The Hertz Corporation

The Hertz Corporation

225 Brae Boulevard
Park Ridge, New Jersey 07656
U.S.A.
(201) 307-2000
Fax: (201) 307-2644

Private Company
Incorporated: 1967
Employees: 18,000
Revenues: $2.8 billion
SICs: 7514 Passenger Car Rental; 7359 Equipment Rental & Leasing Nee

The Hertz Corporation is the world’s largest car rental company, handling approximately 25 million rentals worldwide with over 5,000 locations in 130 countries and a fleet of 420,000 vehicles, including 230,000 vehicles in the United States. Through its subsidiary Hertz Equipment Rental Corporation, the company also rents construction and industrial equipment to contractors and industrial and government markets. Hertz’s claim management subsidiary is a leading third-party administrator, while Hertz Technologies, Inc. provides telecommunications services to corporations. The oldest company in the car rental industry, Hertz has experienced many changes in ownership since it was founded. It is currently owned by Ford Motor Co. (which has a 49 percent controlling interest), Volvo North America Corporation (which holds 26 percent), Commerzbank A.G. (5 percent); and Hertz management (with the remaining 20 percent).

The origins of the company date back to 1918, the year that Walter L. Jacobs, a 22-year-old car salesman with a fleet of a dozen Ford Model Ts, started a small car rental business in Chicago. Within five years, Jacobs expanded his operations to the point where the business was generating annual revenues of about one million dollars through a fleet of 600 cars. In 1923 Jacobs sold the company to John Hertz, the head of Yellow Cab and Yellow Truck, although Jacobs remained with the company, serving as the chief operating officer. Hertz held the DriveUrSelf System, to which he would add his name, for all of three years before including it as part of the deal to sell Yellow Truck to General Motors Corp.

General Motors kept the business until selling it to the Omnibus Corporation in 1953. The following year Omnibus changed its name to The Hertz Corporation, and a stock offering was made on the New York Stock Exchange, where the company’s shares remained until 1967. Also in 1954 the newly public Hertz itself bought Metropolitan Distributors, a pioneer in New York truck leasing and the largest truck rental business at the time, with a fleet of 4,000 trucks. The purchase was made for $6.75 million in cash. Walter Jacobs, who was president of the company until his retirement in 1960, commented at the time that the acquisition “rounds out Hertz operations by providing in New York City the largest single truck rental operation in existence.” Leon C. Greenbaum, the president of Metropolitan, became vice-chairman of the Hertz Board of Directors. The acquisition brought the total Hertz fleet to 15,500 trucks and 12,900 passenger cars.

By 1960 the market for rental cars was rapidly expanding, complementing the expansion of air travel into the consumer market and the rapid growth of the travel industry in general. Despite the influx of new firms into the industry, Hertz retained the number one position throughout the 1960s. Much of the success was attributed to the expertise and guidance of rental car veteran Walter Jacobs, who was recognized as being “the maven of the car rental business,” knowing how to buy and sell cars expertly in order to build and maintain a profitable rental car fleet.

In 1967 ownership of Hertz was again altered, this time in a merger/stock swap deal. The new association was with Radio Corporation of America (RCA)—while Hertz became a wholly owned subsidiary (though the company operated as a separate entity with its own management and board of directors), Hertz stockholders received RCA stock in return. Leon Greenbaum, who was chairman of Hertz by this time, became a director of RCA.

The relationship with RCA continued until 1985, when RCA decided to focus on its more traditional product lines and sold Hertz to UAL, Inc., owner of United Airlines, the largest airline in the country. UAL ostensibly planned to combine Hertz with United and its Westin Hotel Co. subsidiary in order to make UAL the most formidable travel corporation in the world. The deal was expected to, but did not actually, face resistance from federal government anti-trust scrutiny, and once closed, it joined the three leaders in their respective competitive industries. Since United also invested in travel agencies, UAL clearly meant to overlap nearly all travel services “from reservation to check-in to baggage handling,” according to Richard J. Ferris, chairman of UAL. One striking aspect of the deal, according to some analysts, was that during a time of great leveraged buyouts, it did not involve any investment bankers. In the meantime UAL was concerned that it might find itself the target of a takeover.

