Uniting two companies totaling $1.5 billion in revenue is a challenging task. But to United Rentals' Wayland Hicks and U.S. Rentals' Bill Berry, the task is more akin to the developing of a friendship or a marriage. Just as any good relationship has its challenges, so does the union of two companies.
"United has a tremendous record in consolidation, and we have a strong track record in operations," says U.S. Rentals' CEO Berry, who will serve as president of United Rentals, if the deal goes through as expected next month. "In both companies, we have an entrepreneurial spirit that operates for the benefit of the shareholders."
"When you bring the two companies together, you have the best practices of both organizations and the two combined will be stronger than the individual," says vice chairman and chief operating officer Hicks. "The operational experience of U.S. Rentals' management team is so strong in so many areas. Where we might have to hire somebody, they've already got somebody on board."
At that point, Jacobs and his team were financially secure, but still young and hungry. Over a period of several months, they began searching for another industry that was still relatively fragmented and ripe for consolidation. They hired consultants and researched dozens of potential industries. They read publications, attended industry trade shows, asked questions and consulted experts.
After narrowing the field down to a half-dozen industries, there was one that kept coming up ahead of the others - equipment rentals.
"The most important factor to us was the early stage of consolidation," Jacobs says. "It may appear, from all the activity that's going on, that consolidation is far along. But even if you look at last year, the amount of revenue that was acquired was far less than the amount of incremental revenue that was generated by the growth of the industry itself.
"The increase of the rental trend is far more attractive than [the trends in] most other industries. Rentals is not a fad - it's a trend based on the favorable economics of renting versus owning. This is a roughly $20 billion industry that could grow to be a $40 billion to $50 billion industry over the next five years.
"We were also very attracted to the rental industry because the typical owners of equipment rental companies are similar to the owners of solid waste companies - self-made individuals, who by their own wits and resourcefulness have made themselves multimillionaires. They are people with a lot of independence and entrepreneurial spirit, successful leaders in their communities. This industry has a lot of integrity. The average equipment rental company has a high level of ethics, a high regard for the law, and a high regard for treating its employees and its customers properly and with dignity. The quality of the people made us comfortable in this industry."
United put together $55 million in capital. Of that, $45 million came from its management team, including $35 million from Jacobs himself mostly taking the profits from the sale of United Waste Systems. Other investors - including quite a few former United Waste shareholders - contributed various sums to give United a total of $55 million in start-up equity, with which it made its first six platform acquisitions in October 1997. Since then, United has acquired 53 more companies (and, at press time, has another 19 companies signed up under letters of intent), culminating in its dramatic agreement in June to purchase U.S. Rentals, the industry's second-largest rental company.
But the term "former" owners doesn't always apply. In addition to the cash payment they receive for their companies, most receive stock options as well. The United philosophy is to provide them former owners, who continue as shareholders as well as managers, with enough incentive to retain the motivation for success that inspired them as entrepreneurs.
That billion-dollar stock swap propelled United's annual revenue pro forma run rate to close to $1.5 billion and is likely to be considerably higher once that transaction closes this fall.
But United was well on its way to becoming the industry's leading company even before the acquisition of U.S. Rentals. Not including the U.S. Rentals branches, it now has outlets in 28 states and two Canadian provinces. United has acquired an extraordinary stable of RER 100 companies - including Oregon's Power Rents; East Coast-based aerial powerhouses Access Rentals and Equipment Supply Co.; leading Canadian rental players BNR Equipment and Reitzel Rentals in Ontario and Perco Ltd. in Quebec; Northern California's A&A Tool Rentals & Sales and A-1 Rents; Southern California's Able Equipment and ADCO; Houston's Gaedcke Equipment; and North Carolina's Mercer Equipment - and has arrived on the scene with an impact unprecedented in rental industry history.
With the startling purchase of U.S. Rentals, United captured the attention of the national media to a degree far beyond any previous exposure, with Jacobs appearing on CNN/FN and many stories appearing in newspapers and magazines.
The company's strategy is relatively simple: An acquisition team of eight specialists, led by vice chairman and chief acquisitions officer John Milne, is checking out hundreds of rental companies throughout the United States and Canada. United's game plan is to develop clusters of stores not more than an hour or two drive away where they can increase profitability by sharing equipment to drive utilization. Clusters also enable United to benefit from economies of scale by combining back office, accounts receivable, accounts payable, credit and collections functions.
Once United completes an acquisition, its operations team, led by former Xerox Corp. senior operations executive Wayland Hicks, takes over and works to establish stricter budgetary control and integration with the rest of the company through its management information system.
But part of the secret to United's success is that the "taking over" of newly acquired companies consists mostly of providing that company with capital to expand and grow while, generally, allowing the company to continue to do what made it successful in the first place, including keeping the company name. Unlike some national firms with a prominent name, the United management team believes that local name recognition is far more important.
United also, in most cases, keeps the existing management team intact, with the belief that its entrepreneurial spirit, hunger to succeed and knowledge of the local market are what made the company successful to begin with. In many cases, the selling owners stay with the company and continue to run it, often going on to manage a region or district. Many former owners work with United's acquisition team, helping it make contacts with successful rental companies in their particular areas as well as among industry friends in other geographic regions.
Although the two companies will continue to operate separately until the deal is closed, committees are planning the juxtaposition of two distinct, but in many ways complementary, corporate cultures. The companies need to consider how to proceed in a variety of areas.
Both Hicks and Berry say that geographic overlap is comparatively limited.
"If you look at the maps of our two companies, our locations are very complementary; there is very little overlap," says Hicks.
"We've looked at locations and there are probably less than a handful that we might consider closing because they are so close together."
United was in the process of developing its structure with regional vice presidents responsible for operations in four areas.
Hicks and Berry say that eventually the combined companies will have seven or eight regions. Both companies use preferred vendor systems, preferring to concentrate the purchase of equipment from vendors that provide national discounts. Although there is some difference in the vendors the two companies are involved with, many overlap.
U.S. Rentals has its own computer system, but will switch to United's. U.S. had also considered the Wynne system before developing its own. "Just like any other company that we acquire, there is a period of adjustment," says Hicks. "I've stood behind people at rental counters while they were trying to get comfortable with our newly installed management information system, and it's like a trip to purgatory, although the good news is that it's a short trip. But we need a common computer system, and we agree this is the best."
The acquisition will also help United in its efforts to drive down the age of its equipment fleet, since the U.S. fleet is comparatively newer.
U.S. and United will also have to standardize their compensation systems and are working on developing an integration schedule in a wide range of areas. Both Hicks and Berry say attrition will be relatively small, with 50 to 75 people across the two companies likely to face potential job loss, out of a total of about 5,000 people. Saying that United will provide stay-on bonuses to help work through the transition, Hicks adds that many of the people could be transferred to other departments as the company continues to expand. -MR
