Hertz Leveraged Buyout Harvard Case Solution & Analysis

Q3.     What are the potential sources of value creation in this investment? How might this differ for a financial vs. a strategic buyer?

There are 5 factors that lead to value creation in a merger and acquisition case, as of Hertz leverage buyout.

  • Synergies or economies of scale
  • Gain access to new markets, customers and products
  • Diversification of risk
  • Access to new technology and knowledge
  • Ability to limit competition or gain market share

Since, the bidding group is not in the car business of any sort; hence, there will be no synergies or economies of scale achieved on the operational level but on the strategic level the bidding group could add their experience on the board of the Hertz as this was lacking when Hertz was a wholly owned subsidy of Ford.

It will lead to diversification of risk of Hertz as this will help to manage the debt as the bidding group comprises of equity firms, which can help Hertz to manage and raise its finance.

A financial buyer would not like to spend time on developing its investment; hence, it did not pursue synergies and developments. It would look for investments that could give stable returns whereas a strategic buyer would not only invest money as he would also invest time in trying to generate maximum value from the investment.

Q4.     What are the risk associated with this (i) Business/investment and (ii) transaction process? How might these risks be mitigated?

The greatest risk associated with this investment is the target market for Hertz and financing options undertaken by the bidding group.

Target Market

The transportation market is the target market for Hertz. This market is just recovered from a recession due to the 9/11 incident and USA is still fighting war against terror. However, it cannot be said that when such a incident may happen again leading to risk. Since, Hertz is based on transportation from the airport to within the city; therefor, it is very important that the people will travel by flight but in case the country is hit by another mortgage crises as of 2008 then it will reduce the buying power of people, which will make transportation by air and even by car a very difficult task for the people.

There is not much that Hertz can do about this situation. However, it can do one thing and this is it can reap as much benefits as possible because it can do it in the current positive market.

Transaction Process

The conduct of the transaction requires capital, which the bidding group want to raise through Asset Backed Securities, This is the biggest risk regarding using such a strategy is that this method of financing has never been used in a buyout, which takes the bidding group into a completely unfamiliar territory with no indication if these strategy will be successful or will the company crumble under the heavy load of interest due to the large debt.

Since, the ABS is a very complicated process, hence, the bidding group should assign this task to an expert, who will be able to manage and generate positive results from such a transaction.

Q5.     What are the key areas of due diligence, including any that are specific to this business? How would diligence/ research be conducted in these areas?

Due diligence is the process where an organization conducts a thorough overlook of the company regarding all of its documents and records so that it may be attain a satisfactory level to trust the information provided by the management in order to acquire the company.

There are specific areas that are highlighted when ever due diligence is conducted. These areas are to be streamlined with the utmost of caution as any misstatement missed will lead to damages in the future for the acquirer.

  • Review of Financials
  • Review of Legal documents
  • Review of Suppliers and customers list
  • Review of Employees and Employee Contracts
  • Business Lease Review
  • Competitive review

Any other areas of concern regarding the specific business, which could materially affect the acquisition................................

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