AOL and Time Warner. Exxon and Mobil. British Petroleum, Amoco and Arco. Chevron and Texaco. General Electric and Honeywell. First Interstate and Washington Mutual. United Rentals and U.S. Rentals. Prime Equipment and RSC. Case and New Holland. ICM Equipment and Head and Engquist.
ICM and Head & Engquist? Yes.
While hardly rivaling America Online and Time Warner's $112-billion merger, the 2002 merger of these two equipment distributor/rental companies, with annual revenue approaching a half billion dollars, was certainly a major deal in the equipment industry. Yet, although it ranked as one of the largest mergers in rental industry history, the merger of Salt Lake City-based ICM Equipment and Head & Engquist, Baton Rouge, La., took place quietly, with many industry participants not even aware it was occurring.
Well-established now as one of the industry's leading national rental chains, ranked No. 9 on the RER 100 list of North America's largest rental firms, there are clear differences between H&E and most of its competitors. While most national rental companies have followed more of a pure rental model, stocking their fleets in the late '90s with brand new equipment and downsizing their product support staff, H&E is a product support specialist, with more than 500 highly trained service technicians, and large repair facilities that rank among the industry's finest.
H&E Equipment Services follows what it calls an integrated business model: part dealer-distributor for such major brands as Komatsu, Yale Lift Trucks, Manitowoc, Grove and National cranes, JLG, Genie and Gehl, and part rental company. Very much a hybrid, H&E's structure goes back to the origins of each of the two major companies that merged in June 2002 to make up H&E.
The companies — with a combined 70 years of history — were very similar in nature. ICM was founded in 1971 as an offshoot of Salt Lake City-based Caterpillar dealer Wheeler Machinery, which wanted a separate company to represent the sales and rental of different lines of equipment. ICM always had a strong rental presence, especially in industrial forklifts, aerial work platforms and cranes. Its crane distribution business was the largest in the Intermountain region.
Head & Engquist was a major crane dealer. It was founded in 1961 in Baton Rouge by manufacturers' rep Tom Engquist, the recently deceased father of current CEO John, and a Houston-based distributor named Frank Head. The two men saw great growth potential for an equipment business along the Mississippi River. They founded Head & Engquist, primarily as a crane dealer. Its growth accelerated when it became the Grove dealer for Louisiana in the late 1980s, and it later expanded into the Houston market with the acquisition of a Grove dealership there. Head & Engquist became a Komatsu dealer in 1974, making it a then-unusual combination of a crane and earthmoving distributor.
Over the years John Engquist and ICM's Gary Bagley got to know each other well. Both major crane dealers, the two men participated in dealer meetings and councils together and found they had much in common in the way they approached their businesses. Both were fervent believers in strong product support being the essential basis for a successful equipment company and both believed in a harmonious integration of the rental business and the distribution business, although until the mid-1990s, Head and Engquist's rental activity was primarily of the rent-to-sell variety typical of traditional distribution houses. The two companies sold equipment to one another and did a number of business deals together.
“John was the shrewdest guy I knew to negotiate with, which means I knew he'd be a good partner,” says Bagley. “He knew the business. We had known each other a long time and always had a close relationship. Our companies were very similar in type: we were distributors, we were rental companies, we had similar product lines and we had the same philosophy of a product-support-driven type business.”
The geographic synergies made sense as well. At a time when national rental chains were expanding, with ICM's strength in the West and Head & Engquist's power throughout the Southeast, their unity gave the company a national footprint.
An unusual series of events led to the two companies coming together. In 1999 both companies, independent of one another, were acquired by a private equity investment company, Bruckmann, Rosser and Sherrill. Prior to BRS' involvement, ICM received an injection of capital from another investment firm, Ripplewood Enterprises, and made several acquisitions in the intermountain region.
But ICM's partnership with Ripplewood, which was looking for immediate returns, was not harmonious with ICM management's long-term view, and within a year BRS bought out Ripplewood's interest. Bagley and Engquist developed the idea of a merger between ICM and Head & Engquist.
The two companies worked together for two years, towards the goal of an eventual merger. The management teams worked together to prepare the infrastructure. Once the merger was finalized, the management team made the decision to unify beneath one banner — H&E Equipment Services.
“We had a lot of identity issues,” says Engquist. “On the Head & Engquist side, there was Coastal Equipment, Martin Equipment, H&E Hi-Lift, South Texas Equipment and Head & Engquist. On the ICM side, there was ICM, ACM, SNE, GNE and AHR. We just decided up front from Day One, that we're going to be H&E Equipment Services. So we melded all those company names into a new company.”
Once Bagley and Engquist and key senior managers agreed on the plan, they visited the branches to communicate with company personnel and found that employees supported the change to a common name.
Bagley and Engquist are quick to point out that in the merger of a nearly half-billion dollar company there are always issues that arise and they've had their share. Still, they say, communication has been outstanding on all levels.
“As we continue to integrate this business, we find there are things that ICM does exceptionally well and there's things the Head & Engquist side does extremely well,” says Engquist. “We try to adopt best practices and spread that throughout the organization. It's not a situation where we say ‘This is the way Head & Engquist does it and so that's the way we're going to do it.’ We try to see who does what well and adopt that across the board.”
