The Hertz Story Isn’t What You Think
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[1] https://nypost.com/2020/05/03/hertz-struggles-during-coronav...
Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail?
These debt sheet power moves by billionaires impact stockholders, including retirement and pension funds. When the companies they control go bankrupt, they materially harm the people who can't play at that level.
I don't know if this was wrong, but the outcome was certainly not good. It's high stakes gambling with other people's livelihoods.
1. https://www.theonion.com/protestors-criticized-for-looting-b...
He not only stole from the Hertz and from the bank, but he also stole from every US citizen because that credit was printed out of thin air by the bank when it was loaned to Hertz... The creation of this debt diluted the value of the dollar for every citizen of the US... Then that credit went to Icahn while he knew perfectly well that he was running this company straight into the ground.
This is definitely fraud.
Ichan is one the world's most famous financiers, rest assured he's got an army high paid lawyers poring over the fine print of these transactions. It's legal, but not ethical, or "right".
If the corporate leadership is weak, incompetent, scared, or any other pejorative you want to dredge up, then Icahn might convince them to make some bad decisions that benefit him.
Apple is an example of a company that Icahn when into full speed, and didn't really change that much. In the end, Icahn sold his Apple stock for a gain, but Apple leadership obviously made their own good decisions despite him. In fact he would have made a lot more money on Apple if he had held his stock for longer.
But "buy and hold" is not how he has fun, and that's what all this stuff is about. Carl Icahn does not need any more money. He likes doing what he does for the same reason Lebron James still likes playing basketball.
Now, fleet sales are typically very low margin for automakers, but they still need that volume to keep the lines productive without reducing labor (another economic impact).
One bright spot is that most suppliers that I have dealt with only produce about 25% of their volume for new car manufacturing and the rest are "service parts" (repairing existing cars). So, hopefully it won't have chapter 11 impact on most suppliers as the service market should be quote healthy again soon.
At the end of the day, for most companies, too much debt relative to cash flows is just a sign of overextension. And aggressive "real" business practices is hardly something that companies were immune to prior to financialization.
Side note: You can run your personal finances 'debt free' and be in a better position when shit hits the fan too. :-)
Hertz went bankrupt because of the type of debt they took, their lack of cash-on-hand, and the aggressiveness of their business model. But the expected value of their decisions may well have been positive - a single failure is a bad way to evaluate a decision-making methodology.
In this case, I happened to use manufacturing inputs for a specific reason: cars are the inputs to the end product of car rental companies. In the same way it makes sense to pay for product inputs after you've sold an iphone, it makes sense to pay for the cost of a car after you've made the money renting it. If you have to bootstrap, you can't leverage economies of scale nearly as effectively.
I’m not convinced that people who apply prudent personal finance strategies ever come up with anything worthwhile in corporate or government financial scenarios.
The difference between a persons finances and that of a legal vehicle with limited liability or an entity which can print its own currency, these aren’t differences of degree, these (and other differences) change the entire game.
To make this more concrete, let me give you a recent example for advertising. I was watching a YouTube clip from user Jomboy Media about a baseball strike-out. I noticed in the background the stadium seats had Delta decals for marketing purposes. The fact Delta is permitted, effectively by government authority, to continue to advertise in the "market" because of their bail-out, distorts supply and demand. Namely, Tyson Foods, which was able to be assiduous with their profits over the years and provided wages to their employees during the pandemic, suffer from this blatant "synthetic" market competition.
https://www.bloomberg.com/news/articles/2020-05-25/hertz-say...
You can see my three bullet points on the previous response on how they mismanaged their fleet.
The two articles I read pointed these out:
1) When Hertz bought Dollar Thrifty their due diligence failed to realize that most of their cars were well past their prime which required another sizable investment to replace all of Dollar Thrifty cars.
2) Frissora tried to hold onto their cars longer past the depreciation period, trying to keep them until 50K miles, way past the industry norm of 30K miles. He also then took these older cars and sent them to their other budget rental companies Dollar Thrifty and Firefly
3) When Tague entered after Frissora left, he started updating a majority of the fleet with sedans, right in the middle of height of the popularity of the SUV. His other blunder was trying to increase prices, thinking the rest of the industry would follow suit. Instead, they kept their pricing lower and started taking big chunks of the Hertz market.
All of three of these gross miscalculations caused their debt to increase too fast and ultimately was their undoing.
Also, why redeem strategic debt due for 2021 so early?
Financing anything is ok until something goes wrong. The problem is that too many people and companies are living paycheck to paycheck. God forbid a company hold enough cash to finance their own operations - no that needs find it's way to the shareholders.
A recent headline at CNN said the next problem for the economy was people saving money during the crisis or even paying down debt. SMH.
This seems contradictory—if it can’t survive in an emergency, it doesn’t seem like a reasonable strategy.