In 1987 UAL changed its name to Allegis, Inc. Later that year Allegis was involved in a hostile takeover, and Frank A. Olson, the chairman and CEO of Hertz, was named to those positions at Allegis. Olson, who was still leading the company in the early 1990s, joined Hertz in 1964 and helped to build the company’s fleet to 350,000 rental cars.

As part of a restructuring plan in which UAL (the Allegis name was dropped) divested itself of its non-airline holdings, Hertz was sold yet again. In a $1.3 billion deal that was completed in December of 1987, Allegis sold Hertz to Park Ridge Corporation, an investor group that was formed expressly to acquire Hertz and included Ford Motor Co. and some Hertz executives. In the buyout, Ford obtained 80 percent of the equity and Hertz management received the remainder. Of the $1.3 billion in necessary capital, $520 million was provided by Ford while the balance was borrowed. After UAL’s transition, Frank Olson gave up the chairman and CEO positions of that company, although he remained a member of the board of directors.

After the sale there was some speculation that Ford might want to eventually take Hertz public, a move that had proved profitable in other leveraged buyouts at the time. Buyout groups would make an acquisition and hold it for a short time then sell shares to the public at a sizable profit. More importantly for Ford, the buyout was undoubtedly a strategic move. Hertz had been buying 65,000 vehicles a year from Ford domestically and 15,000 overseas. In fact, Ford’s share of Hertz’s vehicle orders, about 50 percent, would increase and thereby help Ford maintain its market share even though Hertz would still buy cars from other makers. Although auto sales to rental car companies are not particularly profitable (since rental cars are generally low profit margin), Ford ostensibly thought the move would allow it to keep rivals out and preserve its strong relationship with the rental companies. Put more pointedly by David Healy, an auto industry analyst at Drexel, Burnham, Lambert, “They bought it to keep Hertz out of the hands of Chrysler.”

At the same time it was completing its takeover of Hertz, Ford was also trying to keep a distance from some serious legal problems being faced by the car rental company. In August of 1988 Hertz pleaded guilty to defrauding more than 100,000 insurance companies and other third parties by overcharging for repairs that resulted from collisions with Hertz vehicles. It was charged that Hertz, in some instances, had claimed for damages when repairs were not made and, in other instances, paid discounted wholesale rates for car repairs, while charging the retail rates to the parties involved. Although it was noted that such rental car companies as Avis, Budget, and Alamo also followed the practice of charging retail repair costs, according to Business Week Hertz failed to disclose to those concerned that they would be billed for repairs at “prevailing retail rates.” Hertz agreed to pay $13.7 million in restitution and $6.35 million in fines, “the largest fine ever imposed upon a corporation in a criminal consumer fraud case,” according to Andrew J. Maloney, U.S. attorney for the Eastern District of New York.

In addition to this history-making legal settlement, Hertz’s parent company, Park Ridge Corporation, faced change in 1988 as well. The Volvo North America Corporation, a subsidiary of AB Volvo of Sweden based in Rockleigh, New Jersey, became an investor in Park Ridge, paying $100 million in cash to Ford in exchange for a 20 percent interest in the joint venture. Park Ridge Corporation was later merged into The Hertz Corporation so that the investors, who retained their equity positions, owned the company directly.

Meanwhile, the competitive battle between the major car rental companies continued to rage. In January of 1992 Hertz and Avis, Inc. reached a settlement after Hertz brought suit against its competitor, accusing them of false advertising. Avis had received the Alfred Award given to the “best car rental company” by Gralla Publications’ Corporate Travel. Hertz’s suit questioned the validity of the magazine’s readers poll. In the settlement, Avis was enjoined from further advertising its receipt of the Alfred Award.

