Where Have All the Giants Gone? The Rise and Fall of U.S. Industrial Segment Lessors
by Dexter Van Dango Monitor 100 2016
There were 17 U.S. Industrial Affiliate equipment leasing and financing companies in the first Monitor 100, 25 years ago. Only one of those companies remains, and next year it will be gone. Dexter Van Dango takes a look back in time at those legacy companies and recounts the stories of their rise and fall.
In 1955, Pete Seeger wrote the classic folk song, “Where Have All the Flowers Gone?” The song was recorded and sung by many artists, including The Kingston Trio, Roy Orbison, Bobby Darin, Johnny Rivers, Joan Baez and Peter, Paul and Mary. In 1960, singer-songwriter Joe Hickson added two verses to Seeger’s original to make the song a circular story. The ballad begins with a lament asking where all flowers had gone. The chorus answers that they were gone because the young girls picked them all. In subsequent verses, the young girls were all gone because the husbands took them all. The husbands were gone because they all became soldiers, and the soldiers were all gone to graveyards, every one. The song ends with graveyards all “gone to flowers, every one.”
In many ways, the fate of the equipment leasing and finance companies that the Monitor has ranked for the past 25 years has mimicked that of the flowers in the song. The Monitor 100 annually ranks the largest equipment leasing and finance companies operating in the U.S. Each entrant is categorized under an industry segment: Captive, Foreign Affiliate, Independent, Not Elsewhere Classified (NEC), U.S. Bank Affiliate and U.S. Industrial Affiliate. When the list was first published, there were 17 companies included in the U.S. Industrial Affiliate segment. This year there is only one, and soon there will be none.
With the sale of the majority of the assets of GE Capital and the strategic retooling of GE’s remains into captive units supporting the aviation, healthcare and energy businesses, next year’s Monitor 100 will include GE as a captive. The company that I have kiddingly tagged as Giant Enormous Capital and Gargantuan Entity will cease to exist as we know it. Its disintegration completes another circular story that began in 1932 with the formation of General Electric Contracts Corporation.
Where Have All the Industrial Giants Gone?
The U.S. Industrial leasing and finance companies included in the first Monitor 100 were: Associates Commercial, AT&T Capital, Bell Atlantic Capital, Chrysler Capital, Dana Commercial Credit, GE Capital, ITT Capital Finance, McDonnell Douglas Finance, Nynex Credit, PacifiCorp Financial Services, Philip Morris Capital, Pitney Bowes Credit, SNET Credit, Textron Financial, US Leasing, US West Financial and Westinghouse Credit.
It is hard to believe that such a diverse group of companies were owned and operated as the financial subsidiaries of their respective industrial parent companies. Today, they no longer exist. What brought about the rise and the fall of the U.S. industrial financial services subsidiaries? The reasons vary from player to player. What follows is my attempt to capture a few key reasons for the rise and demise of some of these finance subsidiaries. Keep in mind that this is my opinion based on research I have conducted. I ask in advance for your forgiveness for any errors or omissions.
Moving Beyond Sales Aid Financing
Vendor leasing is sometimes called Sales Aid Financing. The financial product — generally a lease or a loan — assists in the closing of a sale of capital goods. Certainly, when GE Capital began its long journey in 1932, it was conceived as a sales aid financing tool to help sell more GE appliances. A few names on our list began as sales aid finance companies but evolved into more complex and diverse businesses over the years.
Pitney Bowes Credit Corporation was one of the most successful sales aid finance companies in history. At one time PBCC had a penetration rate above 80%. At least eight out of 10 customers purchased Pitney Bowes products through the company’s finance subsidiary. However, by 1992 the company’s captive finance activities represented just over 30% of gross finance assets with more than 69% originated through external vendor programs. By 1998, the company decided to sell its Colonial Pacific Leasing Corp to GE Capital. But the external financing activities continued until 2005 when Pitney Bowes agreed to a sponsored spinoff of its Capital Services group with Cerberus Capital Management. Today the company has returned to its roots and offers financing for customers purchasing its products.
