No. 13 for No. 2
This October, Avis Rent A
Car will be spun off by its parent company, personal services franchise giant
HFS Inc., in a $225-million initial public offering. I have a modest proposal
for the people who "try harder." To let shareholders know what they're in for,
Avis should change its name. From now on, we'll call the company "Fad." I think
it's got quite a ring to it.
Now it's
true that, not long ago, this very space was filled with invective against
corporate
name changes (which may give you some sense of how far I'll go in pursuit
of a catchy lead). But in this case it's impossible to resist, for in the word
"fad" we have the entire history of Avis--and the recent history of U.S.
business--summed up in just three letters.
Fittingly enough, Avis' roots lie in what turned out to be
one of the great fads of the century, namely, air travel. In 1946, when Warren
Avis scraped together $85,000 and started his eponymous company, rental-car
agencies were all in downtown urban areas, making taxis the only way for
business travelers and tourists to get from airports to their destinations.
Avis decided there was a huge market for rental cars at airports.
At first,
there wasn't. As Warren Avis described it a few years ago, "People just didn't
know how to do it." How could they? It was only 1946. There were no credit
cards. Nor were there courtesy vans--oh, the Dark Ages!--so the cars were
parked right outside the door, and the rental agent would actually escort you
to yours. Eventually, people caught on. By 1954, Avis was the second-largest
company in the industry, behind only Hertz. So Warren Avis sold it.
That first sale, the product of Warren Avis'
fear that he couldn't expand the company fast enough to keep up with the
postwar reinvestment boom, was to a private financier named Richard Robie. Over
the next 43 years, the company would change hands 11 more times. When the IPO
is completed, Avis will have its 13 th owner (a collective of
shareholders, in this case). What makes this history of front-office turmoil
really notable is that it has been shaped, in truly uncanny fashion, by the
prevailing currents of U.S. business ideology.
Avis'
first move into corporate fad-dom came in the early 1960s, when it was
purchased by ITT. Now three different companies, ITT was once one real
company, the kind that could topple a democratically elected government in
Chile without blinking an eye. It was also the prototypical conglomerate,
assembling in the 1960s a stunning array of companies from seemingly every
industry on the globe. When ITT owned Avis, conglomeration was supposed to be
the recipe for success, because diversification would allow companies to offset
losses in one sector with gains from others. Investors diversify their
portfolios, the thinking went, so why shouldn't large companies diversify their
ownership?
One reason they shouldn't, it now seems, is that unless
someone like Jack Welch--of General Electric--is in charge, management tends to
concentrate on the industries they know something about and neglect those they
don't. Still, conglomeration as a theory lasted well into the early 1980s, and
Avis was there for all of it. ITT sold the company to Norton Simon, which was
then bought whole by Esmark, whose name was itself a product of corporate
faddism. And then Esmark was purchased by Beatrice, the ultimate consumer
company for the 1980s, selling Butterball turkeys, Samsonite luggage, and
Tropicana orange juice (while paying millions of dollars for an ad campaign
designed to create brand loyalty around a name, Beatrice, that did not appear
on even one of its products).
But the
transformation of Avis into a plaything for theory-spouting speculators didn't
really happen until the 1980s. First, Kohlberg Kravis Roberts, the investment
firm that made the leveraged buyout an art form, bought Beatrice by assuming
large levels of its debt. The argument was that debt forced managements to
become more efficient: The important thing wasn't the size of the bottom-line
profit, but rather increasing company cash flow. Large interest payments were
apparently not the problem everyone had thought they were.
As part of its effort to reduce Beatrice's
debt, KKR sold Avis to Wesray Capital, a firm led by William Simon, and Avis'
managers. Simon had brought LBOs to public notice when he and Wesray had first
bought Gibson Greetings, a card company, for $80 million and then, 18 months
later, taken it public for $290 million. That deal earned Simon himself $66
million on an investment of $330,000 and, not surprisingly, made the LBO more
popular on Wall Street than bad contemporary art.
Wesray's
purchase of Avis was trendy in three ways. It was an LBO. The company was run
by management now, which, people argued, would make Avis more
"entrepreneurial." And the company was no longer part of a conglomerate, which
was good because everyone was talking those days about focusing on your "core
business." But if the entrepreneurial spirit was willing, the flesh was
apparently weak, because, less than two years later, Wesray sold Avis to its
employees, who bought the company through what's called an Employee Stock
Ownership Plan.
ESOPs were invented in the late 1950s, but did not become
popular until the 1980s. Traditional thinking on employee ownership held that
employees would sacrifice long-term gains for short-term rewards, which is why
economists consulting in post-Communist Eastern Europe disparaged worker
ownership. Critics also suggested that, with their salaries and stock wrapped
up in the same company, employees were putting too many eggs in one basket.
(Strangely, no one ever said the same about Michael Eisner.) But by the time
Avis' employees bought the company, the new thinking was that there was no
better way of encouraging their creativity and dedication. Avis employees, said
one fan, "will be motivated, they will be happy, they will be competitive." I
have seen the future, and it works.
Actually, it did work, for a
while. Avis' profits jumped 35 percent in the first six months of employee
ownership, and the company remained profitable for the next decade. But more
recently, the bloom has gone from the ESOP rose, and last year Avis was sold to
HFS, which also owns Howard Johnson, Days Inn, and Century 21. Conglomeration
may not be back in, but franchising is, and that's HFS's whole business. You
might say the acquisition of Avis was therefore inevitable. And given the
recent resurrection of the IPO market, you might say the upcoming public
offering was as well.
What's really interesting
about Avis is that each change in management has been accompanied by claims of
superiority and inevitability. These claims can't, after all, all be right.
(Though in the 1980s, Congress did jiggle the tax rules in ways that encouraged
both LBOs and ESOPs.) If employees are the best owners, then Simon was wrong to
orchestrate the management buyout. If franchising is more efficient, the ESOP
was a mistake, as were both conglomeration and the core-business focus.
But nothing like this ever gets said. The new moves in, with scant reference to
the old. The avatars of the new make huge sums of money, all the while
pontificating about the efficiency and rationality of the market. But the
market can be productive without being rational, and you can have change
without progress. Right now, I'm waiting for Avis to announce that huge new
investment that Bill Gates has made in its future.