In another legal battle, a federal judge in New York City upheld a newly enacted city ordinance that prohibited rental companies from imposing “resident-based” rates, but at the same time barred the city from putting the law into effect. Specifically, Hertz was charging residents of the boroughs of Manhattan, the Bronx, Brooklyn, and Queens higher rates when cars were rented locally. Hertz argued that the increased rates covered what it called the excessive liability costs faced by the company when renting to residents of these boroughs. The U.S. Court of Appeals reversed the U.S. District Court ruling and remanded the case for trial. Hertz continues to charge residence-based rates in New York, while the court continues its stay of the law at issue, effectively barring the city from stopping Hertz’s practice.

Competition remained fierce among the top five car rental companies in the early 1990s, and many analysts likened the ensuing price wars to those of the airline and hotel industries, whose markets certainly complement the rental car business. In addition to price cutting, Hertz offered various promotional strategies to expand its product base. One strategy, for example, allowed customers to earn mileage in the frequent flyer programs of such airlines as American, Northwest, United, and U.S. Air as well as gain points in Mariott’s Honored guest program. In a cost-cutting maneuver in early 1993, Hertz arranged for IBM to provide the company with some information technology services. Through its Integrated Systems Solutions Corp. unit, IBM agreed to provide some software applications and support of the IBM mainframes at Hertz’s Data Center in Oklahoma City, Oklahoma, over the next five years.

Since 1950, when the company began expansion into Europe, Hertz has also been an international firm. In the early 1990s the company began franchise operations at the airport in Tirana, Albania, marking that nation’s first rental car company as well as the presence of Hertz in all of the Eastern European countries. In addition, Hertz had operations in Russia and was also represented in Africa, Asia, and Latin America.

Hertz, the oldest car rental company still in business, remained the market leader while facing stiff challenges from four major competitors—Avis, National, Budget, and Alamo—into the 1990s. With an expanding rental car market and a solid competitive position that includes the backing of Ford and Volvo, Hertz was expected to continue holding the industry’s top spot.

Principal Subsidiaries

Hertz Equipment Rental Corporation; Hertz International Ltd.; Hertz Claim Management Corporation; Hertz Technologies, Inc.

Further Reading

Buder, Leonard, “Hertz Admits Use of Fraud in Bills for Auto Repairs,” New York Times, August 5, 1988.

“Hertz Is Doing Some Body Work—On Itself,” Business Week, February 15, 1988.

Cole, Robert J., “United Airlines Set to Buy Hertz from RCA in $587 Million Deal,” New York Times, June 18, 1985.

Halper, Mark, “Hertz Mulls Outsourcing Rescue,” Computerworld, June 22, 1992.

Harler, Curt, “How Hertz Makes Its Call Center #1,” Communications News, November, 1992.

“The Hertz Corporation,” Park Ridge, New Jersey, Public Affairs Department, The Hertz Corporation, January, 1993.

Magenheim, Henry, “Car Rental Firms Expect a Boost From Air Fare Restructuring,” Travel Weekly, May 11, 1992.

Moskowitz, Milton, et al, eds., Everybody’s Business: A Field Guide to the 400 Leading Companies in America, New York, Doubleday, 1990.

“Hertz Corp. Plans Acquisition Here,” New York Times, December 4, 1954.

Ross, Philip E., “Volvo to Get 20% of Hertz Parent,” New York Times, June 23, 1988.

Salpukas, Agis, “Ford Leads Group Deal for Hertz,” New York Times, October 3, 1987.

“Hertz Warns That Car Rental Fees Could Rise,” New York Times, November 11, 1992.

Ruggless, Ron, “Operators Woo Foreign Tourists With Hertz’s Help,” Nation’s Restaurant News, April 12, 1993.

Thomas, Charles M., “Hertz Pays Record Fine: Pleads Guilty to Defrauding Consumers,” Automotive News, August 8, 1988.

“Judge in New York Upholds Law Barring Surcharge by Hertz,” Wall Street Journal, April 1, 1992.

McDowell, Edwin, “Pricing Plans Shift at Hertz and Alamo,” Wall Street Journal, May 5, 1992.

“IBM Reaches Pact With Hertz,” Wall Street Journal, March 31, 1993.

—John A. Sarich