Appeared in the October 2005  Monitor – Leasing and Financial Services

The year 2005 is shaping up as another relatively quiet year for mergers and acquisitions involving equipment leasing and financing companies in the United States.  Acquisition activity peaked in 1998, when there were a number of newly-public leasing companies that were trying to grow through acquisition and many independent leasing companies that were ready to take advantage of the high prices being paid.  The current low activity level is not due to lack of demand.  With interest rates low and liquidity high, there are many interested acquirers looking at the few equipment leasing and financing companies currently available for sale.  One reason for this low supply is the fact that many of the largest and most attractive independent leasing companies have already been acquired.  Lease portfolio purchases are also in high demand at the present time, but again there are few sellers.

Acquisition Activity in 2005

Two of the largest 2005 equipment leasing company acquisitions were completed in January.  GE Commercial Finance acquired CitiCapital’s transportation finance business for a reported $4.6 billion, and National City Commercial Capital acquired Charter One Vendor Finance.  The transportation finance business no longer fit into CitiCapital’s business strategy, and Charter One Vendor Finance was sold after its parent bank was acquired by a unit of Royal Bank of Scotland, which had other leasing businesses in the U.S.

The aircraft leasing sector has had an active M&A market this year.  Aviation Capital Group, a unit of Pacific Mutual Holding Co., acquired Boullioun Aviation Services from West LB in June for approximately $2.6 billion.  Also in June, GE Commercial Finance acquired a portfolio of approximately $1 billion in corporate aircraft loans and leases from CIT Group.  CIT announced that it would reinvest the capital from this sale of the majority of its corporate aircraft portfolio into other commercial finance businesses with stronger growth opportunities.  In August, Morgan Stanley announced that it was putting up for sale its $2 billion aircraft leasing company.

Every year there are acquisitions of equipment leasing and financing businesses because the selling company’s founder/owner wishes to retire.  An example of such a transaction in 2005 was the March sale of Allco Enterprises to LEAF Financial, a unit of Resource America.  Another common type of leasing company acquisition is the purchase of an equipment leasing company by a bank that does not a have a significant presence leasing.  In May 2005, Bancorp Rhode Island made such an acquisition of Macrolease International in order to expand its leasing capabilities.  Leasing companies often add to their leasing capabilities and/or geographic scope by hiring a group of individuals from another organization.  For example, All Points Capital, a subsidiary of North Fork Bancorporation, expanded its operations in February 2005 by hiring a team of managers and sales people who were available due to Washington Mutual closing its equipment finance division.

A growing trend has been the diversification of commercial finance organizations.  Some companies with major equipment leasing and financing activities completed acquisitions in other specialty finance sectors in 2005.  These include GE Commercial Finance’s $2.3 billion acquisition of Bombardier Capital’s inventory finance business in May and CIT Group’s $0.4 billion acquisition in February of Education Lending Group, which provides student loans.  CIT also announced in July that it has reached a definitive agreement with Itochu Corp. to acquire Healthcare Business Credit Corp., which provides asset-based and cash-flow financing to healthcare providers.

Another source of consolidation in the equipment leasing industry has been the acquisition of the parent companies of leasing companies by corporations that have leasing businesses.  During the major consolidation in the banking industry, many leasing affiliates of banks were eliminated or folded into their new parent company’s leasing operations.  In June 2005, it was announced that MBNA, a major credit card issuer that also has equipment leasing activities, would be acquired by Bank of America Corp., which has a much larger equipment leasing presence than MBNA.

Perhaps the most unusual leasing company M&A transaction announced in 2005 is Pitney Bowes’ plan to spin off its Pitney Bowes Capital Services external financing business.  Under a definitive agreement Pitney Bowes entered into with Cerberus Capital Management in April, Cerberus is expected to invest in excess of $100 million for common and preferred stock representing up to 19.9% of the voting interest and up to 48% economic interest in the entity that will be spun off to Pitney Bowes stockholders in a tax-free distribution.  This entity will include most of the assets of Pitney Bowes Capital Services and will be an independent publicly traded company having approximately $2 billion of assets.

