How To Manage Your Lenders' Expectations - Finance
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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How To Manage Your Lenders' Expectations

Written By Larry Pelka

Article Date: 11-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.

Create a plan that presents your company in a transparent way.

The biggest source of capital for most dealers is banks. Banks have been going through extreme changes over the past 10 to 15 years; changes that are having a big impact on how you run your business and how you manage those relationships. First, consider consolidation. For example, in Chicago, First National Bank of Chicago acquired a number of banks, they were acquired by Bank One and now, of course, they’ve been acquired by Morgan to create a bank to compete with CitiGroup. This is not just happening with big banks. Small, local banks are being bought by regional banks, and regional banks are being purchased by bigger regional banks. And this goes beyond our shores. Hong Kong/Shanghai Bank is one of the biggest banks in the world and is acquiring banks and finance companies in the U.S. Also, two of the largest banks in Japan just merged and will wield considerable global power. These are just some of the examples of the big getting bigger. With these huge consolidated banks, there is going to be less local authority for the people you deal with. If that local authority was a regional authority, it will now become, in many cases, national authority. Almost all of the consolidation has been towards public companies. A lot of us have dealt with banks that were owned by a number of people or organizations that weren’t public companies. When you are part of a public company, as your banker is today, every quarter you are expected to make 15 percent to 20 percent more. No one asks, “How is the economy?” or “How is delinquency?” – they want 20 percent more. That pressure that comes to your banker is passed on to you. No longer can a banker say, like many of you who run private companies: “I’ll take a year off. It’s a tough time and we’re not going to make as much money in 2004 as we made in 2003.” That’s not part of the jargon. Because of this, you have financial analysts who have tremendous power over pubic companies. If a number of financial analysts begin to pressure the chairman of a company to drop a certain industry or question why they are in an industry, that bank will begin to make changes. Why is that? The people who run the company make a lot of their money on stock price. If the financial analysts don’t like the company, what happens to the stock price? Look what happened to Caterpillar recently – a great company doing a great job. They announce a small slippage and even though their full year forecast looks good, the stock value drops. That’s happened to Intel, IBM, and others. In other words, we don’t want to hear any bad news. When we hear bad news, it gets put out in the stock market, which means, of course, that, if you are shareholders in Larry Pelka Inc., your stock price goes down, your wealth is affected and you come to management and say, ”Do something about it.” That forces some of the sweeping reactions you’ve seen and that you’ll continue to see in the future. It also impacts financial scrutiny – not just the financial scrutiny of the company reporting the numbers, but their financial scrutiny of the numbers you present to them. They want to see more and more data. If you don’t supply them with the data, they will consider you a very small company or a company they don’t want to do business with because these are people who want to make decisions based upon data. Although your local banker may come to visit, he is not often the one that makes the decision. These bigger banks have good knowledge of the industry on an international level. They don’t have a lot of knowledge of your local industry. There is no national construction equipment market. Each area of the country has different characteristics and dynamics. Banks don’t often know that. They make decisions based upon the data they get. They also make comparisons. With a bigger universe of data, they can take 28 dealers they do business with, put those numbers together, and compare it to AED – if you fall on the bottom, you may not be someone they want to do business with. Manufacturers’ captive financial divisions have become more important to dealers. They are a ready source of retail financing, and financing for mergers and acquisitions. They allow dealers to get bigger. It also allows dealers to build up rental fleets, and in good times and bad, manufacturers’ captives invest in dealers. They have become a very important financial source. But, let’s take a look at what’s happened to them because what’s happening to them affects you – consolidation. Manufacturers are getting bigger, they are buying their competitors, and they are buying companies who have equipment adjacent to what they sell. It’s become an industry standard and it’s not going to change. It’s impossible for many of these manufacturers to fight a global battle unless they are global. You have to have some financial strength in order to compete on today’s stage. The result is consolidation. That consolidation will continue, which means that if you have a manufacturer that is helpful and close to you, and they are purchased by another company, you have new relationships to deal with. That will continue. Manufacturers and captive financial divisions have the same public pressure banks do. If you are going to be that big, you probably have to be a public company. The same pressures that were evident with banks are evident with manufacturers. And a lot of the pressures a manufacturer puts on their dealers is because of this public company pressure. If the market is going to grow 15 percent, there will be a lot of pressure on the manufacturer to grow 20 percent. Or he will want dealers who will allow him to grow 15 percent to 20 percent. When you get pressure from a manufacturer, it’s not because they’d like to grow, it’s because they have to grow. The pressure on manufacturers to grow means there will be more and more pressure on the financial captive divisions to make money. Up until now when captives were in a growth stage, it was easy for them to have double-digit increases in profit. That will become more difficult as they get bigger. I ran a finance company. It’s hard to get big when you are $24 billion in size. It’s not that easy to grow $4.8 billion a year. You have to buy something big. Second thing you want to know is that finance companies are a funny animal. We [Associates Commercial Corp.] were owned at one time by Ford. We made a lot of money for Ford. Ford decided to take us public and somebody said, “Why?” It’s simple: A financial subsidiary makes a lot of money on the balance sheet and the income statement. But they eat cash. For every dollar they make, they have to keep up their ratios. I can make $100 million in my finance company, but the fact that it’s growing means I have to take that $100 million, borrow another $20 million, put $120 million back as equity to keep up the ratios. The manufacturer and captive finance companies are not a well you can go to forever. They can, however, be the best relationships you can have. A manufacturer and a captive have helped many a dealer in good times and bad. Those relationships are as important as banks today. Consolidation has already hit finance companies, but it will continue. When I was at Associates, we were the largest independent S&P 500 finance company, except for GE, with well over $100 billion in assets. CitiGroup purchased us. Pick up the CitiGroup financial statement and it will be a challenge to find Associates there. That’s how big some of these companies are. The same “public company pressures” are put on independent finance companies, which means they have to find markets big enough for them. In a way, manufacturers and captive finance companies eat into their markets and make the construction equipment industry less attractive. It’s hard to put all your resources in an area where you are getting only a small piece of the pie. These huge finance companies will diversify into a lot of different areas because it’s impossible for them to put all their resources in one or two markets. What that means, of course, is that when you don’t have somebody totally devoted to your market and times are bad, nobody shows up at the door; when times are good, everybody shows up at the door. What do you do about that? We’ve said that there is less local control. We’ve said that there are more and more people making decisions in far off places and they won’t be doing it based upon knowing you, coming out to visit you, and knowing the peculiarities and strengths of your organization. They’ll base it on pieces of paper. Those pieces of paper can be written by you, or they can be written by somebody who doesn’t know you. It’s your choice. Excerpted from November 2004 Construction Equipment Distribution. For the complete article, email or to subscribe, CLICK HERE.
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