It's a Wonderful Life.....Hertz Edition

I recently shared an article about Hertz and its attempt to restructure $17B in debt. In the comments, a discussion came up about the acquisition of Dollar Thrifty Group. It was suggested that the acquisition was a horrible move. As someone who felt strongly about going in that direction, I'd like to take a little trip back in time and envision a different future for Hertz, Dollar, and Thrifty.

It is late in 2008 and we're pretty deep in the financial crisis. The stock market was down sharply and car rental stocks were no exception. Hertz was the only one of the big three firms (Hertz, Avis, Enterprise) that continued to officially operate only a single brand. There were concerns about growing leisure business. There were concerns about growing insurance replacement. Diversification was clearly a very important strategic goal in order to improve market share and keep up with the competition.

One year earlier in 2007, Hertz began an experiment called Simply Wheelz by Hertz in Orlando. You can still Google it and find a bunch of info, images, etc. The idea was pretty simple. Launch a new, homegrown, no frills, no people proposition as an alternative to the traditional, high end, high level personal service of Hertz. It was a kiosk only operation that, if launched today. would still be a unique offering in a sea of relatively commoditized experiences.

Unfortunately for Simply Wheelz, Advantage Car Rental declared bankruptcy in December 2008 and was acquired by Hertz a few months later in April 2009. With a second traditional brand now under its umbrella, Hertz abandoned Simply Wheelz and followed the course that leads to where we are today. I've previously noted that I felt the acquisition of Advantage was possibly the worst thing that could have happened to Hertz. Let's pretend it didn't happen for just a moment.

At the end of 2008, Simply Wheelz was very successful in Orlando and soon after a few other markets. Hertz was planning to expand the brand to 14 more major cities. The prospects were very good for success but launching a new brand from scratch is always going to be a slow and difficult uphill battle, especially in a market as crowded as car rental with necessary airport space in short supply.

While this is going on, the stock price of Dollar Thrifty Group (DTG) had sunk well below $1 a share. I believe it actually bottomed out at $0.57. It seemed like an extremely opportune moment for Hertz to consider its first major acquisition. I will clarify now that I was not an insider on this process and have no firsthand knowledge of when or how the purchase was initiated. Some basic math suggested the company stock could be bought for a steal but I was also really concerned that DTG would go completely out of business. What to do?

It seemed like there were 2 options. Hertz could try to buy DTG right then and there, buying up as much stock on the open market as they could before formalizing a deal for the rest of the company. That would give them 3 brands to work to match up with Avis/Budget/Payless and Enterprise/National/Alamo. The second choice would be to wait for Dollar and Thrifty to collapse and then buy up the assets like the brand names, trademarks, etc. at some type of liquidation auction.

My personal vision of the future was never to run 3 independent brands. I felt like in the case of Dollar and Thrifty, there was never enough distinction between the 2 for it to make sense to continue operating both. When you consider that for Hertz, going from 1 legitimate brand to 2 would be a huge change already, it was easy to write off a third. Again, let's not forget that Hertz was at the end of the successful pilot with Simply Wheelz because that's important.

Simply Wheelz was a great concept and it was performing well. It was completely different from everything else in the market at the time. What it needed was better brand recognition and more airport locations. It was for this reason that I thought the Dollar and Thrifty would be the way to go. Admittedly I knew very little at the time about the two brands other than that they were more "middle tier" than Hertz or Avis. I actually didn't want Dollar or Thrifty as a complementary brand to Hertz. I wanted to acquire the assets so that they could be repurposed for Simply Wheelz.

Without knowing the differentiators between Dollar and Thrifty, my post-acquisition vision was based purely on brand perception. The Thrifty name seemed far more along the lines of a no frills, bargain brand than Dollar. If you want to be thrifty, then rent from Thrifty. As a result, I saw the complete dissolution of Dollar. It simply wasn't going to be needed anymore. Hertz would continue to be Hertz and the Thrifty brand would be transformed into the Simply Wheelz kiosk only model, now under an established brand name with a nationwide network of airport locations. Both problems solved.

Remember now that at the time I had the initial idea the share price of DTG was around $0.57 as noted earlier. Instead of getting the company for something near that figure, after an extremely drawn out bidding war with Avis, Hertz paid the whopping sum of $87.50 per share in a deal worth roughly $2.3B. If you reverse engineer the math, the common share price of the the stock at its bottom would have valued the same deal at just $15M. Instead of getting a well known name brand to grow the Simply Wheelz business model at a rock bottom bargain, Hertz ended up adding $4B in debt to its balance sheets that year. Today, Hertz continues to operate all 3 brands independently but I doubt you could find anyone that could tell you the difference between Dollar and Thrifty.

This brings me to alternate history #2, the bidding war with Avis. Hertz made its initial bid at $1.2B in April 2010. Keep in mind that this is 18 months after I had the initial idea for the acquisition. Time definitely cost Hertz in terms of DTG's valuation and a recovering stock market. After the initial Hertz announcement, it took only 1 week for Avis to state it was going to make a substantially higher offer, without actually bidding. It was just enough to make the DTG shareholders want to hold out and not approve the Hertz deal. You can follow the link to see the timeline, but I 'm curious about a world where Avis actually buys Dollar Thrifty Group. Given that the FTC required Hertz to divest Advantage Rent a Car in order to complete the transaction, there is simply no way that it would have approved the Avis purchase unless it divested something that Hertz could possibly have still picked up for a fraction of the money they spent. Whatever they picked up, it would have been a brand that would have been worth attaching Simply Wheelz to. Instead, the bidding war dragged out 17 months until Avis withdrew and Hertz finalized the deal.

As we know now, the Simply Wheelz operating model was never expanded beyond the initial few markets and Advantage came and went (even though it was Simply Wheelz on paper). I said in my earlier post that I thought this would make a very interesting case study and I still stand by that claim. Hertz was flying solo in a market full of multi-brand competitors. Hertz had an innovative new operational model getting ready to expand, but a timely bankruptcy made it change course back to the traditional. At a time when debt was already an issue, Hertz added 30% more by seeming more desperate for the acquisition than the company being bought. There's lots to sift through here and I know I've hardly done it justice.

Some of you will remind me that Hertz actually did introduce kiosks into the core business, but these were simply a video interface to a remote counter agent. The experience was still the same as walking up to the counter just a few feet away.

Do these alternate possibilities change anyone's mind? Do you still think that the acquisition of Dollar Thrifty Group was so bad or was it merely badly timed? Did Hertz get outplayed in some way by Avis such that the butterfly effect would lead to its demise only 8 years later? Only time will tell and the next few months are going to be critical for sure. If Hertz can get out from under its debt, there are definitely ways we can see Hertz get back to its roots and once again emerge as powerful brand in the future.