Chrysler Capital was originally part of Chrysler and then part of DaimlerChrysler following the companies’ merger. Chrysler Capital grew into a diverse financial services business dabbling in international structured trade finance and other hybrid offerings. In 2007, Chrysler was sold to Cerberus Capital Management. Following the financial crisis of 2008, a bankruptcy and the sale of Chrysler to Fiat, Chrysler partnered with Ally Financial to again offer customer financing. In 2013, Chrysler signed a 10-year agreement with Santander Consumer USA, a subsidiary of Spain-based Banco Santander, which operates Chrysler Capital under license from Chrysler.
Without a doubt, Textron Financial and McDonnell Douglas Finance both originally developed their financial subsidiaries to help their parent companies sell products. However, both firms also expanded into broader financial service offerings. Today McDonnell Douglas is a part of The Boeing Company, and my presumption is that McDonnell Douglas Finance was rolled into Boeing Capital. In Q4/08 Textron announced a plan to exit the non-captive portion of its commercial finance business, while retaining the captive portion of the business that supports customer purchases of Textron products.
Break Up of the Bell Dynasty
Five of the 17 firms on the list were part of telephone companies. How many of you remember when you leased your telephones from Ma Bell and, like the Model T Ford, they came in any color you wanted, as long as it was black? Further, it was illegal to use outside equipment on the line. You had to lease the phones manufactured by Bell Telephone’s subsidiary, Western Electric.
That monopoly came to a crashing end in 1982 with the federally mandated Bell break-up, which led to the formation of regional Bell operating companies. So-called Baby Bells like AT&T, Bell Atlantic, Nynex, Southern Bell and US West were charged with replacing the old AT&T Credit Corporation, providing leased equipment to be used with each parent company’s services. However, as part of the breakup, the government granted consumers the option to purchase equipment from outside vendors instead of leasing it from the phone company. The phone companies were given the ability to sell rather than lease equipment to customers. Clearly, at this point, each company’s focus expanded beyond leasing phones, especially AT&T Capital.
AT&T Capital purchased Eaton Financial in 1989, a move that steered it away from being a pure captive. In 1993, the company issued an initial public offering for shares of AT&T Capital. In a way, it completed the cycle — divestiture. The company evolved into a diversified vendor financial services company, was spun off in the IPO later sold to Newcourt Credit in late 1997, which itself was acquired by CIT in 1999. By 2001, the company was a notch on the belt of “deal-a-day Dennis Kozlowski” when Tyco bought CIT, only to give it up in another IPO in 2002 to raise desperately needed cash. Tyco investors took a $5 billion loss on CIT.
Bell Atlantic Tricon Leasing Corporation had bold ambitions. Like others, it strayed off the beaten path and ultimately became part of The Finova Group, which went out of business per its Chapter 11 liquidation filing.
Southwestern Bell merged with several other Baby Bells and finally morphed into SBC Communications, which merged with AT&T in 2005 and purchased the rights to the AT&T brand name from CIT, although it uses AT&T Inc to distinguish itself from AT&T Corp. Another circular story completed.
Before the Tax Reform Act of 1986, companies could take advantage of an investment tax credit applicable against the acquisition of capital goods. Tax credits, like ITC, had a direct impact on reducing tax liability for corporations. Certain leasing companies were formed and industrial conglomerates acquired independent lessors, specifically for their available tax credits. One such purchase was Potomac Leasing Company’s acquisition of VMS Financial. Potomac was a subsidiary of Dana Corporation and later changed the merged company’s name to Dana Commercial Credit. In 1998, Dana sold a majority of the leasing company to Heller Financial. Two years later, GE Capital acquired Heller.
Some companies generate large amounts of cash when they sell their products. Earnings generated by growing businesses can be put back into the business for growth, distributed to shareholders through dividends or used to repurchase shares to reduce the number of shares outstanding and increase the earnings per share. In 1992, Philip Morris Company was the largest producer of cigarettes, packaged food products, cheeses, processed meat and the second largest seller of beer in the U.S. The company owned Kraft Foods and Miller Brewing. While 62% of the firm’s operating profits came from tobacco products and 27% from food products, only 2% was derived from beer and another 2% from financial services and real estate. Nevertheless, because it was flush with cash, the company poured millions of dollars into Philip Morris Capital for investment in the equity portion of leveraged lease financings in assets such as aircraft, manufacturing facilities, power generation assets, rail cars and real estate. In 2003, the company ceased making new investments and began focusing exclusively on managing its portfolio to maximize gains and generate cash flow from asset sales.
