Although the proposed Lloyds TSB
takeover of HBOS still requires shareholder and regulatory
approval, the chances of it going ahead are high given the current
banking crisis and the reported willingness of HBOS executives to
accept the deal.

For motor lessors the most revolutionary feature of the takeover
will be the shape of the UK company car sector if Lloyds TSB
Autolease’s (LTSBA) 129,000 vehicles and Lex’s 250,000 vehicles are
merged into one super fleet.

Both Lloyds and Lex have a similar evolutionary path (see
timelines) and both are headed by experienced fleet men (see
profiles) hardened by years in the industry. Both have faced the
challenges of integrating acquired fleets – with mixed results –
and both have introduced a specific culture into their respective
companies.

Given the market turmoil, respondents wished to remain anonymous
when discussing possible implications of any future merger.

“The scale of such a merger is so huge,” says an industry
analyst, “that the full impact remains below the radar. If the
banks deal goes through, it will probably be quite some time before
any planned merger of fleet companies is brought about.”

A possible sale

Given that the newly-formed bank will inevitably be faced with
liquidity challenges, notwithstanding the government’s rescue plan,
the need to shrink its balance sheet may lead to its fleet
operations being put on the market.

“Who would have the appetite to acquire them?” the analyst
continues. “Most banks will be re-trenching to their core and not
seeking to expand horizontally.”

One lessor adds: “There are purchasers out there who would be
interested. The contract hire industry has always attracted those
banking organisations seeking to make capital gains – and in good
times the capital gains in the fleet leasing market can be
substantial. When the market is doing well and residual values are
rising then lenders do very well indeed.”

“If it comes to an industry sale,” says an executive with broad
industry knowledge, “I cannot see any bank having the appetite to
buy both. Then, between the two, Lex would be a ‘tidier’ company to
acquire and, as such, would have a lower cost of integration. LTSBA
would be a totally different situation – with its recent
integrations not completed and deals running on different
paper.”
The size of the new operation would probably have an
disproportionate effect on an acquirer’s profits, argues the
lessor. “By bolting the two businesses together, the new company’s
vast buying power, and efficiencies of scale, could give a buyer a
20 per cent return on equity – which any buyer would find
attractive.”

Differing cultures

A practitioner with long experience in the sector explains:
“Although Lloyds TSB is in the process of acquiring HBOS, it is a
widely-held view that that the better-run business in the leasing
sector is Lex.”

He explains: “LTSBA has carried the might and majesty of the
Lloyds TSB brand for some years, but the success of the brand has
been borne from treasury resource and core product pricing, along
with brand delivery to market. Its organisational infrastructure,
underwriting stance and channels of trade have been considered
patchy by many observers in the industry over the last few years.
Its current portfolio of clients is heavily influenced solely on
price.

“By contrast,” says the practitioner, “Lex is a highly-regarded,
well-managed brand with tight disciplines and controls imposed by
the management team, headed by their most recent owners HBOS.”

He describes LTSBA as having a “can-do” culture which translates
into the market as a “let’s just do it” ethos, whereas the culture
in Lex, he argues, has emanated from HBOS as a cautious “let’s make
sure the business is worth doing first” attitude.

The analyst agrees. He argues: “Lex’s marketing and brand is
stronger. The company has achieved that largely by being out of
bank ownership for most of its history. Bank business models are
very different to those of independent companies.”

“The great thing about Lex,” the lessor stresses, “is that it
has persisted with its model successfully for a hell of a long
time.”

Integration

Jon Walden introduced Q6, a Six Sigma quality programme into Lex
in 2002. Under Walden’s interpretation of this US-originated
business model, each of the company’s key processes that impact
upon service and cost are first analysed, then measured. Then,
depending upon the result, control processes are implemented to
improve performance.

If the “marriage” between the two companies were to come about,
one observer argues that a key task would be the “fusion of the
sales and marketing functions of LTSBA and the back-room
underwriting, controls and business disciplines of Lex”.

“However,” he adds as a caveat, “this would have to be managed
with a ‘steel hand in a velvet glove’ approach, since going too
tight on the back end means new business suffers – but too lax, and
the provisions may quickly erase any reportable profitability.”

Lex’s Sales Academy is often held up as an innovative and
imaginative way of maintaining staff enthusiasm and loyalty. In
2004 Walden formed the academy to provide staff with the expertise
and skills they need to do their job effectively. It not only
measures success by examination but also offers remuneration
rewards for those who are successful.

The men in charge

The analyst says: “Jon Walden is one of the most successful and
experienced lessors in the UK and would probably be the man to head
such an operation. But whether he would want to do it is another
question.”

“Lex has the smarter systems in place and the smarter staff,”
the executive opines. “It is also more profitable per unit
financed. Bank of Scotland Vehicle Finance’s fleet of 65,000
vehicles was successfully subsumed into Lex’s existing system.”

“By contrast,” she adds, “LTSBA has been acquisition-happy for
many years and has continued running multiple systems to support
the various acquired companies. The company is not process-driven.
It is a shame that it is not a case of HBOS acquiring Lloyds TSB
rather than the other way around.”

