Enterprise's Leader on How Integrating an Acquisition Transformed His Business

The Idea: When the car rental company acquired Alamo and National, rather than execute a “takeover,” it moved slowly and sought to learn from its new brands.

In 2007 Enterprise Rent-A-Car was marking its 50th anniversary. We had much to celebrate. With more than $9 billion in global revenue, we were the largest car rental company in the world and one of the largest family-owned and -operated companies in the United States. As the industry leader, we had been approached from time to time about acquisition opportunities—especially after several of our competitors merged or changed owners in the mid-1990s. However, while our major rivals had always focused on renting cars at airport locations, Enterprise had concentrated on “home city” rentals, with much of our business coming from people who needed a car while their own was being repaired. So we had never really been tempted. We were growing steadily and organically, in local neighborhoods and at airports. We believed in our strong, do-it-yourself culture. And we had little interest in altering what was working so well.

But all that changed on Valentine’s Day in 2007. That morning the New York Times reported that two of our biggest airport rivals, Vanguard (which owned National and Alamo) and the Dollar Thrifty Automotive Group, were close to an agreement on a $3 billion merger. We saw right away that this deal would be bad news for Enterprise. To continue our growth, we needed to increase our share of airport rentals; if four rival brands were combined into one competitor, our climb would become that much harder. We quickly started the debate: Should we make a bid for Vanguard?

Such a deal had obvious attractions. Both National and Alamo were already well established at airports across the country, while we were still battling to obtain decent space at some major facilities. Our brands also seemed to complement one another: Although Enterprise was known for its “everyday low price,” Alamo’s discounts appealed to price-sensitive shoppers, and National competed for premium business travelers. What’s more, neither Alamo nor National was a major contender in nonairport rentals, which meant that we had virtually no overlap with Vanguard’s facilities, technology, and personnel.

But our company had never done a deal anywhere near this size. I knew it might be unpopular with our executive team. Some would question why we should acquire these rivals when we were already gaining ground on them. There would also be big operational and cultural differences. Most Enterprise branches were neighborhood locations where a small team of employees serviced about 100 cars; National’s and Alamo’s airport branches were much bigger. Enterprise’s culture focused on customer satisfaction and “promote from within” policies as paths to business success, whereas Vanguard’s culture stressed operational efficiency. Enterprise owned 100% of its branches; Vanguard had both corporate-owned locations and independent franchises. For its branches, Enterprise hired only college graduates looking to move up in the company; Vanguard’s branch personnel included many employees who expected to spend their careers at a single location.

Big differences, no question. But the more we discussed the potential deal, the clearer it became that we should proceed. All our independent directors were in favor of it. So we made a phone call to Vanguard’s owner, the private equity firm Cerberus. It was clear that the firm would welcome our all-cash bid and the prospect of a speedy close, so we quickly settled on a price of approximately $3 billion of invested capital. Over the next few months we did our due diligence and worked to win antitrust approval.

Integrating an acquisition like this is a tough job. A lot of companies fail at it, and even when an integration succeeds, the acquired company sometimes feels that it has been swallowed up or “conquered.” With Vanguard, however, we worked hard from the start to execute a thoughtful and respectful integration. We wanted to learn all we could from the company’s brands, not impose our systems and methods at every turn. On the surface the deal was about boosting Enterprise’s presence at airports, and that did happen. But in the process we also learned a lot about ourselves and changed our company in ways that have equipped us for faster growth on a global scale.

Meshing Cultures and Values

When the deal closed, in the summer of 2007, we began what can best be described as a deliberate integration. It was far more important to do it right than to do it quickly. We could afford a thoughtful approach, not only because our private ownership shielded us from short-term financial pressures, but also because we got Vanguard at an affordable price. I knew there was no significant financial risk to Enterprise, even if the deal did not work out. Although we lacked experience in major acquisitions, we moved forward in what turned out to be the right way.

First we focused on the two companies’ cultures, using a simple message and a few powerful symbols. On August 1, after I signed the papers that closed the deal, my family and members of our executive team flew to Tulsa, Oklahoma, for an evening meeting at Vanguard headquarters. I introduced myself and my family, stressing our commitment to making this combination work over the long term. I was convinced that the same business philosophy that had propelled our growth would drive Enterprise and Vanguard together. “Employees on both sides of the transaction,” I said, “are now part of a company that is dedicated to three things: listening to and satisfying our customers, creating opportunities for our employees, and achieving long-term, sustainable growth.” The message seemed to resonate with the audience. I emphasized that as a family-owned organization, we aimed to bring stability and continuity to Vanguard. This was welcome news at a company where a series of ownership and management upheavals over the previous decade had left employees feeling a bit unsettled and disenfranchised. I also announced that as part of our measured and steady integration process, Vanguard would operate as an autonomous subsidiary for at least a year.

We had already made it clear to Vanguard employees that there would be no “invasion of the white shirts” from our St. Louis headquarters—a reference to Enterprise’s well-known conservative dress code. Greg Stubblefield, one of our strongest field executives, whom we’d appointed as the president of Vanguard, took just two Enterprise executives with him to work in Tulsa. Greg’s job was to help the two companies learn from each other. When a new direction was chosen, it would reflect the best elements of both cultures and operating approaches.

Vanguard clearly had a lot to teach us about airport operations. At Orlando, LAX, and other big airports, National and Alamo managers presided over thousands of rental transactions every day. Their systems and processes operated on a much bigger scale than ours. At the same time, they had a quality assurance process that was specifically designed to head off potential problems. We eventually adopted this program at Enterprise airport locations—an illustration of how we took ideas from Vanguard when they complemented (or were better than) our own.

