Steven Hudson learned early about the power of performance-based compensation. As a teenager in Scarborough, Ont., he took a job at a bingo hall for seniors, pushing a refreshment cart up and down the aisles. The more chips and popcorn he sold, the more money he took home. It was a lesson Hudson, now 39, never forgot. As he puts it: "You eat what you kill." That pungent principle has plainly served him well. The leasing firm Hudson founded in 1984, Newcourt Credit Group, has just become the second-largest nonbank lending house in the world.
Getting there has made millionaires of 25 Newcourt employees, including Hudson and his two 38-year-old deputies - Bradley Nullmeyer, head of commercial lending, and David McKerroll, who runs the corporate finance side of the company. They credit their success to a workaholic company culture in which base salaries are low, bonuses high and virtually everyone is a part owner. "If you don't earn your badge, you simply don't stay," Hudson said in an interview at the firm's office in Toronto's BCE Place, one of corporate Canada's most coveted addresses. Hudson himself plays the part of the affable, trust-inspiring troop leader, anxious to share the credit for Newcourt's success with Nullmeyer, McKerroll and their teams.
What they do hardly sounds glamorous. In simple terms, Newcourt provides financing for large-scale equipment-leasing deals - often for construction, transportation and aircraft fleets. It also provides financing for manufacturers such as Dell Computer Corp. of Texas, Western Star Truck Holdings Ltd. of Kelowna, B.C., and Yamaha Motor Canada Ltd., to sell and lease equipment to their customers. But the field is a growing one: nonbank lending now accounts for at least 45 per cent of the North American commercial finance market, up from 20 per cent in 1984.
As corporate demand for fast, flexible financing options has taken off over the last five years, Newcourt has metamorphosed from a humble leasing outfit into an international powerhouse. As revenues have grown from $12 million in 1992 to $64 million in 1996, the bulk of Newcourt's business has shifted beyond Canada's borders. This year, only 20 per cent of its deals are expected to be done in Canada - compared to 85 per cent in 1992. Meanwhile, Newcourt shares have gone through the roof: stock worth $13.50 a share when it was issued in 1994 was trading at $60 last week. "We have grown up on growth," Hudson says. "It becomes a way of life."
The pace has sometimes been blistering. The company has made 18 acquisitions in the past six years, including three since last August, when Newcourt paid $360 million for Commcorp Financial Services Inc., CIBC's leasing arm. A month later, Newcourt purchased Business Technology Finance, a division of Lloyds Bank PLC, for $522 million.
But Newcourt's biggest and most ambitious acquisition so far is its $2.3-billion takeover of Morristown, N.J.,-based AT&T Capital Inc., which closed in mid-January. The deal nearly tripled Newcourt's owned and managed assets - from $11.4 billion to $31.2 billion - and was financed through the sale of Newcourt shares, with virtually no debt. Says McKerroll of the conservatively leveraged acquisition: "We're three accountants. We've never done anything really scary."
The fear should perhaps be among Newcourt's competitors. With its acquisition from AT&T, Newcourt now reaches into 24 countries around the world, looming larger than all other players in the field save one: giant rival GE Capital Corp. of Fiarfield, Conn. The lending subsidiary of General Electric Co. is twice the size of the Toronto company, but Newcourt has plans to surpass it. The firm expects to grow by 25 per cent annually as it pursues more global business in the fast-growing computer, telecommunications and aerospace industries. Says Hudson: "It's a very, very long game. We are only at halftime."
Still, Newcourt's achievements to date have already turned Hudson into something of a poster boy for Bay Street's young and exceedingly rich. It is an image that makes him squirm. Although his income in 1996 was a far-from-shabby $2.9 million and his 2.78 per cent of Newcourt stock is worth roughly $200 million, Hudson prefers to portray himself as a dull but forward-thinking accountant who made good. "Everyone thinks it's an overnight success," he protests, "but we've been at it for 14 years."
That meat-and-potatoes attitude has its roots in the solidly middle-class background that all three Newcourt principals share. Hudson's mother is an accounts payable clerk for a candy retailer; his father is a retired heavy machinery mechanic for Ontario Hydro who reacts to his son's success by joking that he brought the wrong kid home from the hospital. Nullmeyer, the son of a Baptist minister and a schoolteacher, worked as a gas jockey in Barrie, Ont., while McKerroll was delivering prescriptions for a drugstore in Owen Sound, 100 km to the northwest. "We were all self-starters with an entrepreneurial spirit," says Hudson, adding: "There's not a shred of the Canadian Establishment in this company."
That egalitarian impulse is apparent in Newcourt's open-plan office design, which more closely resembles a newsroom or a trading floor than a conventional investment bank. Hudson, Nullmeyer and McKerroll each work at small desks at the edge of the floor, within earshot of dozens of underlings. That arrangement, the three insist, along with encouraging employees to call them at home, ensures that they hear about developing problems before they get out of hand.