Nevertheless, Nigel Stead is undoubtedly a survivor with many
years’ experience of managing consolidations and takeovers. He also
has trade association experience and is currently chairman of the
British Vehicle Rental and Leasing Association.

In the final reckoning any amalgamation will need to be
delicately formed and shaped by the needs of the parent and the
requirements of the market.

The end result

The practitioner concludes: “Whatever the outcome, there are
those in the marketplace that love one and despise the other.
Putting these aside, the brand chosen to be promoted post-merger
would need heritage and legacy to carry confidence. LTSBA has good
business levels based on pricing, while Lex has a strong brand with
stronger customer loyalty at all three entry points – end-user,
provider and manufacturer.”

At the end of the day a fleet consisting of 380,000 vehicles is
in many ways similar to any fleet number with fewer zeroes. It will
be the integration process that will be the challenge – although
the challenge will be lessened with appropriate systems
implementation, and close and ongoing contact with the client base.
However, that significant number of lessees who did not pick the
new company as their first choice in the first place will need
re-assurance that their concerns are being heeded.

In their own words…

Jon Walden:

“We are closely concentrated upon three equally crucial areas:
customer focus, operational delivery and our people. The aim of all
this is simple – to become a world-class company.” – 2004

“We are making annual savings of £4m from Q6.” – 2006

“Although we can’t rule out possibilities of growth by further
acquisition, I’ve worked out over many years that acquisition is
very disruptive.” – 2006

“I believe that what we put into the company, rather than what
we take out, is what really counts.” – 2006

“We have carried out integrations many times now and the primary
concern is always that there is no negative impact on our
customers. What small challenges we had with the latest integration
were quickly ironed out and we have now successfully created one
business where there was two previously.” – 2008, regarding the
integration of Bank of Scotland Vehicle Finance’s fleet of 65,000
vehicles.

Nigel Stead:

“The integration process was completed by this March and
according to plan in terms of both time and budget.” – June 2003
regarding the 2002 acquisition by Lloyds TSB Autolease of First
National Vehicle Holdings and Abbey National Vehicle Finance.

“Consolidation is a fact of life amongst UK motor lessors now.
There does not seem to be a place now for the middle-sized player.”
– 2003

“Fleet growth is not our sole driver, and it is our intention to
use efficiencies to increase profits and shareholder value.” –
2003

“We fit nicely into the bank’s lending businesses. We have a
significant capital requirement for the purchase of our assets but
we are, of course, expected to give a good return.” – 2006

“The bank never makes it easy to obtain finance – nor should it
be easy – but Lloyds TSB Autolease is a high-performing business
and our parent is therefore very supportive of us.” – 2006

Timeline: Lex

1959: Lex Service acquires British and Colonial Motors, the UK
importer for Chevrolet and Pontiac. (Inside this company was a
small business called Vehicle Contracts which had innovated a new
method for customers to acquire cars – contract hire.)

1969: Lex Service (LS) purchases Controlled Cost Motoring, based
in Sale, Manchester.

1972: LS re-brands as Lex Vehicle Leasing (LVL).

1980: LVL, with a fleet of some 3,000 units, sets up a joint
venture with Lombard North Central, part of National Westminster
Bank. The venture means Lombard provides the funding whilst LVL
provides the management expertise. This partnership proves
extremely successful, so in 1983 LVL sets up Lombard Contract Hire
to sell contract hire through dealers to small businesses.

1988: LVL acquires Fleetdrive, a public sector contract hire
business running around 3,000 vehicles. This was the last
acquisition it made and since then it has grown organically.

1989: LVL wins Fleet News Best Contract Hire Company in the UK
award (and again in 1993, 1997 and 1998).

1994: LVL launches Lex OneCall, a service for company car
drivers.

1996: With a fleet size now of 75,000, LVL wins a solus
five-year contract to supply 3,000 vehicles on contract to the
Royal Air Force.

1998: LVL is established as a 50/50 joint venture between
Halifax plc and RAC plc. This assures long-term funding and new
opportunities for product development and growth.
The company achieves ISO14001, an international standard which
recognises its commitment to resource management.

1999: Lombard Contract Hire changes its name to Lex Vehicle
Partners (LVP). LVP has developed partnerships with distributors
around the UK to meet the needs of small businesses. LVL has a
fleet totalling some 90,000 vehicles and invests over £12m in new
technology.

2000: LVL wins the Ministry of Defence White Fleet contract for
nearly 10,000 non-combat vehicles. The company joins the
international fleet alliance, Global Fleet Services.

2005: LVL wins Best Leasing Company award from Fleet Management,
and Best for Customer Satisfaction from apd Landmark. It signs the
HSBC Vehicle Finance contract, through which the company’s fleet
increases to 170,000 vehicles, making it the largest UK motor
lessor.

2006: Full ownership of LVL passes to HBOS from Aviva, paving
the way for a partnership with Bank of Scotland Vehicle Finance
(BoSVF). Company re-brands as Lex.

2007: Lex wins Best Leasing Company and Best Fleet Management
awards from BusinessCar magazine. The company integrates with
BoSVF.

2008: Fleet size 251,000 vehicles.

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merger would radically alter the shape of the UK point of sale
finance market…—>click here for more