Key was a solid agreement from the beginning between the two principals to have total candor in all dealings. “John and I made a pact up front that there would be no tip-toeing around,” says Bagley. “If we have an issue, we put it on the table and neither one of us take anything personally. We've addressed some pretty serious issues this last year that could have been show stoppers, frankly, if we didn't have the kind of relationship that we have. To develop trust and confidence in people takes a while, but John and I hit it off really well and we've laid it on the line when we had tough issues.”
Now that the merger is long completed, H&E has more than its share of reasons to feel good about its chances for strong success in the coming years, despite the continued weak economy. To begin with there's its product support capability. H&E service technicians average more than 120 hours a year in factory-sponsored, hands-on, troubleshooting-type service training. As dealers for major lines, H&E service technicians have to be trained to perform warranty work of the most sophisticated nature, and repairs including complete re-manufacturing of machines.
Touring a typical H&E shop, one sees equipment belonging to most of the industry's major rental companies, which send their machines to H&E for service and repair. H&E performs repairs for customers, including end users as well as rental companies, working on equipment sold by H&E as well as machines customers acquired elsewhere. The repair business is profitable for H&E, bringing in more than $100 million in annual parts and service revenue. H&E employs a group of product support sales personnel to network with customers and promote the company's product support capability.
Mechanical expertise allows H&E to maintain its rental fleet at a high level that contributes to a customer's profitability by reducing downtime. By offering well-maintained equipment, the company can command a higher rate structure. In recent years as most rental companies aged their fleets, H&E's product support capability became even more advantageous than during times of prosperity when companies could afford new equipment with comparatively low maintenance expense.
H&E didn't just decide to become product support specialists because of a change in the economic climate. Its product support culture developed over a 40-year period, through two separate companies that based their business success on it. The knowledge and experience of its technicians, its facilities and shop size and layout, and its large parts inventories represent the cumulative effort of decades of preparation.
“Our facilities are set up for heavy service work, with overhead cranes, paint booths, with all the fluids, air and power available in each bay,” says Engquist. “We've developed this over a long period of time.”
Success in product support requires a product support mentality that values product support as a core competency, deeply engrained in the company's culture. With both the ICM and Head & Engquist sides of the company strongly dedicated to product support, it was easier for the two firms to come together.
Not a one-stop-shop
H&E Equipment Services is not a one-stop shop. It is not trying to be all things to all people. It specializes in four key categories: cranes, aerial work platforms, material-handling and earthmoving equipment, along with a few related categories of equipment. It is an authorized dealer for more than 50 manufacturers, but its primary specialties are those four categories. And while rental is a $170 million portion of its business and it does handle related construction equipment such as compaction, air compressors, pumps, welders, light towers and generators, there are a lot of category classes it doesn't handle. The company analyzes profitability and compatibility before taking on additional lines.
If a customer wants an item that H&E doesn't carry and the company determines it would not be a worthwhile investment, it would partner with another rental company to provide the item to the customer, rather than attempt to be a one-stop shop. If branches request a different equipment category, they must get the capital expenditure request approved.
“The key factor is our ability to support it, not to be all things to all people,” says Brad Barber, H&E's vice president of rental. “We don't believe that hurts us. There's a mentality that says your customer will go elsewhere if you don't have something they want. But we only want to carry something if we can support it with service and parts availability. We cater to a specific targeted customer base. We have a general fleet mix that may vary in certain branches, specific to those markets, such as more emphasis on the industrial side in the West and in Houston and Atlanta, and a more heavily commercial mix in most large metropolitan areas.”
Flexibility is strength
While not a one-stop shop, flexibility remains one of the company's strengths, in terms of its ability to meet customers' needs. It can structure rental-purchase options, lease agreements and short-term rentals, and the sale of new or used machines. It excels with larger corporate customers and also has thousands of local-level small- to mid-sized patrons and niche players. The ability to satisfy different kinds of clientele helps H&E navigate the turbulent waters of the economic slowdown, by not being confined to one particular type of customer or type of service.
“We have the ability to basically handle any customer's needs,” says Bagley. “Some customers want to lease equipment fully maintained, some want it on demand on a short-term basis, some want to own it and make sure we service it all. Every customer is different. Lift truck customers are typically a little different from dirt customers or crane customers or high-reach.”
H&E is also a fleet management specialist. “That means source the product, provide the best quality products and service, and other ancillary services such as financing or leasing,” says Bagley. “Or if the customer has a fleet it needs help in disposing, we'll do that.”
As a large company that is now national, the enhanced ability to serve the large construction corporation that does jobs all over the world is an obvious benefit of the merger. As Brad Jacobs, CEO of United Rentals, says “size does matter.”
“We've done projects before where, for example, we put 1,700 pieces of major equipment on a jobsite within 90 days,” says Bagley. “That's with a full shop on site with full service capability. We've got the ability to mobilize immediately, to source equipment quickly and maintain it properly. It's just what the job dictates. We do well at big projects with big customers that require high degrees of quality and safety. We have the product support capability and parts on the shelf in all locations. Big projects demand those kinds of services. We do well at that and look forward to the economic recovery that will generate more of these major projects.”
