When U.S. shopping mall magnate Malcolm Glazer launched his controversial $1.47 billion bid for England's world-famous Manchester United Football Club last May, he bypassed a host of big banks and turned to humble Livingston, New Jerseybased CIT Group to lead-manage a key chunk of the acquisition financing: a $364 million secured bank loan.
Glazer, who also owns American football's Tampa Bay Buccaneers, seems to fancy underdogs as much as dynasties. CIT certainly qualifies as the former. Just a few years ago, the commercial finance outfit nearly went out of business when its financing sources dried up in response to the well-publicized troubles of its parent, Tyco International. (The conglomerate's notorious former CEO, Dennis Kozlowski, is serving eight to 25 years in prison for grand larceny; civil suits against the company by the Securities and Exchange Commission and private shareholders are still pending.)
CIT, spun off from Tyco in June 2002 after the company had owned it for barely a year, did not appear to have a bright future as a world-class deal maker. Its chief activity for almost a century had consisted of the dependable though unglamorous business of lending money and leasing equipment to midsize industrial concerns. Internal revenue growth was stagnating.
But then Jeffrey Peek showed up. The seasoned investment banker became CIT's president in September 2003, a couple of years after losing out to E. Stanley O'Neal in a bare-knuckle brawl to head Merrill Lynch & Co. After leaving Merrill, Peek landed upright as a vice chairman of Credit Suisse First Boston, but his hopes of succeeding then-CEO John Mack were dashed when floundering Credit Suisse decided to sell CSFB's Pershing trade-clearing unit, one of the biggest businesses in Peek's portfolio.
Serendipitously, CIT found itself in need of a CEO at about the same time. The opening represented a shot at redemption for both the company and the individual: Peek got his chance to become a financial firm CEO, and CIT won an opportunity to escape the bounds of everyday commercial finance.
Peek promptly began a stem-to-stern reorganization of CIT to make it a little more like a Wall Street firm. But he also sought to whip CIT's regular lending and leasing operations into top condition. That process continues, but his efforts are already bolstering the company's bottom line.
In 2005, CIT earned $936 million, up from $754 million in 2004 and $567 million in 2003. Return on equity has moved up smartly from 11 percent in 2003 to above 15 percent last year. The share price, $25 when Peek joined the company, was $52 in early February.
The Man U coup epitomizes CIT's growing capabilities. The company's sports finance squad once consisted of a single loan originator in Atlanta and a tiny group in Tempe, Arizona, that mainly leased scoreboards and other equipment to pro teams. Peek merged the operation into a bigger media, communications and entertainment deal group. He also hired Gordon Saint-Denis, a veteran investment banker who had founded the sports advisory boutique Triton Sports Associates. Saint-Denis had a long-standing relationship with the Glazer family, and he persuaded the mogul that the upgraded deal group at CIT could handle his business. The loan went off without a hitch.
"We would never have seen this transaction before," says CIT vice chairman Frederick Wolfert, whom Peek hired in September 2004 from GE Healthcare Financial Services. to head CIT's commercial finance division.
Overseeing CIT, with one sixth the earnings and one ninth the employees as Merrill, might be viewed as a comedown for Peek, 58, who has a reputation -- rare on Wall Street -- for being a good manager. He doesn't see it that way.
"What attracted me to CIT was the opportunity to run a company that had a fundamentally very strong platform, develop my own management team and build a new legacy for the company," declares Peek.
His plan: By injecting some Wall Street savvy and salesmanship into CIT's staid, credit-fixated culture, he hopes to deepen and expand its relationships with 54,000 existing corporate clients and attract a bevy of new ones.
Walter Owens, CIT's sales and marketing chief, who joined the company in March, sums up the strategy this way: "We want to be king of the middle market."
