It hardly seems possible that this is the 30th anniversary issue of the Monitor. This publication has provided through the years a wealth of articles written by many of the equipment leasing and financing industry’s leading executives. All of us in the industry have benefited through this sharing of forward-thinking ideas, and the Monitor has also kept us up to date on important leasing industry news. A sizable amount of space in the Monitor these past 30 years has been devoted to news of mergers and acquisitions, and I have been privileged to write a number of articles for the Monitor describing my views on merger and acquisition trends.

Historical Perspective on Leasing Company Acquisitions

Just as the dynamics of the equipment leasing and financing industry are constantly changing, so too are the factors impacting mergers and acquisitions of companies in the industry. That can be seen in my own career in equipment leasing, which began in 1972, sho rtly before the first issue of the Monitor. As chief financial officer for a corporation, I was looking for good acquisition opportunities that could take advantage of our corporation’s financial strength and complement our other business activities. My investigation of the equipment leasing industry led me to conclude that the equipment leasing business not only satisfied these two objectives but it also could provide important tax shelter to the corporation. We acquired a small equipment leasing company, which was for sale because a passive investor wanted to liquidate his investment. This business achieved tremendous growth and was an important profit contributor to the parent company for the next 15 years. After 8 years of overseeing the parent company’s investment in this leasing company, I was ready to go out on my own, and I acquired a major interest in another small leasing company that was seeking growth capital. This company was approached a year and a half later by a major privately owned company that wanted to use its financial strength to build a major leasing company. My partner and I saw the benefits of such an affiliation, as our company was highly leveraged and could not utilize all of the investment tax credits that it was generating. Our new parent company’s support helped the business grow beyond our most optimistic expectations.

The equipment leasing company acquisitions I initiated in 1972 and 1980 had the advantage of taking place when the equipment leasing industry was relatively young, and small independent companies could find niche markets where there was minimal competition from banks and major diversified financial service companies. Aggressive, well-run companies could benefit from the double-digit annual growth rates being experienced by the leasing industry to achieve very high returns on equity.

One advantage of equipment leasing businesses is that it is relatively easy for the owners to convert their investment to cash through the sale of the business or the sale or liquidation of the lease portfolio. The parent company of the leasing company I acquired in 1972 needed to sell the leasing company in 1987 in order to support the capital needs of its other businesses. By that time I had established Kropschot Financial Services as an M & A advisory firm for equipment leasing companies, and I arranged the sale of this leasing company to Wells Fargo Financial for a very attractive price. The leasing company that my partner and I sold in 1981 to a privately owned company ha s been sold twice since then. It first was acquired by a major Japanese bank, which subsequently sold the company (now known as De Lage Landen Financial Services) to a major Dutch bank.

The 1980s and the 1990s were decades of tremendous consolidation in the equipment leasing industry. By some estimates, the top 25 leasing companies now account for about 75% of U.S. equipment leasing activity; this concentration is due principally to acquisitions. The proverbial whales seemingly had an insatiable appetite for consuming the minnows. The three largest U.S. equipment finance and leasing companies in the Monitor’s survey for the year 2001, GE Capital, CitiCapital and CIT, are the surviving entities of what once were dozens of independent equipment leasing companies. Numbers 6, 8 and 9 in this Monitor 100 survey, Fleet Capital, Banc of America Leasing & Capital Group and Wachovia Leasing, also encompass a number of leasing companies, including acquired independent companies and various bank leasing subsidiaries brought together by bank consolidations.

Much of the early acquisition activity in the leasing industry involved either the large diversified financial service companies buying niche businesses or new entrants to leasing acquiring a platform business. These new entrants included non- financial corporations that were attracted by the enhanced tax benefits of leasing in the early 1980s, regional telephone companies formed from the AT&T break- up, thrift institutions and Japanese banks. Most of these new entrants disposed of their leasing businesses in the 1990s, and they have not been significant factors in the M & A market in recent years.

Large U.S. banks were major acquirers of equipment leasing businesses in the 1980s and 1990s. However, in recent years much of the bank M & A activity has involved one bank acquiring another. Since almost all of the large banks have leasing businesses, much of the recent growth in large bank leasing companies has resulted from bank acquisitions and not from leasing company acquisitions.