PacifiCorp Financial Services was another lessor whose parent company, PacifiCorp Holdings, was a wholly owned subsidiary of a power utility — PacifiCorp. By 1992, the company was beginning to wind down its leasing operations. In the company’s 10-K filing with the SEC for year-end 1992, PacifiCorp announced, “Consistent with PacifiCorp’s strategic plan, PFS plans to continue to sell substantial portions of its loan, leasing and real estate investments over the next several years. PFS presently expects to retain only its tax advantaged investments in leveraged lease assets (primarily aircraft and project finance) and low-income housing projects.” As the company returned to its core business model, it became more attractive, and was purchased by Berkshire Hathaway in 2005.
Envy, Greed and Wall Street Swagger
Much like GE Capital, Westinghouse Credit was formed in 1954 to help Westinghouse appliance and radio-television dealers obtain inventory and to provide financing to retail customers. The credit corporation was modeled after GE Capital. But in the 1980s — the decade of Gordon Gekko’s Wall Street — Westinghouse Credit grew from $1.9 billion in assets to $10 billion. The strategy to focus on high-interest loans began under John McClester, chairman of Westinghouse Credit for 17 years.
His plan called for faster growth, with an emphasis on riskier but more lucrative corporate and junk bond financing, speculative commercial real estate loans and direct loans to developers. The company took on more and more risk and ultimately, during the financial downturn of the early 1990s, the portfolio began to unravel. By the time the first Monitor 100 was published, this train wreck was well underway. The company suffered $1.6 billion in losses in 1991 and in November 1992, the Westinghouse board of directors adopted a plan that included exiting the financial services and other non-strategic businesses.
US Leasing was the granddaddy of the leasing industry. It probably churned out more seasoned executives than any other lessor. In 1987, US Leasing was owned by Ford Motor Company. In 1996, Ford sold the financial services company to Mellon Bank. In 2001, GE Capital acquired Mellon US Leasing — a fate that was shared with others in the first Monitor 100. In late 1994, ITT (International Telephone and Telegraph) agreed to sell its ITT Commercial Finance unit to Deutsche Bank for $2.23 billion. A few months later, ITT agreed to sell the remaining pieces of ITT Financial Services to GE Capital. Eventually, GE would also acquire the commercial finance business from Deutsche Bank.
Associates First Capital Corp built a strong franchise of consumer and commercial financing. Citigroup swept it up in 2000. CitiCapital successfully grew the transportation division of the business until GE Capital acquired CitiCapital in 2008. In December of last year, GE Capital’s transportation finance business unit was sold to BMO Financial Group.
When General Electric announced its plan to divest most of GE Capital, retaining only those business units that were directly in support of the industrial giants’ product sales, it began the final chapter of its circular story. GE was the last of many to make this strategic shift back to the core businesses that had contributed to its initial success. Philip Morris, Textron, Dana, Chrysler, Pitney Bowes and probably others, made similar choices. Some got out with gains — their timing was good. Include GE on that short list. Others took a beating with their shareholders bearing the brunt of their bad decisions and bad timing. Include the AT&T Capital/Newcourt/CIT/Tyco rollup, Bell Atlantic-Tricon/Finova and Westinghouse Credit on that list.
History has a way of repeating itself. Today the industrial giants are gone. But don’t be surprised if a new breed of players — a completely new segment — appears on the horizon someday soon. It could be the fintechs or the service sector offering non-standard agreements or the pay-as-you-go model. It could be Alphabet or Amazon. Whatever it is, you can be certain it will represent innovation and opportunity. If you have a different opinion, please share it with me at email@example.com.
Some sales tax concepts for the leasing industry are simple; others are more complicated. Brian Greer, Partner and CRO at TaxConnex, gives some context to the more complex terms and offers advice on managing tax obligations.