CIT's annual organic revenue growth has hovered at about 2 percent in recent years. Overall, its top line grew by just 8 percent between 2000 and 2004. Peek aims to lift annual organic growth to 10 percent by 2008. But, Wall Streeter that he is, he also wants to hike CIT's fee revenue, earned on the likes of advising on mergers and structuring complex corporate finance transactions, from less than 40 percent of the total now to 50 percent. The idea is to sustain the company through inevitable downturns in the lending cycle.
The CEO's moves have been aggressive. To promote cross-selling, Peek has consolidated 17 business lines that focused on products into five that concentrate on client groups and industry sectors. He has changed the way CIT allocates internal capital so that more money flows to the fastest-growing businesses. Peek has hired more than 75 senior executives from rivals, notably GE Commercial Finance, J.P. Morgan Chase & Co. and Citigroup, and he has presided over a 50 percent turnover in CIT's sales force.
Peek has acquired four businesses to make CIT a player in high-growth sectors, such as European vendor and health care finance, in which it had been a laggard. He has added 50 subprime mortgage originators and grown receivables in that high-margin business by nearly 50 percent in the past year, to $9 billion. Peek also wants to expand CIT's relatively small, $100 million equipment-leasing business in China. And in a move that will no doubt be construed as a frontal attack on his old Wall Street turf, the CEO has hired 15 investment bankers to provide merger and acquisition advice to CIT's corporate clients. He has also created a group to serve private equity firms, which have been big players in the M&A market recently.
And in an act with as much symbolism as substance, Peek is shifting CIT's headquarters from a nondescript office park near a shopping mall in suburban New Jersey, to a new, state-of-the-art high-rise two blocks from Grand Central Station in the heart of New York, at 505 Fifth Avenue. The move should be complete by summer.
The CEO has played defense as well. He has sold slow-growing, nonstrategic businesses, such as the aerospace and manufactured-housing finance units. And his move into M&A advice, though designed to boost revenue, also has a defensive component in that it could prevent CIT clients from taking their financing business to outside merger advisers.
"Peek is not a commercial finance veteran, but he has significant financial industry experience and a valuable perspective," says David Hochstim, an analyst at Bear, Stearns & Co. "He's improved the operations of the business noticeably."
All the same, CIT remains a smallish player in its chosen business. Its commercial finance division posted revenues of $1.2 billion last year, and its specialty finance side -- vendor financing and consumer loans -- brought in $1.1 billion. By contrast, CIT's most direct competitor, GE's commercial finance unit, boasts annual revenues of $42.6 billion. GE's consumer finance division brings in $15.7 billion.
CIT's 6,340 employees, close to $11 billion in market capitalization and $63 billion in assets likewise pale beside those of its big bank competitors. Bank of America, for example, has 176,000 employees, $182 billion in market cap and $1.25 trillion in assets. Comparable numbers for Wachovia Corp. are 96,000; $83 billion; and $532 billion.
So far Peek has had the wind at his back. Long-term interest rates, despite 14 consecutive rate hikes by the Federal Reserve Board, remain at historically low levels, and corporate profits have surged. But business conditions won't remain so rosy forever. CIT under Peek has yet to endure a downturn in the credit cycle. One hint of possible trouble: The company has a $260 million credit exposure, dating to 2001, to San Jose, Californiabased electric utility Calpine Corp., which filed for bankruptcy on December 20. (CIT has told investors it isn't concerned about the Calpine credit and has stressed that it is just a small part of its $60 billion-plus in assets.)
Moreover, competition in the corporate middle market is stiffening. Along with having to go up against GE, BofA, J.P. Morgan and Wachovia, CIT must contend with aggressive hedge funds crowding into the corporate loan market.
Some shareholders and analysts worry that Peek's reconditioning of CIT is costing too much. Since 2003 the outflow for salaries and operating expenses has swollen by 22 percent, to $1.1 billion. "When you have a big growth push, you worry that it comes at the expense of returns," says Richard Pzena, head of New Yorkbased Pzena Investment Management, which owns more than 6 million CIT shares.