Not that Newcourt's top managers are blind to the importance of image. "If a client came and sat in an open-office environment to talk about a $600-million deal, you're going to feel uncomfortable," explains Hudson. "So we created an area I call the grande facade." In Newcourt's lobby, an oil painting by Canada's Michael French hangs near a collection of old English guns and three video monitors displaying stock prices. Black wallpaper sets off the polished brass fittings in the rest rooms. It is the sort of ambience in which former prime minister John Turner and ex-lieutenant-governor of Ontario Hal Jackman can be expected to feel at home when they meet with Hudson to discuss the nonprofit Toronto foundation to which all three give their time.
Hudson's heady climb from bingo concessionaire to charity foundation chairman began with a stint in the Toronto offices of Clarkson Gordon, where he struck up an acquaintance with two other ambitious young accountants: Nullmeyer and McKerroll. After what he describes as a "short sojourn" at Clarkson, Hudson left the accounting firm in 1983 to become a financial manager at Toronto General Hospital. It was there that the eager 24-year-old came up with a way to help cash-squeezed health administrators afford expensive equipment such as CAT scanners through innovative, tax-driven leasing deals. Hudson quit his hospital job a year later and formed his own company to pursue the concept. Michael O'Keefe was CEO of a suburban Toronto hospital when Hudson first approached him with the untested idea. "This was completely new," recalls O'Keefe, now an executive search consultant and close friend of Hudson. "It was a window that had never been opened."
After recruiting Nullmeyer in 1986 and McKerroll the next year, Hudson trained his sights on universities, again managing to win over skeptics among the lawyers and bankers on their boards of directors. Dental anesthetist Steven Small became Hudson's start-up backer. Within a week of meeting Hudson in 1984, Small bet $400,000 on his venture. "He had a brilliant idea," Small says, "seemingly simple but extraordinarily sophisticated." And, he adds, Hudson "was thinking big right from the beginning. He did a half-billion dollars of transactions in the first year."
Newcourt can now do that much in a single transaction. McKerroll recently negotiated a $500-million agreement with U.S. regional airline Mesa Air Group Inc. of Farmington, N.M., to lease 16 regional aircraft manufactured by Bombardier Inc. of Montreal. There are plans for Mesa to lease another 16 in a second stage of the deal.
The ride up has not always been smooth. Hunting for larger sources of financing, Newcourt sold a large part of its stock to Confederation Life Insurance Co. in the late 1980s. Within three years, Newcourt experienced what Hudson calls a "near-death encounter," as Confederation Life faltered, failed and was ultimately put into liquidation in 1994. "We all have receding hairlines because of that," Hudson quips today, adding: "It's that kind of experience that chastens the management team." Still, Hudson says the debacle forced Newcourt to focus on those niches where it does best. Recently, that has meant turning away offers to take over the finance subsidiaries of several companies - including one large automaker - when they felt they would be stepping into markets that are foreign to them.
Calling himself a true believer in the partnership principle, Hudson peppers his conversation with motivational management terms, speaking of "creating commonalities" among his employees. Specifically, that means paying staff a modest base salary - Hudson, Nullmeyer and McKerroll are at the top with upwards of $100,000 a year - augmented by rising bonuses, which kick in only once the company generates enough business to earn a 10-per-cent return on the value of Newcourt stock. The system, Hudson asserts, helps to "screen the good from the excellent. If someone leaves, it tells you they're not comfortable that they can produce." Another form of motivation is to invite new employees to buy shares. Employees own 11 per cent of the firm.
Newcourt's challenge now is to graft that entrepreneurial culture on to the far less efficient AT&T. The faltering U.S. giant had already begun a turnaround under CEO David Banks, who will have a continuing role as chairman of the combined company. Paul Currie, the former CEO of the Ontario government's privatization secretariat, has been hired as executive vice-president to handle the integration of the two lending houses, but Hudson and Nullmeyer are setting up second homes for themselves in New Jersey, to help oversee the transition. McKerroll remains based in Toronto.
Already, the three men spend most of the time on the road, and say they find it a struggle to get back to Canada every weekend or so to see their young families. Nullmeyer and McKerroll each have three children under 10. Hudson, who has an eight-year-old boy from his first marriage and a 10-month-old son with his second wife, says he makes a point of carving out time for his family. But what he appears to be nurturing most is his plan to become the global leader in nonbank lending. "This company is very much like a child," says Hudson. "It needs constant care. We go to bed with it, we wake up with it. We've gone through infancy and the teenage years. We're now into early adulthood." A proud and protective parent, Hudson knows exactly where he wants to see his cash-rich baby when it reaches maturity.
Maclean's February 23, 1998