Corporate bully of the day: Hertz

By Felix Salmon
October 9, 2009
released a report, based on new and proprietary analysis, listing 20 large public companies with the highest probability of declaring bankruptcy in the next twelve months. One of those companies was Hertz, which, in its latest 10-K, has a 23 pages of risk factors, including these:

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Good on Audit Integrity for fighting back against the blatant bullying being perpetrated on it by Hertz.

A brief history is in order: on September 16, Audit Integrity released a report, based on new and proprietary analysis, listing 20 large public companies with the highest probability of declaring bankruptcy in the next twelve months. One of those companies was Hertz, which, in its latest 10-K, has a 23 pages of risk factors, including these:

We have substantial debt and may incur substantial additional debt, which could adversely affect our financial condition, our ability to obtain financing in the future and our ability to react to changes in our business…

Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt…

Our reliance on asset-backed financing to purchase cars subjects us to a number of risks, many of which are beyond our control…

We may not be able to generate sufficient cash to service all of our debt or refinance our obligations and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful…

A significant portion of our outstanding indebtedness is secured by substantially all of our consolidated assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent to the extent the value of such assets exceeded the amount of our indebtedness and other obligations.

Hertz wasn’t happy with the Audit Integrity report, and sent the company a rather silly letter on September 22, which included lines like this:

Several analysts follow Hertz and its competitors closely, and all of them have significantly increased their estimates of the per-share price of Hertz’s common stock from where their price targets were 6 months ago. In addition, had your staff taken the time to review what the analyst community is saying about the rental car industry in general and Hertz in particular, you would have learned the favorable macro economic factors working in favor of the industry into the foreseeable future.

Heaven forfend that an independent research house should do something other than just “review what the analyst community is saying” and look at “macro economic factors”!

The really nasty bit of the letter, however, was where Hertz’s general counsel not only threatened to sue Audit Integrity over the report, but also copied the general counsels of all the other companies on Audit Integrity’s list, encouraging them to do likewise.

The lawsuit arrived on September 25. It’s pretty weak stuff, but Hertz is clearly hoping that it can embroil Audit Integrity in a large number of annoying and expensive lawsuits, brought not only by itself but by any other company that Audit Integrity singles out as being at risk.

So Audit Integrity’s chairman, James Kaplan, has decided to take this to the SEC:

Hertz is entitled to protest Audit Integrity’s findings. It also has the right – in fact, we believe the obligation — to address the areas of risk which we identified, and take steps to correct them. Such actions would benefit Hertz’s shareholders and would show that fact-based research was being used to improve the transparency and financial health of the company. Instead, the company has chosen to defame our methods – which are published on our website, but which the company’s management apparently has not read – and to invite unrelated companies to file action against us.

Frivolous attempts to crush independent research do not benefit investors. Publicly dismissing our model as “misinformation and untruths” also is a materially misleading statement about Hertz’s current financial condition…

As you have stated that you plan to step up the SEC’s enforcement efforts and better protect investors, it is my hope you will investigate this matter. It is possible Hertz will yet prove to be one of America’s great corporate success stories, but there is a disturbing trend of financially precarious companies aggressively trying to silence or tarnish their critics in the months immediately prior to their demise (Enron, Tyco, and Lehman immediately come to mind). If Hertz is allowed to mask serious financial risk by attempting to discredit quantitative research, Hertz’s shareholders may follow in the footsteps of others who suffered from a lack of warning.

It would be great if the SEC took this letter very seriously. Not all independent research is accurate, but the way for companies to deal with inaccurate research is to engage it on the merits and the substance, rather than to launch bullying lawsuits which have the aim of shutting down the research house in question. I haven’t spent any time looking in detail at the Audit Integrity report, but I do know that Hertz’s response is extremely worrying, and in and of itself raises serious questions about the company’s commitment to transparency and openness.


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Hertz may or may not be about to go bust, but quoting from the risk factors section of their annual report is unlikely to enlighten anyone. There’s a certain sort of lawyer who expects you to identify the risk that an asteroid might hit the earth and destroy your principal markets, and they seem to be the kind working for hertz. Meanwhile, they don’t have any discussion of the risks that might cause their revenues to reduce or costs to increase…

Posted by jestyn | Report as abusive

As an investor, I share your concern about Hertz’ attempt to punish independent researchers for publishing unflattering information. I’d also be interested to read more about the Audit Integrity report that provoked the upset. Did their findings differ from other quantitative analysts? What is your opinion of their model?

Posted by R Westmoreland | Report as abusive

Every publicly traded company lists every possible risk they can think of in their 10K reports, otherwise if their stock price declines $1, they get sued. Here is the latest risks to google:


Risks Related to Our Business and Industry

We face significant competition from Microsoft and Yahoo.

We face formidable competition in every aspect of our business, and particularly from other companies that seek to connect people with information on the web and provide them with relevant advertising. Currently, we consider our primary competitors to be Microsoft Corporation and Yahoo! Inc. Microsoft has developed features that make web search a more integrated part of its Windows operating system and other desktop software products. We expect that Microsoft will increasingly use its financial and engineering resources to compete with us. Microsoft has more employees and cash resources than we do. Also, both Microsoft and Yahoo have longer operating histories and more established relationships with customers and end users. They can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing more aggressively in research and development and competing more aggressively for advertisers and web sites. Microsoft and Yahoo also may have a greater ability to attract and retain users than we do because they operate internet portals with a broad range of content products and services. If Microsoft or Yahoo is successful in providing similar or better web search results or more relevant advertisements, or in leveraging their platforms or products to make their web search or advertising services easier to access, we could experience a significant decline in user traffic or the size of the Google Network. Any such decline could negatively affect our revenues.

We face competition across all geographic markets from other internet companies, including web search providers, internet access providers, internet advertising companies, destination web sites, and local information providers, and from traditional media companies.

In addition to Microsoft and Yahoo, we face competition from other web search providers, including start-ups as well as developed companies that are enhancing or developing search technologies. We compete with internet advertising companies, particularly in the areas of pay-for-performance and keyword-targeted internet advertising. Also, we may compete with companies that sell products and services online because these companies, like us, are trying to attract users to their web sites to search for information about products and services. We also provide a number of online products and services, including Gmail, YouTube, and Google Docs, that compete directly with new and established companies that offer communication, information, and entertainment services integrated into their products or media properties.

We also compete with web sites that provide their own or user-generated content and provide advertising to their users. These destination web sites include those operated by internet access providers, such as cable and DSL service providers. Because our users need to access our services through internet access providers, they have direct relationships

I’m not making any judgment on Hertz, but using a company’s published risks to determine if they are going out of business isn’t really thorough analysis.

Posted by KenG | Report as abusive

I saw an Audit Integrity presentation two years ago and was impressed positively by their methodology. At the time, however, it was being touted more as a quant product that could detect the possibility of questionable accounting practices than as a metric of corporate financial health.

The main point here is that the methodologies used by the company are based upon filed financials, It seems to me as an attorney that if issuer-paid S*P and Moody’s continue to be effective in using the First Amendment as a defense for ratings that have subsequently been demonstrated to be inaccurate – and this without discosing the subjective inputs incorporated in their methodologies, then any lawsuit filed against Audit Integrity should be found to be without merit.

Posted by Thomas Reynolds, Esq. | Report as abusive

Looking at that report, I really wouldn’t blame Hertz for their mad retaliation. But the report does look worrying and it seems they had the intention of withholding these debt issues from investors and the public. Embroiling in another lawsuit is just another underhand means to drag Audit Integrity into the realms of debts with them.


Posted by simoniddings | Report as abusive