JEFF PEEK HAS BEEN A NEW YORKER FOR THE better part of three decades, but that doesn't necessarily define his character or his style. He was born in Washington, D.C., where his father, Merl Peek, ran the Capitol Hill press office during the Eisenhower administration. Peek's uncle, Kenneth Wherry, was the Republican House minority leader from 1949 to 1951. Peek grew up largely in the Midwest and has a relaxed, genial demeanor -- unusual for a successful investment banker -- that friends attribute to his upbringing there.
Still, nice guy Peek is fiercely competitive. While a student at Arlington Heights High School outside Chicago, he played on the doubles team that won the Illinois state tennis championship in 1964. He also played tennis at Princeton University for two years, while studying at the Woodrow Wilson School of Public and International Affairs.
After failing to gain admission to the law schools at Harvard and Yale, Peek decided to further his studies at Harvard Business School and earned an MBA in 1972. Following a stint at New York real estate developer Canal-Randolph Corp., Peek responded to an ad in the Wall Street Journal for a junior position at investment bank A.G. Becker & Co. and got the job. Showing up for work in his suede loafers, with his background in real estate, Peek stuck out amid the firm's upper-crust bankers. Perhaps that gave him an extra incentive to excel in the financial institutions banking group.
"Jeff was very bright and good with people," recalls longtime Merrill executive Barry Friedberg, who ran investment banking at A.G. Becker at the time and now heads New York investment firm FriedbergMilstein. "He was laid-back but inwardly very competitive."
In 1983, Peek, a rising star among financial services bankers, was hired away by Merrill. Fortunately, he left A.G. Becker on amicable terms: One year later Merrill acquired the firm and named Friedberg its head of investment banking. His old boss promptly asked Peek to run the financial institutions group. It thrived, advising on a series of bank mergers, including National City Corp.'s $665 million acquisition of Merchants National Bank in 1990 and Travelers Corp.'s $4.2 billion sale to Primerica Corp. in 1994. Under Peek the group became one of the biggest contributors to Merrill's investment banking revenues.
"We had to deal with Morgan Stanley, Goldman Sachs, First Boston and Solomon Brothers on every single transaction," says Friedberg. "But we were No.1 in the league tables."
Peek built a reputation not only as a trusted adviser to clients but also as a leader who would put the firm's interests ahead of his own. One of his best clients was California thrift Great Western Financial Corp.; Peek made sure that junior bankers in his group cultivated a relationship with the company's chairman, James Montgomery. Thus, in 1997, long after Peek had left the group, Merrill represented Great Western in its $6.6 billion merger with Washington Mutual.
"I worked with Jeff off and on with transactional work with clients, and he's absolutely first-rate," says David Heleniak, a former M&A lawyer with Shearman & Sterling who last year became a vice chairman of Morgan Stanley. "He's always inclusive of his team, and that was true every place he has been."
Peek's success as both rainmaker and manager caught the eye of Merrill executives and directors. In the early 1990s he jetted around the country with the firm's then-CEO, Daniel Tully, wooing clients and impressing his boss. In 1995, Peek was asked to run Merrill's research department, a move that gave him exposure to the firm's secondary markets business and clearly signaled that he was being groomed for bigger things.
Two years later he briefly co-headed Merrill's investment banking division before being assigned in December 1997 to a far more challenging task: jump-starting the firm's lackluster Merrill Lynch Investment Managers division. Merrill's mutual funds were such poor performers at the time that its retail brokers were reluctant to sell them. In 1998 the funds suffered net outflows of $4.4 billion. But during the first half of 2001, Peek made good headway on turning things around, attracting $4 billion of net inflows. He had less success, however, with Merrill's institutional asset management business. Assets grew by a paltry 6 percent, to $533 billion, during Peek's three-year tenure.
