Going From Staid To Supercharged?
After nearly two decades running CIT Group (CIT ), Albert R. Gamper Jr. needed a change. And so, he figured, did the firm. None of his senior managers, who averaged 17 years of service, could outline a vision for how the finance outfit should grow. Few dared to contradict him anymore. So Gamper sought new blood to take the staid, but profitable, Livingston (N.J.) company -- a key player in financing small and midsize businesses -- to new heights. His choice: veteran investment banker Jeffrey M. Peek, who yearned to make his mark as a chief executive but had been rebuffed in contentious succession battles at both Merrill Lynch & Co. (MER ) and Credit Suisse First Boston. (CSR ).
So far, the 95-year-old CIT is getting just the shakeup -- and the vision -- Gamper wanted. Peek, 57, who joined CIT a year ago and became CEO in July, aims to diversify the business and smooth out earnings by selling more services -- such as advice on how to buy or sell businesses -- to existing clients. He also wants to ramp up the financing side of the business by acquiring smaller lending outfits worldwide and to bolster operations to satisfy customers expanding overseas. He will run CIT much like a Wall Street firm, further tying compensation to financial results, keeping a close eye on risk, and boosting fee income. "We're going to get more aggressive," he says. "We're talking more productivity, fewer meetings, more time with clients, and less time at the water cooler."
Triple-A lenders such as GE Commercial Finance Services (GE ) and American International Group Inc. (AIG ) also serve the vast midsize market and can offer lower rates because of their greater heft. But others are fair-weather lenders, disappearing when the economy turns down. "We see an opportunity to forge greater ties to the middle market, which has been largely vacated by the big banks," Peek says. "We are part of the fabric of these companies."
"FAST ON THEIR FEET"
CIT's sales culture -- which emphasized selling products over serving clients -- was first to get an overhaul. CIT now gets 70% of its revenue from interest income earned on loans and leases. That should fall to 50%, says Peek, as he brings in more fee-based income from client services, such as mergers-and-acquisitions advice -- his Wall Street forte. The strategy makes earnings less volatile, and clients seem game. "If he broadens the things they do, we'll do more business with them," says longstanding client Wilbur L. Ross Jr., who secured $1 billion from three lenders -- including CIT -- in 30 days to acquire Bethlehem Steel Corp. in May, 2003. "We find CIT is just about as fast on their feet as Goldman Sachs (GS ) and UBS (UBS ), and that's pretty good," he says.
Peek has already dramatically changed the way CIT uses its capital. Historically, CIT allocated capital equally across the company, regardless of the industry each unit served. Now it spreads it according to risk, which tempers its overall exposure. "That's another benefit that comes from Peek's experience on the outside," says David Hochstim, financial-services analyst at Bear, Stearns & Co. (BSC ).
There's some reengineering in the works, too. Peek promises to cut the company's $1 billion in annual operating expenses by as much as 7.5%. The market likes what it sees: The stock has doubled since it went public in July, 2002, prompting Standard & Poor's to put it in the S&P 500-stock index on Oct. 26.
Much more than Gamper, Peek has set his sights on expanding overseas. He added to the company's London staff to build up the European lending and corporate finance business. He's also leasing more jets to growing European airlines, avoiding the embattled U.S. airline market. And he has cut costs by consolidating back-office operations in Dublin. Eventually, he'll expand in Asia, where many of CIT's textile and manufacturing clients operate factories.
Peek will pep up organic growth with acquisitions. Expect him to buy companies with $500 million to $1 billion of assets every few months. In a year, he has bought GATX Corp. (GMT ) of Tampa's equipment-leasing accounts and Citigroup's (C ) CitiCapital in Britain. Purchases from HSBC Holdings (HBC ) and GE boosted accounts-receivable income. Peek is selling assets, too: Gone is CIT's money-losing venture-capital portfolio, which he sold for $90 million after taking a $30 million loss. CIT's $150 million in private-equity investments could be next.
Heading up CIT is sweet success for Peek, who has long wished to run his own show. A Midwesterner and Harvard MBA grad who spent 18 years at Merrill, Peek lost to Stanley O'Neal in a succession battle to head the huge brokerage in 2001. Barry Friedberg -- who not only gave Peek his first Wall Street job in 1975 at AG Becker but was also his boss for a decade after Merrill bought the firm in 1983 -- says Peek had star power from the start. Peek ran the financial institution group, the largest segment of Merrill's investment banking operations, at a time when this part of Merrill's business was growing rapidly. "What was accomplished during those years was very important to Merrill's growth," says Friedberg. "For all that Jeff has accomplished, he has got a very understated and balanced ego."
After the tussle over Merrill's top spot, Credit Suisse First Boston (CSR ) CEO John Mack recruited Peek to help fix the bank's regulatory problems and declining profits. Again, Peek hoped to be Mack's heir apparent. "CSFB had every problem in the book," says Mack, now a consultant for hedge-fund firm Pequot Capital Management. "But he did a lot of pulling people together. Jeff understands what you have to do to change an organization." CSFB's troubles, however, ran so deep that the best Peek could do, being the investment banker he is, was to sell its most profitable asset to raise cash. Peek brokered the $2 billion sale of CSFB's securities clearing unit, Pershing, to the Bank of New York in February, 2003. By then, Peek and Gamper had begun to talk.
After Gamper named Peek as his successor five months later, the inevitable rumors flew. Did Peek's arrival mean Gamper was gunning to sell CIT -- again? In 21 years, Gamper courted owners from Japan's Dai-Ichi Kangyo Bank to infamous Tyco International (TYC ) CEO Dennis Kozlowski, who paid $9.5 billion for CIT in 2001. Tyco spun it off soon after the Koz's fall from grace in a $4.6 billion initial public offering -- CIT's second in five years. "Give me a break," says Gamper, 61, about the scuttlebutt. "Who sells this company better than I do? I've sold it to the Japanese, the Polish, and the public. I don't need an investment banker." Gamper will become full-time chairman of the Board of Governors at Rutgers University in December.
In one of the better executed successions in recent Corporate America history, Gamper passed to Peek a stable company he grew from $7.9 billion to $52 billion in assets. He salvaged CIT after its near-death experience under Tyco -- a cash crunch that sunk its credit ratings and drove its borrowing costs sky-high. "A few years ago, they were in a situation where they couldn't charge enough to make money," says Hochstim. "The CIT of today is in much, much better shape than the one that was bought by Tyco."
In fact, on Oct. 21, CIT reported that third-quarter earnings rose 24% from a year ago, the sixth straight quarter of increasing profits. And new business volume has grown by $6 billion, or 10%, since last year. Margins are improving and credit losses are at a three-year low.
Still, one of Peek's challenges will be to keep CIT independent. Its ties to the volatile airline industry could spell trouble. If a large carrier liquidates, leasing rates could plummet, hitting CIT with losses. Worse, warns Bear Stearns's Hochstim, "In another downturn, the financial markets could get nervous again and CIT's funding costs could spike." That might open the door for a suitor to swoop in. If so, CIT will already have an investment banker on the payroll.
By Mara Der Hovanesian in Livingston, N.J.