Shouldn't the conclusion be that it isn't a reasonable strategy if it causes the company to fail after a couple of months of significantly reduced demand? This global situation is awful, but it's far from unforeseeable.
But sure, if government bailout money is there for the taking, obviously many large companies won't plan for it.
I don't get that. Surely people still need to travel, and are less likely to take public transport, wouldn't that drive up demand rather than drive down?
OK people might not be commuting 5 times a week, and perhaps doing fewer miles overall, but you'd still need a car.
If you live in a walkable city, then your requirement for a car hasn't changed if you are no longer walking/subwaying to the office
Those with good credit and a reliable if not older working car probably aren't buying cars much right now, but these people definitely are.
They might not be allowed to...
Data point: I have two vehicles parked outside the house right now, I have purchased exactly one tank of fuel for each of them since the start of March.
My understanding with americans is that having a car is more essential than having a house
Despite the 3rd party transactions being ethically dubious, Icahn lost a bundle on his equity, so I'm not sure there was much "short term profit" earned here.
So there's probably more to the story than your comment suggests.
Yes - he did lose a lot of money, but please understand he was in the process of sucking the company dry when the pandemic hit: https://www.cnbc.com/2020/05/26/carl-icahns-bet-on-hertz-goe...
They were clearly in trouble, however the pandemic is what buried them. Lenders didn't see that coming.
Whether in the larger picture the creditors are getting paid enough to take on the risk is an interesting question. My guess is that they don't take enough account of a scenario where many bankruptcies happen at once.
That's what the savings and loan crises was about.
And most activist investors don't plan to lose all their money. I don't know where this meme comes from but investor's interests are totally aligned with the company (Ichan lost nearly $2bn here...how much did the CEO lose? The article says they bought a few shares that didn't go up...oh, won't someone think of the poor CEO).
You can't "transfer their assets out" if you are an investor or "load them up with debt"...that just isn't how corporations work (most activists have non-controlling stakes).
The issue, and the reason activist investors exist, is because the interests of management are usually not aligned with the company. Most of these companies are vulnerable because they are poorly run. If you want to criticise them, you have to start by saying that you think managers are never wrong and shouldn't be accountable to do the people that pay their wages...go ahead (bear in mind, former managers at Hertz committed accounting fraud and the reason Icahn came on board was massive market share loss).
To give a classic and well-known example, consider the type of investor known as "venture capital". Their interests are to make sure that the founders don't run off with their money, and to have the company "swing for the fences" to have a shot at outsized returns. If all of their companies do this, the ones that succeed pay for the majority that failed.
But it is typically in the company's interests to be more conservative. To take guaranteed growth over a lottery ticket for stellar growth.
Now consider this case. Ichan has an incentive to fix management fraud (this aligns with the company), to increase volatility to increase the odds of a good payout (loading the company with debt does this), and to have the company do business with his other businesses.
About 1.5 of these incentives align with the company's interests. (The first and half of the third.) The others do not. And the second in particular is close to the misalignment that venture capital has with startups.
Icahn had nothing to do with "loading the company with debt"...again, he didn't have a controlling stake, he didn't have a majority on the Board (iirc)...the reason they used a lot of debt is because they own a lot of vehicles (the majority of their debt is secured). The reason he came to the company wasn't financial structure (that does occur but very rarely...again, most investors don't want to lose all their money...this isn't a hard point requiring maths) but chronic mismanagement and huge market share loss. He didn't increase volatility (every other company in the sector uses the same kind of debt).
No activist investor acquires a company so that they can do related-party transactions. Again, they often don't have a controlling stake. Icahn owns about $50bn worth of businesses, it would not surprise me if one of his companies does business with Hertz...but there is no way that he can control this.
Btw, if you are an activist and you acquire a reputation for doing things that hurt other shareholders (related-party transactions would be an example) then you will lose your ability to run these campaigns overnight. Activist investing is based on appealing to other shareholders and being able to make changes that produce results.
Again, all of these errors seem to arise out of not really understanding how companies work (unsurprising given your confused take).
I don't understand your point about: it is in the company's interest to go for "guaranteed growth"...no growth is guaranteed, you aren't buying a washing machine...and if a VC goes for growth that isn't profitable, they lose everything. Again, this isn't confusing.
The point that you appear to be referring to, but didn't quite get, is that VCs often aren't aligned with companies because they often don't care whether they succeed or fail. Investors have everything at stake. VCs just have an option on that stake. That doesn't really apply here. Icahn has all of his own money invested.
Secondly the VC issue isn't because VCs are not investors - they are. It is because VCs spread their money around and know very well that their investment returns depend on getting a home run or two. Gambling on high risk, high return strategies is therefore in the VCs interest, but not in the interest of people whose net worth is almost entirely in the company. This dynamic is widely understood and is a common source of conflict between VCs and founders.