Peek's rescue mission was hampered by two acquisitions Merrill had made just before he took over. In 1996 the firm paid $200 million for Los Angelesbased boutique manager Hotchkis and Wiley. A year later it spent $5.3 billion on London's Mercury Asset Management, a $177 billion-in-assets goliath. Mercury's funds tanked, prompting client defections and a 1999 lawsuit in which the pension fund of consumer products giant Unilever sued Merrill for negligence. (Merrill settled out of court in late 2001, neither admitting nor denying wrongdoing.) On the West Coast, meanwhile, star portfolio managers at upscale Hotchkis resented Peek's attempt to integrate them into the more downmarket Merrill and fled in droves, clients in tow.
In 2000, when Merrill's board began to consider candidates to succeed CEO David Komansky someday -- he had taken over for Tully in 1997 -- Peek emerged as one of four contenders. The others: O'Neal, securities division head Thomas Davis and international chief Winthrop Smith. Before long the race had narrowed to Peek and O'Neal, who had been turning around Merrill's retail brokerage business, traditionally the breeding ground for the firm's CEOs.
Following an intense political battle, O'Neal was named president in 2001, a prelude to his elevation to CEO one year later. He had proved himself to be a tough cost cutter, turning around the bloated retail division amid the onset of a wrenching bear market. Investors and directors alike knew that the rest of the firm needed similar treatment after Komansky's years of international expansion. O'Neal also possessed surer political skills, having forged close ties with key directors. Peek's mixed record as asset management chief didn't help his cause.
Following the succession drama, O'Neal made it known that Peek and several other senior executives from the ancien régime were no longer welcome. Peek resigned in September 2001.
Peek won't say much about this period, though he dismisses the suggestion that he wasn't tough enough to shake up benevolent "Mother Merrill." O'Neal declines to comment.
Still wanting badly to earn a Wall Street CEO job, Peek resurfaced in February 2002 as vice chairman of CSFB. There he oversaw asset management, private client services and the firm's Pershing clearing subsidiary. The job positioned him as one of a handful of senior executives in line to succeed Mack as CEO.
Peek planned to revive the struggling Credit Suisse Asset Management in part by selling its products through Pershing's correspondent clients. But that plan unraveled quickly. In June 2002, Credit Suisse's Winterthur insurance division suffered huge stock market losses, forcing the Swiss bank to inject $1.3 billion in capital to keep the business afloat. To shore up its own balance sheet, Credit Suisse decided to sell Pershing. Peek knew that the sale would hurt his career, but he had his orders. By the following January he had struck a deal to sell the business to Bank of New York, which paid a higher-than-expected $2 billion. He realized it was time to move on.
ABOUT THE TIME PEEK WAS EXITING WALL STREET, CIT was reeling from an equally tumultuous few years, the most turbulent since its founding in 1908. Henry Ittelson had launched the Commercial Credit and Investment Co. in St. Louis to offer financing on horse-drawn carriages. In 1915 he moved the headquarters to the New York area and shortened the name to CIT. That year the company made the country's first car loan. Over the next several decades, it shifted its resources from consumer lending to its growing industrial equipment leasing, financing and factoring businesses. It generated solid, predictable earnings that attracted the attention of bigger corporations. In 1980, RCA Corp., then a sprawling conglomerate, purchased CIT for $1.35 billion, only to sell it four years later to New York bank Manufacturers Hanover Corp. for $1.5 billion. In 1989, when Manny Hanny ran into tough times and needed cash, it sold 60 percent of CIT to Dai-Ichi Kangyo Bank, in a deal that valued it at $2.1 billion. Keeping the cycle going, the Japanese bank responded to financial troubles of its own and sold 20 percent of CIT's shares to the public in 1997 for $851 million.
By the late 1990s, CIT had fallen out of favor with investors more enamored of dot-coms. So Albert Gamper, a Manny Hanny veteran who had been CEO of CIT since 1987, acquired Toronto-based technology lender Newcourt Credit Group, which counted Dell Computer among its major clients. But before the deal closed, Newcourt restated earnings and announced that its first-quarter profit had fallen 30 percent short of Wall Street expectations. Gamper went ahead with the acquisition anyway but renegotiated the price from $6 billion to $4 billion. It closed in 2001, as the dot-com bubble was bursting. Newcourt's credit losses mounted, and CIT's share price plummeted 41 percent, to $22, within a few months.