Meanwhile, we used the first year not only to listen and learn but also to share our values and practices. From the beginning it was understood that we had a lot to teach about achieving consistently high customer satisfaction. During the 1990s we had developed the Enterprise Service Quality index (ESQi) for measuring and managing it. (See “Driving Customer Satisfaction,” HBR July 2002.) The index confirmed that customers who were fully satisfied with our service were three times as likely to rent from us again. Managers’ ESQi scores were an important factor in their compensation and advancement. Vanguard immediately adopted the index for both Alamo and National, although it informally tracked results for six months before fully implementing it.

Three Distinct Characters

During this get-acquainted period, our St. Louis–based integration committee analyzed many issues, including the brand portfolio, the general management structure, and the question of franchises. One key question was whether we would maintain all three brands or combine Enterprise and Alamo. When we’d first considered the deal, the answer was far from clear. But as we studied Vanguard’s marketing and operations, we came to see that each of the brands was distinctly positioned to serve a well-defined segment.

National appealed to business travelers; we referred to them as “rental experts” because they wanted to get in and out of their vehicles as fast as possible, without stopping to fill out forms or deal with customer representatives. And they were willing to pay a premium for those benefits. National’s loyalty program, the Emerald Club, was a major driver of reservations and repeat business. Alamo, on the other hand, was a destination brand for vacationers, often from outside the United States, who were headed to places like Las Vegas and Disney World. Its customers generally looked for bargains on the internet. Meanwhile, Enterprise’s strong track record of affordable pricing in home-city markets attracted customers to its airport locations as well. Each brand had significant value and offered its customers what was most important to them. So we worked to reinforce the distinct character of each.

Our back-office operations, though, were a different story. We were very interested in finding operational ways to leverage our joint ownership. Because Alamo and National facilities were generally colocated at airports, we tried to position Enterprise as close to them as possible, and we removed brand identification from vehicles so that the operations could share cars when necessary. (National and Alamo had pioneered this approach, allocating vehicles to National’s business customers during the workweek and to Alamo’s leisure customers on weekends.) This fleet management approach increased flexibility and lowered costs.

Next we had to decide on an organizational structure. Enterprise is highly decentralized: It operates through regional subsidiaries in which branch managers have significant P&L responsibility and ultimately report to general managers, who also enjoy plenty of autonomy. For Vanguard, virtually all management decisions were centralized in Tulsa. We debated about the best way to run a multibrand airport operation, and the more we looked at it, the more we saw the advantages of adapting our regional structure. This meant, however, that many Enterprise general managers would have to oversee big, factorylike operations at airports, manage discrete market segments, and strike the right balance in promoting all three brands. At the same time, most Vanguard employees would need a better understanding of the home-city market.

This is where we realized yet another advantage of moving carefully on the integration. We had time to equip our general managers for a much bigger job and to identify and prepare Vanguard managers who could thrive under the new structure. In many cases, Enterprise personnel wound up holding the general manager positions, but we also put Vanguard managers into those critically important slots in markets such as California and Hawaii.

Meanwhile, about a year into the integration process, and just as the country was sliding into one of the worst economic downturns in history, Enterprise relocated 80 employees from Tulsa to our St. Louis headquarters. Along with some attrition and a small number of job cuts, that left approximately 400 people to staff a “shared services” center at the former Vanguard headquarters building. Today the Tulsa team, now more than 500 strong, provides sales support, oversees accounts payable and accounts receivable, manages vehicle administration (such as tags, titles, and citations), and coordinates damage recovery responsibilities.

We also launched a new corporate identity—Enterprise Holdings—so that we could speak with a unified voice across our portfolio of three car rental brands. That last major step in our two-year integration process built on the Enterprise name and heritage and reassured all our stakeholders that our founding values were still front and center.

A Change for the Better

It has now been more than six years since we found that Valentine’s Day gift in the New York Times. Without question, the deal we made has worked out very well. In fact, it paid for itself in less than three years. Total revenue for all three brands now surpasses $15 billion—that’s pretty healthy growth in a tough economy, especially for the travel industry. Meanwhile, from 2007 to 2013, the combined market share at airports for all three brands climbed from about 28% to more than 33%. And for the first time, our brands captured the top three rankings in the J.D. Power and Associates 2012 North America Rental Car Satisfaction Study.

National’s performance is a particularly good story. The brand had suffered under leadership turmoil and a lack of investment from 1997 to 2007, but National is now competing as a top-tier brand at airports. It even outperforms Enterprise on our companywide service quality index. That is fine with us—it gets Enterprise’s competitive juices flowing.

We have also learned to work with Vanguard’s franchises. As independent businesses, they manage their own affairs, have their own distinctive cultures, and are free to use the National and Alamo brands to compete with Enterprise. We have been open to acquiring franchised territories whenever they are available, and at this point we have absorbed the majority of U.S. locations and a significant number of Canadian ones. But where franchisees remain in control, goodwill and cooperation obtain on both sides.

An unexpected benefit of learning to work with franchisees—not only in the United States and Canada but also in the Caribbean, Latin America, and Europe—is that it has helped us better understand partnerships in other contexts, including foreign markets, as we continue to expand our global footprint.

Our biggest lesson from the Vanguard integration is that our company can execute a major acquisition without risk to our fundamental values and culture. But we have learned other lessons, too. We have learned that the most important factor in deciding whether to do a deal is a clear understanding of what is to be gained. We have learned—as we suspected from the outset—that in integrating a merger you should work deliberately, because you get only one chance to do it well. And we have learned that symbolism matters. It was important that Enterprise not send a whole cadre of executives to Tulsa to execute a “takeover.”

Today Enterprise Holdings is stronger than ever. Our values have not changed, and they never will. But the Vanguard deal did help our company change—for the better.