Thirdly related-party transactions are not necessarily a bad thing. I listed it as half in the company's interest. It is very good that when the company needs to do business they have someone to call who can make deals happen. But the activist investor isn't always acting in the company's best interests.
That said, you are correct that Icahn was not the one who loaded Hertz with debt. (That restructuring happened in 2005 when Ford sold it to investment bankers.) But he has his own history of loading companies down with debt ever since he bought TWA back in the mid-80s. So the fact that he didn't do it to Hertz doesn't change the fact that he has proven willing to do so in the past.
Your story that some activist or VCs don't act in the "companies" interest doesn't make much sense. At most you could say that some owners have different interests than others.
While it is true that the people working there generally move on after a few years, it is also true that founders and early employees dedicate their lives to the startup.
If you're talking about SV style VC backed startups, It's not evident at all to me that VCs are seeking higher risk than founders seeking VC financing or early employees seeking significant equity stakes. Furthermore, they only dedicate a large part their lives to the if it looks like it's heading towards a big payoff, otherwise that dedication is limited to a few years at best.
Similar to the shortcomings of treating evolution as having a goal.
I'm not going to write an essay on it right now though.
I think that genre is my favorite.
Sometimes you don't really care or are uninformed about a topic, in which case you can't be said to have arrived at the position of being "wrong".
Other times it's a subject you deeply care about, have investigated, and you either agree with the author or don't, but you probably can't really be said to be "wrong" in either case without further context.
Edit: I should clarify that by "walking away with millions" I was referring to their normal cash comp. 2019 CEO cash comp was $3.6MM, and she got $700k as a retention bonus.
Or many of them could probably afford to sit on their butt at their beach home for a few years and ride out the recession.
I don't see any reason why they couldn't work at a SaaS company though. It's relevant that they're senior execs because their job position is so far removed from the actual product that they really only need a general understanding of it.
... plus income from directorships, investments, etc.
People with high net worth don't need to rely on consistent income the way the rest of us do. A lot of them are later on in their careers and could potentially retire as well.
There are other options too, like quit and become a consultant, which is exactly what Marinello did.
It is very common for senior management to run to the door during a bankruptcy, even during an economic downturn. If there's any argument that this payout is unnecessary, it is that senior management doesn't really care about the money as much as it is about the situation.
I was referring to their normal compensation, should have made that clear.
According to the article the CEO got $700k from the $16MM, and her 2019 cash comp was $3.6MM.
EDIT: if you're going to neglect your duty I will seize control and dub this type of story "an EllieKelly story".
There's probably some German word for it, like Schadenfreude
As long as the net money out the bottom is positive, the more cars and things you have to rent the more money you get per unit.
It both justifies infinite borrowing (each incremental unit is cash flow positive) but creates extreme risk if your rental market dries up or pauses. Pre-pandemic that was pretty much not on anyone's radar given Hertz's position in the market.
But now you turn off the rental income and boom, those debt payments are still due and suddenly you are bleeding cash faster than you can liquidate other assets.
This is a bit esoteric but next here's the funny part. The definition of working capital is commonly (and I would argue incorrectly) current assets minus current liabilities. In the alternate definition, it goes non-cash current assets less non-debt current liabilities. Because with the alternate definition you're not incentivized to push down your cash balance artificially.
This probably isn't a huge reason Hertz struggled, but having more cash on hand always helps.
Just ~two months ago they couldn't sell even the treasuries! The best credit paper in the whole world! Corpses will be flying left right and center, you don't just pretend things like that never happened and continue happily ever after.
It is always the same reason: too much money/credit. It was the same in 2008, it was the same in 2000, it was the same in 1987 (okay, maybe this one was more on the "quants" of the day with their insured portfolios), it was the same in 1968, it was the same in 1929, it was the same in 2012 in Europe, it was the same in Japan in the 80s, etc. It's literally that simple: too much money = problems down the line. The only variables are how much is too much (above all time highs in corporate debt is almost certainly too much) and how much more down the line (seems the treasury bond market cannot be much more clear on this issue; also look at the GDP prints and projections).
https://www.theregister.com/2019/04/23/hertz_accenture_lawsu...
not so much the money aspect of this, but instead worth knowing that Hertz had massively eol ready digital infrastructure in need of being replaced.
One has to wonder if this failure created a disruption to business cadence that put them in a particularly weakened state facing these times.
Agreed the management bonuses aren't that extravagant, but I'm not sure the debt is either.
Now, a properly set up rental company would have hedged this, so that in the case their market disappears on them, they have survival money coming in from some financial option or other. But, I'm guessing Hertz did not.
Anecdotal, but it seems like every company that has ever received the anti-Midas Touch of Carl Icahn has had some kind of negative consequence.
That's no surprise - it's literally what he does for a living. He damages companies, gets a quick payout and moves on. It may not be illegal but it's revoltingly malevolent and sociopathic. The world would be a better place without him and his likes.