Newcourt Merges with CIT
On May 5, hundreds turned up in their finest for the première of the National Ballet of Canada's revamped production of Swan Lake. Yet, as fabulous as artistic director James Kudelka's $1.6-million production was, an equally remarkable performance had taken place before the dancing ever started. The sponsor of the gala, Toronto-based Newcourt Credit Group Inc., had hosted a champagne reception where the company's top executives in black tie were seen smiling and laughing. No small feat, given the drama that was unfolding inside the high-flying financial powerhouse itself.
Earlier that day, Newcourt had shocked investors, not to mention its soon-to-be merger partner, CIT Group Inc. of Livingston, N.J., by revealing that first-quarter profit had fallen 30 per cent short of analysts' expectations - a disaster attributed in the following months to everything from bungled accounting to the failure to fund $45 million worth of securitization deals. (In these deals, Newcourt acts as the middleman, arranging loans and leases that are then packaged and sold to outside investors.) It is likely that nobody outside the company will ever know what really went wrong. The only indisputable fact is the result: Newcourt's stock price got walloped, CIT's took a bit of a battering in its wake, and the merger the two had announced with much fanfare two months earlier teetered on the brink of collapse.
In the end, the deal went through. CIT managers, mad as hell but still intent on acquiring Newcourt's fabulous vendor-financing contracts with such companies as Dell Computer Corp. and Lucent Technologies Inc., came back with a revised $4-billion offer - $2 billion less than the original. Last week, the share-swap received resounding approval from shareholders on both sides of the border.
Beyond a significantly lower price, the merger required two key changes to the initial proposal. First, the Newcourt name disappears, with everything run under the CIT banner. This is a sore spot with some Newcourt executives, who, between 1984 and 1998, built the small medical-equipment-leasing outfit into the second-largest nonbank lender in the world. "It was supposed to be CIT-Newcourt in Canada," says Newcourt chairman David Banks, who will remain as CIT's non-executive vice-chairman as well as one of Newcourt's four appointees to the new board. "If we hadn't had the bust-up, it probably would have worked."
The other big change is the departure of Newcourt chief executive officer Steve Hudson. The 41-year-old accountant from Scarborough, Ont., was to have been president of the new company, as well as heir apparent to CIT chief executive Albert Gamper. "If I don't screw up, I'll get his job," Hudson told Maclean's in March.
But Hudson did screw up - if not personally, at least in the fact that he did not catch what amounted to a $2-billion blunder. "I'm to blame," he told shareholders in a goodbye speech last week. "No one else." Newcourt officials claim Hudson himself decided to leave, along with five other executives. But, they acknowledge, that does make the deal easier. "No matter how sophisticated or how quantitative mergers are, they're also very human," says Banks. "And in this case, there was bruised tissue on both sides."
For all their fury, however, CIT managers are not skimping on the salve being handed out at the door. The departing executives get a severance package totalling $25 million (the company refuses to disclose how this will be allocated) and their pro rata share of 1999 bonuses. Banks emphasizes that Hudson and the others are not being let off the hook for millions of dollars in loans from Newcourt - despite the impression created by confusing legal wording in the information circular mailed to shareholders. "There is a turn of phrase that created huge problems in our company," Banks says. "Nobody's had their debt forgiven." What CIT decides to pay Hudson and his team for the part they played in the past year's events will not be known until next spring at the earliest - ensuring that Newcourt, while gone, is unlikely to be as quickly forgotten.
Maclean's November 8, 1999