Capital shortly after Christmas, 1989.

According to Rogers, GE Capital was interested in expanding into the regional market catering to small to mid-size d f1eets through acquisition. "We contacted companies we felt could help GE Capital's strategy to broaden its presence in the regional middle fleet market," says Rogers. "We were looking for a stand-alone entity and McCullagh was a natural fit to develop into a full-fledged P&L business segment."

An Interview With Jim Rogers and Jim Culotta

Between Jan. 27-30, 1990, McCullagh Leasing held its annual sales meeting in Rancho Mirage, CA. Attending the three-day meeting were McCullagh management and sales personnel, GE Capital Fleet Services management, and factory fleet representatives. The purpose of the meeting was to outline McCullagh's sales strategy for 1990 and to introduce GE Capital Fleet Services' management to the lessor's national salesforce. Also attending the conference was AF's Mike Antich, who interviewed Jim Rogers, GE Capital Fleet Services' president, and Jim Culotta, McCullagh's president, regarding the merger of the two companies.

AF: In December, 1988, GE Capital officially completed the integration of Gelco, D&K Financial, and Kerr Leasing into a single entity known as GE Capital Fleet Services. How will McCullagh Leasing fit within this integrated framework?

Rogers: We spent all of 1988 internally focusing on the integration of three companies' various computer systems and corporate cultures. It was a year of operational challenges, team building, and many lessons learned. On the other hand, 1989 was a year of significant investment in people, products, business systems, and market expansion. We roll into 1990 as a company that has not only preserved the best of the combined prior businesses, but also with its own defined strategy for industry leadership, capitalizing on its unique strengths and commitment to this industry. McCullagh Leasing is a strategic acquisition that will only strengthen that commitment.

AF: What is GE Capital Fleet Services' strategy behind the acquisition of McCullagh Leasing?

Rogers: Overall, McCullagh Leasing significantly enhances GE Capital Fleet Services' breadth and depth in all North American market segments. But more specifically, McCullagh provides us with excellent business capabilities to provide custom service on a nationwide basis. Through its unique network of full service regional offices, McCullagh has a real competitive advantage over other national fleet management companies.

Culotta: I. must admit that we were somewhat nervous before GE Capital's first visit here last November and then somewhat skeptical about their strategy after that visit. Frankly, we were convinced that they would try to consolidate McCullagh into Minneapolis. But now, our management team is highly impressed with their strategy and the rationale behind it. We realized they had a clear, exciting, and well-communicated strategy to win in all market segments and how a 'standalone' McCullagh would contribute to this strategy. To their credit - they also asked for and listened to our input - and several modifications in the strategy have been incorporated.

AF: How will McCullagh Leasing fit into GE Capital Fleet Services organization?

Rogers: Domestically, McCullagh Leasing will remain as a separate entity including the name: McCullagh Leasing, a division of GE Capital Fleet Services.

Jim Culotta and his team will continue to operate from Roseville, MI, but will also be responsible for the strategic, operational, and financial management of our Guardsman Operation in Long Island and our Special Services Operation in Minneapolis. McCullagh's operation in Canada will be consolidated with GE Capital Fleet Services' operation headquartered in Toronto. Les Kolls will remain as president of our Canadian operation.

AF: What kind of changes do you anticipate in McCullagh's management as a result of the acquisition, and what will be the management relationship to the Minneapolis headquarters?

Culotta: The McCullagh management structure will remain pretty much as is. We will be adding two key players from GE Capital Fleet Services: Tom Raskin will join us as vice president of marketing and business development. Larry Moldauer will join us a vice president of Eastern sales, with sales and service responsibilities for our (Eastern) regional offices and Guardsman. John Blessing III, our current vice president of regional sales, has been appointed vice president of Western sales, and Paul Allmacher's role will be expanded to include all customer service and sales support responsibilities for McCullagh-based national accounts. Personally, I will be working for Jim Rogers and am looking forward to working with him and his team in maximizing the market opportunities available to us.

AF: What competitive strengths will McCullagh Leasing add to GE Capital's presence in the fleet leasing and management market?

Rogers: A group of very talented people. Jim and his team are a group of known proven players in this market with an excellent relationship with automotive manufacturers and a positive proactive presence at the industry trade associations. They have a very desirable and highly creditworthy group of customers. In addition, they have a unique network of full-service, regional offices capable of consistently providing a full range of high quality local service and support, including pickup, delivery and resale services to their customers across the country; and critical mass to our Canadian operation. The Canadian acquisition will position us as an equal number two in that important and growing market.

AF: How does the acquisition of McCullagh benefit the customer?

Rogers: I am really excited about what the merger of GE Capital Fleet Services and McCullagh Leasing brings to both our current and prospective customers. We truly can provide the strength of a large company and the local service of a small company. This big company/small company competitiveness will provide customers with a unique flexibility in choosing the best product and service offerings from both companies. For example, McCullagh's custom pick-up and delivery service will be an excellent added-value service to the executive fleets of many of GE Capital Fleet Services' customers. GE Capital's Truck Vantage, RapidTag, Fuel Plus+, and Accident Services programs will definitely help McCullagh's customers lower their operating costs.

Both companies have a strong commitment to the industry and a business focus to make our customers more competitive by supporting their important role of asset management whether they lease, own, or driver reimburse their vehicles.

AF: Since McCullagh will be based in Roseville, MI, and GE Capital in Minneapolis, will you be shifting accounts from one location to another?

Culotta: We expect to have a minimal transition in the middle market and larger accounts and it will be customer-driven. Our clients will have the opportunity to pick and choose the location and the best of our combined service offerings. By and large, we anticipate that most customers will continue to be serviced out of their current location. For the GE Capital Special Services group, I anticipate a very gradual and customer sensitive transition to McCullagh.

Regarding Guardsman, we do not plan any changes - as a matter of fact, I am excited about extending their expertise in full maintenance leases and servicing executive fleets to the McCullagh regional offices.

AF: Many customers have been doing business with McCullagh Leasing and GE Capital Fleet Services separately. What will be your approach to split-vendor accounts?

Rogers: Jim and J will be personally involved with each customer to ensure that their best interests are served. We will offer them a level of flexibility in terms of available products and service location that will give them the opportunity to make those choices which result in GE Capital and McCullagh effectively meeting all of their fleet management needs.

AF: What advantages in consolidation will result from the GE Capital Fleet Services/McCullagh acquisition?

Culotta: There are the obvious synergies in such overhead functions such as finance (treasury), legal, and human resources (payroll and benefits), as well as some field office rental savings. Economy of scale savings will be realized in Canada and terrific synergistic opportunities exist in the areas of business systems capabilities.

Rogers: What Jim said is true, but the real strategic synergies which we expect to derive come from the relative strengths of each business. Over many years, McCullagh has developed a network of full service regional offices which have the capability of serving GE Capital customers with local services, thereby leveraging the significant investment in people as well as bricks and mortar. And, as I said before, McCullagh can now offer its customers the full menu of value-added fleet management services which GE Capital Fleet Services has developed.

AE: What is the size of the GE Capital Fleet Services' portfolio after the McCullagh leasing acquisition?

Rogers: Our North American operations will have over 280,000 cars, trucks, and specialty vehicles on lease and overall manage more than 450,000 vehicles. We are still relatively small in the context of the size of the entire industry, but we are large enough to have the necessary economies to become the low-cost producer. Our commitment to strategic systems, the rapid introduction of new customer-driven products and services, and the fostering of a work environment that engages the commitment and creativity of every employee in the excitement of winning in a competitive marketplace will make us the most competitive fleet management company in the industry.