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The Upside of Private Equity
When Hertz went public in late 2006, dubious investors were questioning how the company's value had increased in value by $3 billion from thin air. After all, a consortium of private equity groups (including Merrill Lynch (MER)) purchased Hertz for $14 billion just 11 months prior to the IPO, which priced Hertz at $17 billion. However, since the company went public, its initial price of $15 per share has increased by approximately 40%. The company is a case study for the high value creation through private equity over such a short timespan.
- Private equity investors recognized positive market forces. In particular the increase in airline travel and new construction increased the demand of its rental cars and heavy equipment
- Private equity investors were able to buy the company at a discount from Ford, who needed a fast injection of cash and has bigger problems to resolve
- New management found operating efficiencies. For instance, the company doubled the number of rental vehicles that were made available for rent every hour by speeding up the time it took employees to refuel and clean the cars. In addition, Hertz is much more active in making sure the right number of rental vehicles are available in locations where demand is highest (e.g., weekends are slow at airports while business is more brisk in suburban locations)
- Top executives were given a large equity share, thus aligning overall compensation with stock price performance.
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