There have not been many publicly owned equipment leasing companies, and leasing company stocks have not generally achieved favorable valuations. However, with Wall Street experiencing euphoria and a receptivity to initial public offerings, six leasing companies went public from May 1997 to May 1998. Two of these companies, The CIT Group and Heller Financial, had been controlled by Japanese banks that wanted to liquidate their investment. Both CIT and Heller made sizable acquisitions after going public. In 2001 CIT was acquired by Tyco and Heller was acquired by GE Capital, and in 2002 Tyco spun off CIT in an initial public offering.

The other four leasing companies that went public from May 1997 to May 1998 were SierraCities.com (formerly First Sierra Financial), UniCapital, LINC Capital and T & W Financial. From late 1996 through 1998, these companies accounted for about 50 leasing company acquisitions, most of which were relatively small independent lessors. SierraCities acquired over 20 companies, and I helped UniCapital acquire 17 companies. This acquisition boom came to a screeching halt when gain on sale accounting for securitized leases lost favor among investment analysts in the second half of 1998. These four newly public leasing companies succumbed to pressure from the investment community to discontinue the use of gain on sale accounting, resulting in greatly reduced earnings and substantially lower stock prices. This made it more difficult for these companies to access the capital markets, and their problems were exacerbated by the difficulties these companies encountered in managing their rapid growth. LINC, T & W and UniCapital were forced into bankruptcy and liquidation, while SierraCities survived by being acquired by American Express. The difficulties encountered by these four companies and the bankruptcies of two larger public companies, FINOVA and Comdisco, have made it more difficult for other leasing companies to access the public equity market.

Recent Acquisition Activity

The hundreds of acquisitions of leasing companies in the 1980s and the 1990s have depleted the ranks of the most desirable acquisition targets. The majority of the sizable privately owned independent leasing companies have already been acquired. In the most recent Monitor 100 survey, there are only 10 privately owned independents, and the largest is ranked #59 in terms of assets. Of course, there are hundreds of privately owned leasing companies that are smaller than those in the Monitor 100, but many of them are too small or too limited in their capabilities to be of interest to the larger acquirers.

With few sizable independent companies remaining, it is not surprising that much of the leasing industry acquisition activity in recent years has involved sales of larger leasing companies and business units or assets of large financial service organizations. Following are some of the largest transactions announced in the past four years:

As most readers of the Monitor would expect, GE Capital has been by fa r the most acquisitive leasing company in the past 4 years, accounting for 8 of the 20 major transactions listed in the preceding table. It should be noted that some of these acquisitions are asset-based lending businesses, as GE Capital and other diversified financial service companies continue to expand into other commercial finance activities. Citigroup and CIT each had two major transactions on this list; also, in 2001 Citigroup acquired European American Bank, which owned several equipment leasing businesses. Thus the 3 largest U.S. leasing companies continue to grow by acquisition.

Despite the large transactions listed above, the overall equipment leasing acquisition market has declined substantially in terms of number of transactions since the peak in 1998. Very few independent leasing companies were acquired in 2002. This is due both to the limited availability of attractive independent companies and the reduced demand for smaller leasing company acquisitions. No longer are there aggressive newly public leasing companies competing against each other for acquisitions, bidding up purchase prices to exceptionally high levels. The equipment leasing acquisition market has also been adversely impacted by economic uncertainties and the reduced level of capital equipment expenditures and leasing volume. U.S. acquisition activity in all sectors was down substantially in 2002, with investment banking firms blaming the declining stock market, poor corporate earnings, the weak economy and accounting scandals. According to The Wall Street Journal, “The total value of U.S. deals in 2002 fell 41% to $447.8 billion, its lowest level since 1994. The number of U.S. deals fell to its lowest level since 1993, suggesting that the business of smaller and midsize deals is also off. From its peak in 2000, the value of deals has fallen by 74%.”