At the same time, the economic climate can have a lot to do with what kinds of jobs the company does. “Right now it's the small- to mid-sized contractors that are carrying the load and giving us the most business,” says Bill Fox, vice president and general manager of the crane and earthmoving division. “By having branches take care of customers on the local level, we can deal with the small contractors and niche people. Right now many of the larger, corporate accounts are struggling.”
As in any business, keeping an ear to the ground, staying tuned to the changes in the marketplace is a necessity and a skill that H&E prides itself on.
“You've got to have a balanced profile to serve end user customers,” Engquist adds. “They don't just rent equipment. The average customer out there usually owns a few pieces of equipment, they've got to buy parts, and they need service and safety training. The balanced profile is a better way to gain confidence and trust and serve the customers. Consequently, a lot of what was just pure rental in the past is migrating now to a little bit more of that balanced profile because customers are demanding it. That's the market opportunity. The rental growth isn't there any more, so what do you do?”
That's a question a lot of companies are struggling hard to figure out as they head towards 2004 and an economy that is still uncertain. H&E has survived the consolidation era when the industry was pumped with capital, when the margins of the distribution business dwindled, and is still passing through an era when downward rate pressure is threatening the ability of rental companies to offer value-added services. Is the strategy H&E is following, taking advantage of its strengths in a market full of pitfalls, a sound one? Only time will tell, but its investors are betting that the emphasis on quality will endure in the long run.
Michael Roth can be reached at [email protected].
AN RER CAPSULE
H&E EQUIPMENT SERVICES, BATON ROUGE, LA.
History: Head & Engquist was founded in Baton Rouge, La., in 1961 by manufacturers' sales representative Tom Engquist, and Houston-based distributor Frank Head. It started as a crane distributorship, soon obtaining the Grove crane account for south Louisiana. In 1974, the company became a Komatsu dealer. Head & Engquist started out with one branch and then grew throughout Louisiana, and parts of Texas, Arkansas, Mississippi and Tennessee. It acquired South Texas Equipment, the Grove dealer in South Texas in 1988, and Houston-based Coastal Crane in 1998. It also acquired Dallas-based Martin Equipment in 1998, giving it access to the Manitowoc crane line and expanding its north Texas market share in aerials and cranes.
In May 1999, capital investment group Bruckmann, Rosser and Sherill acquired the majority interest in Head & Engquist's parent company, Gulf Wide Industries. In spring 1999, BRS made another significant investment in a large equipment distributor that operated in the West, ICM Equipment Co. Its intent was to merge the two corporations. ICM had 17 locations throughout the Intermountain area and Head & Engquist had 21 in the Texas and Southeast markets.
The potential merger was delayed several years by a slow economy, but Head & Engquist established H&E Hi-Lift in 2000, with locations in Texas, Florida, Louisiana, Georgia and North Carolina, with dealership rights from JLG, Genie, Gehl, Gradall and Skytrak.
Salt Lake City-based ICM was founded in 1971 when Wheeler Machinery, Caterpillar dealership in Utah and surrounding counties of Nevada and Wyoming decided to start a non-Cat business to deal with auxiliary product lines, and to get into the lift truck distributing manufacturing business. ICM started as a Cat lift truck dealer, a Cat engine dealer and took on Grove cranes and JLG aerial work platforms and a few other lines in its first year. ICM was one of the early pioneers of the aerial business, and a major player in aerial and lift truck rentals from its inception.
In 1998, ICM brought in an equity partner named Ripplewood Enterprises, and acquired several dealerships in neighboring states such as American Hi Reach in Denver and Southern Nevada Equipment in Las Vegas. ICM also integrated ACM in Arizona, a subsidiary it started 10 years earlier. Ripplewood's interests were bought out by BRS in 1999.
As conditions improved in the bond market in 2002, funding became available for the merger of the two companies, which became final June 17, 2002. The name was changed to H&E Equipment Services.
Equipment Lines: H&E represents more than 50 manufacturers, but its top lines are Komatsu earthmoving equipment; Yale forklift trucks; Manitowoc, National and Grove cranes; JLG and Genie aerial work platforms; SkyTrak and Gehl telescopic handlers, and the Bobcat line.
Top management: Gary Bagley, chairman; John Engquist, CEO: Lindsay Jones, chief financial officer; Johnnie Jones, vice president of product support; Brad Barber, vice president, rental division; Bill Fox, vice president and general manager, cranes and earthmoving division; Ken Sharp, vice president, western region; Rob Hepler, vice president, aerial division; Dale Roesener, vice president and fleet manager.
Revenue: 2002 rental volume: $169.0; 2002 Total volume: $432.5. No. 9 on the RER 100.
Locations: 43 locations: Alabama 1; Arizona 2; Arkansas 2; Colorado 2; Florida 2; Georgia 1; Idaho 2; Louisiana 11; Mississippi 1; Montana 3; Nevada 2; New Mexico 2; North Carolina 1; Texas 9; Utah 2.