The Present M&A Market

There are currently a number of equipment leasing and financing companies that are officially or unofficially for sale.  Many of these companies that are considering a sale are small independent companies, but they also include larger companies, divisions of large leasing companies and U.S. leasing affiliates of foreign companies.  Some of the sellers are just testing the market and will sell their leasing business only if a relatively high price can be obtained.  With a limited supply of companies for sale, the most attractive acquisition candidates will command premium prices.  Leasing companies that are most likely to be in high demand are those that maintain a strong position in a specialty niche market, have valuable vendor or lessee relationships, realize high residual values by being an equipment specialist and/or provide value-added services to their customers.  Of course, the highest purchase prices generally are paid for companies that have the highest returns on equity and the most attractive growth prospects.

An alternative for selling a leasing company is to have a public stock offering.  There are very few public leasing companies, with Marlin Business Services’ initial public offering in November 2003 being the most recent one.  Both Marlin and CIT, which was spun off by Tyco in 2002, have performed well in the public market.  The performance of public leasing companies has an important impact on the valuations placed on non-public leasing companies; thus the planned spin off of the Pitney Bowes Capital Services external financing business as an independent public company will provide another valuable comparable in determining leasing company valuations.  At least one other leasing company is currently exploring public market options, although the high demand for acquisitions of successful leasing companies may present a more attractive alternative for some sellers.

Many of the interested acquirers of small equipment leasing companies are small and mid-sized leasing companies that are looking to grow and diversify their business focus.  Also, small banks that want to add leasing expertise are candidates to acquire small leasing companies, especially those that are based in the bank’s geographic markets.  The large diversified financial service companies and the large bank leasing companies are more interested in acquiring larger leasing companies and lease portfolios.  

Acquisition strategies are often influenced by the need to meet lease origination volume goals.  With leasing volume declining from the peak in 2000 through 2003, many leasing companies did not achieve their growth targets.  Although ELA’s estimates show that overall leasing industry volume has increased in 2004 and 2005, certain big ticket and tax-oriented leasing markets are depressed, and some companies in those markets are seeking to enter new leasing markets, often through acquisition.  Portfolio acquisitions are in great demand by leasing companies in need of additional origination volume, but very few sizable lease portfolios have been for sale in 2005.

A number of private equity groups and venture capital firms continue to have interest in the equipment leasing industry.  They have invested in established companies and backed management teams in forming several new leasing companies in recent years.  Successes by private equity groups and venture capital firms in their equipment leasing company investments will likely attract additional investment interest in leasing companies.  Recently hedge funds have shown interest in investing in lease portfolios and leasing companies.  However their need for substantial volumes of high yielding assets limits the types of leasing investment opportunities that are appropriate for hedge funds.

Future Prospects

If the U.S. economy continues to strengthen, business investment in equipment should increase, bringing with it growth in leasing volume, greater profitability for leasing companies and greater interest in acquisitions of leasing companies.  Acquisition demand will come largely from other leasing companies and banks, although private equity groups and venture capital firms will continue to make selective leasing company investments.

The supply of successful independent leasing companies that are large enough to attract significant acquisition interest continues to be relatively small.  In the 2005 rankings of the Monitor 100, there were only 12 independent non-public leasing companies, and the largest of these ranked #50 in asset size.  There will always be a supply of entrepreneurial leasing companies whose owners would like to sell their business in contemplation of retirement, but such companies are often too small to have broad acquisition appeal.  One source of future acquisition or IPO candidates will be the leasing companies that have been backed by private equity groups and venture capital firms, who typically expect to have a liquidity event in three to seven years.  Other acquisition candidates will come from large companies who, for strategic reasons, have decided to get out of one or more of their leasing business segments.  The limited supply of acquisition candidates will help assure that there will continue to be substantial competition to acquire successful leasing businesses.

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Bruce Kropschot is President of Kropschot Financial Services of Vero Beach Florida, a firm he founded in 1986.  The firm is the leading provider of merger and acquisition advisory services for equipment leasing and financing companies, having initiated the sale of more than 140 businesses.  In addition to representing buyers and sellers of leasing companies, Kropschot Financial Services arranges lease portfolio sales, assists leasing companies in locating debt and equity financing and performs business valuations of leasing companies.  The firm is a founding member of the International Network of M&A Partners, an organization comprised of 60 leading M&A advisory firms from around the globe.  Mr. Kropschot has been a senior executive of three leasing companies and is active in four leasing industry associations.  He is a CPA and holds BBA and MBA degrees in accounting and finance from the University of Michigan.