Harvard Case - Hertz in Bankruptcy: A Wild Ride in Pandemic Times
"Hertz in Bankruptcy: A Wild Ride in Pandemic Times" Harvard business case study is written by Samuel Antill, Stuart C. Gilson, Kristin Mugford. It deals with the challenges in the field of Finance. The case study is 32 page(s) long and it was first published on : Feb 22, 2022
At Fern Fort University, we recommend a strategic restructuring of Hertz's business model, focusing on a combination of asset management, debt management, and strategic partnerships to navigate the post-pandemic landscape. This strategy aims to optimize Hertz's capital structure, reduce financial risk, and unlock opportunities for profitability and growth.
2. Background
Hertz, a leading car rental company, faced unprecedented challenges during the COVID-19 pandemic. The sharp decline in travel demand led to a significant drop in rental volumes, resulting in a severe cash flow crunch. This, coupled with pre-existing high debt levels, forced Hertz into bankruptcy in May 2020.
The case study focuses on the company's efforts to navigate this crisis, including:
- Financial restructuring: Negotiating with creditors, selling assets, and seeking new financing.
- Strategic partnerships: Exploring alliances with private equity firms and other stakeholders.
- Operational adjustments: Adapting to the changing market conditions and implementing cost-cutting measures.
3. Analysis of the Case Study
The case study highlights the critical role of financial analysis in navigating a crisis. Hertz's management had to quickly assess the impact of the pandemic on its financial statements, including its income statement, balance sheet, and cash flow statement. This analysis revealed the company's precarious financial position and the need for immediate action.
Key issues:
- High debt levels: Hertz's pre-existing high debt burden exacerbated the impact of the pandemic, making it difficult to access additional financing.
- Declining rental volumes: The sharp drop in travel demand led to a significant reduction in rental volumes, impacting revenue and profitability.
- Liquidity concerns: The combination of high debt and declining revenue created a liquidity crisis, threatening the company's ability to meet its financial obligations.
Strategic Framework:
The case study can be analyzed through the lens of the Porter's Five Forces framework:
- Threat of new entrants: Relatively low due to high barriers to entry, including capital requirements and brand recognition.
- Bargaining power of buyers: Moderate, as customers have alternative options like ride-sharing services and personal vehicles.
- Bargaining power of suppliers: Moderate, as Hertz relies on vehicle manufacturers and other suppliers for its operations.
- Threat of substitute products: High, with the rise of alternative transportation options like ride-sharing and electric vehicles.
- Competitive rivalry: High, with numerous competitors in the car rental industry.
4. Recommendations
Optimize Capital Structure:
- Debt Restructuring: Negotiate with creditors to reduce interest rates and extend maturities, freeing up cash flow for operations.
- Equity Financing: Explore options for raising equity capital through IPOs, private placements, or strategic partnerships.
- Asset Sale: Sell non-core assets to generate cash and reduce debt.
Strategic Partnerships:
- Private Equity Investment: Seek investment from private equity firms to provide capital and strategic guidance.
- Joint Ventures: Form partnerships with other companies in the transportation or travel industry to expand services and reach new markets.
Operational Restructuring:
- Cost Optimization: Implement cost-cutting measures across all departments, including activity-based costing to identify areas for efficiency improvement.
- Technology Adoption: Invest in technology to enhance operations, improve customer experience, and reduce costs.
- Fleet Management: Optimize fleet size and composition to align with changing demand patterns.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Hertz's core competency lies in its expertise in vehicle rental and fleet management. The recommendations focus on leveraging these strengths while adapting to the changing market landscape.
- External Customers and Internal Clients: The recommendations prioritize customer satisfaction by providing efficient and convenient rental services while ensuring employee engagement and motivation.
- Competitors: The recommendations aim to position Hertz competitively by optimizing its cost structure, expanding its service offerings, and leveraging strategic partnerships.
- Attractiveness: The recommendations are expected to improve Hertz's profitability, enhance its cash flow, and reduce its financial risk.
6. Conclusion
Hertz's bankruptcy was a stark reminder of the vulnerability of businesses to unforeseen external shocks. By implementing the recommended strategies, Hertz can emerge from bankruptcy stronger, more resilient, and better positioned for future growth. The company needs to prioritize financial stability, strategic partnerships, and operational efficiency to navigate the post-pandemic landscape.
7. Discussion
Alternatives:
- Liquidation: While a quick solution, it would have resulted in significant losses for stakeholders and a loss of brand value.
- Chapter 11 Reorganization: This would have allowed Hertz to continue operating while restructuring its debt, but it would have been a lengthy and complex process.
Risks and Key Assumptions:
- Economic recovery: The recommendations assume a gradual recovery in travel demand. A prolonged economic downturn could negatively impact the company's performance.
- Competition: The recommendations assume that Hertz can maintain its competitive position in the evolving transportation landscape.
- Technology adoption: The recommendations assume that Hertz can successfully implement technology to improve its operations and customer experience.
8. Next Steps
- Immediate: Negotiate with creditors to restructure debt and secure short-term financing.
- Short-term: Implement cost-cutting measures, optimize fleet management, and explore strategic partnerships.
- Long-term: Develop a comprehensive business plan for growth, including investments in technology, expansion into new markets, and diversification of services.
By taking these steps, Hertz can emerge from bankruptcy as a leaner, more efficient, and more competitive company, ready to thrive in the post-pandemic world.
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Case Description
Hertz filed for Chapter 11 bankruptcy in response to ABS obligations and the COVID-19 pandemic. Enthusiastic Robinhood investors and shrewd negotiating tactics helped Hertz stabilize. Roughly nine months into the bankruptcy, Hertz received several bids to reorganize the company. Now, key Hertz advisors William Derrough and Tom Lauria must decide (i) whether the valuations implied by these bids are high enough, (ii) how they can negotiate higher valuations, and (iii) when to exit bankruptcy.
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