Acquisition Outlook for 2003

Most observers do not expect the overall U.S. acquisition market to rebound until business executives have a higher confidence level on the econo my. Furthermore, the potential for a war with Iraq, the tensions with North Korea, the continuing concerns about terrorism and the stock market doldrums are putting a damper on corporate interest in acquisitions. Nevertheless, the U.S. economy has shown great resilience and is showing signs of improvement.

Many economists predict that business capital expenditures will turn upward in 2003. Equipment leasing volume in recent years has represented about 31% of business investment in equipment, and I expect that 2003 will show modest improvement in total equipment leasing industry volume. As business prospects in the leasing industry improve, there will be greater interest in acquisitions. Potential acquirers of leasing companies will begin to realize that it is a buyer’s market, with prices at their most attractive levels in recent history. Perceptive buyers will want to take advantage of this opportunity before competition for acquisitions heats up.

The acquisition market necessarily follows the law of demand and supply, and the market is most vibrant when there are both many interested buyers and many motivated sellers. Of course, the relative motivation of a seller is generally heavily dependent upon the selling price that can be obtained. As interest in the acquisition of leasing companies increases, selling prices will start to rise, and I expect that an increasing number of leasing businesses will become available for sale in 2003. Such companies will include independent leasing companies tha t have pressing needs for equity capital and lower-cost debt sources, that have decided that the public equity market does not represent a viable alternative and/or whose owners are seeking liquidity. Also, we will see a number of corporate owners decide to exit the leasing business or segments thereof. Some of these potential sales have been on hold for several years while the owners awaited improved market conditions.

Who are the potential acquirers that are going to rekindle the leasing company acquisition market? The large lessors such as GE Capital, CitiCapital and CIT are likely to continue to look at opportunistic acquisitions of corporate divestitures of substantial leasing companies or segments as well as asset-based lending businesses. These large lessors can achieve economies of scale by eliminating much of the infrastructure of acquired businesses. Although many of the major bank leasing companies are still busy integrating the parts that came together in the wave of bank consolidations, a number of community and regional banks are exploring opportunities in the leasing industry for the first time. They could be good matches for privately owned leasing companies that can provide the bank with an established leasing platform. Many of these smaller banks are very liquid, and the yields available in equipment leases are very attractive to them.

Another potential source of demand for equipment leasing company acquisitions is private investment groups. With the demise of investment opportunities in the high technology sector, there are substantial amounts of private equity available to be deployed. Although private equity groups have typically shunned leasing companies as not having high enough growth potential, some such groups are now looking at leasing as a relatively stable industry with acceptable returns on equity and the ability to sell their investment at the appropriate time. Some private investment firms are looking for privately owned companies whose management wants to retain an equity interest; such investment groups could be excellent partners for leasing companies that are looking for an equity investor to provide growth capital.

I expect 2003 to show an increase in the number of equipment leasing company acquisitions from both corporate divestitures and the sale of independent companies. Although we may never return to the high level of acquisition activity and pricing experienced in 1998, prices should improve. Successful companies are always salable, and the pricing for profitable small leasing companies with solid sales and back-office capabilities should approach historical norms. As always, companies that specialize in niche markets, those that provide value-added services and companies with strong equipment remarketing capabilities will be able to command the highest premiums. The equipment leasing M & A market will improve as the leasing industry achieves its overdue turnaround in leasing volume. We then can expect to see an increased number of motivated sellers and motivated buyers that will be able to consummate transactions that satisfy their respective needs.

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Bruce Kropschot is President of Kropschot Financial Services of Vero Beach, Florida, a merger and acquisition advisory firm for the equipment leasing and financing industry, which he founded in 1986. Mr. Kropschot has been active in the equipment leasing industry for over 30 years and has served as a senior executive of 3 large leasing companies. Kropschot Financial Services has arranged the sale of over 130 equipment leasing and specialty finance businesses and numerous portfolios. The firm also arranges lease funding, subordinated debt and equity for leasing companies and performs business valuations. Mr. Kropschot is a CPA and holds BBA and MBA degrees in accounting and finance from the University of Michigan. He has served on the Board of Directors of ELA, EAEL, UAEL and the Equipment Leasing and Finance Foundation.