"We ended up in a situation where the traditional CIT equity holder wasn't happy and the growth holder wasn't happy either," notes Lawrence Marsiello, a CIT veteran who joined from Manny Hanny in 1984 and is now a vice chairman and chief lending officer. "We got caught in a Bermuda triangle."
The dogged Gamper appeared to have salvaged the situation in June 2001 when he sold CIT to Tyco for $9.2 billion, a 50 percent premium over its stock market valuation. Tyco, of course, had already run into problems of its own, including an investigation into its accounting practices by the SEC. As Tyco's crisis deepened, credit rating agencies downgraded the company, effectively blocking CIT's access to commercial paper -- a vital funding source for finance companies.
"We were insolvent," recalls Marsiello. "A finance company not having access to the money markets is akin to a person not having oxygen. You need fresh money every single month."
Gamper drew down on $8.5 billion in credit lines and hit the road to persuade investors and clients that the company would survive. In June 2002, while CIT was planning to spin out from Tyco in an IPO that was expected to raise $7 billion and repay the credit line, Tyco CEO Kozlowski was indicted for tax evasion. Ultimately, Tyco raised just $4.6 billion from the July 2002 IPO.
Liberated from Tyco, CIT was able to concentrate on business, yet there were still pressing problems. Its cost of funds was too high, and the aftermath of 9/11 exacerbated an already treacherous situation. The share price fell from $23 in July 2002 to just $14 in October 2002. CIT posted a net loss of $187 million for the year, excluding a big goodwill charge related to the spin-off.
Nevertheless, Gamper managed to reestablish CIT's commercial paper program and hang on to key clients. And as the economy slowly improved, so did the company's outlook.
But Gamper wanted to retire and began seeking a successor. CIT had a number of prospects, such as chief financial officer Joseph Leone, specialty finance chief Thomas Hallman and Marsiello. Each, however, had come up mostly in a single business line. Gamper wanted someone who had overseen multiple businesses.
Having heard of Peek's situation at CSFB, Gamper called him. They met one snowy weekday afternoon in early February 2003 at the Canoe Brook Country Club in Summit, New Jersey. Leaving their cars in the empty parking lot, they strode into an equally deserted clubhouse. "It was like something out of The Sopranos," recalls Peek.
The two men had very different backgrounds. A native of hardscrabble Rutherford, New Jersey, Gamper got his bachelor's degree in 1966 after attending night classes at Rutgers University, a state school. He joined Manny Hanny's training program in 1962 because he needed a job to help care for two ill parents. He rose through the ranks and negotiated the CIT acquisition. In 1987 he became its CEO.
But there were also similarities between the pair. Peek and Gamper are both unpretentious family men committed to civic causes. Peek married his wife, Elizabeth Peek, now a columnist for the New York Sun, in 1972 and has three children. He's treasurer of the New York City Ballet and a trustee of Teachers College at Columbia University. Gamper and his wife, Janice, are backers of Saint Barnabas Medical Center in Livingston and have two children.
Peek agreed with Gamper on CIT's potential. They met several times before Gamper offered Peek the job of president and COO, with the promise that he would become CEO when Gamper stepped down.
Peek quickly realized he would have to change CIT's culture to revamp its operations. In the fall of 2003, soon after joining, he asked subordinates for a list of the company's top 50 clients. He received a list of its 50 biggest credit exposures: Managers were more concerned with managing credit risk than with maximizing their relationships with customers.
"Without being judgmental, that was a true indication of what was important to the company at that point," Peek says. "It had always been a strong credit- and risk-management culture."
Peek wanted to transform CIT from a lending and leasing company into an aggressive diversified financial services firm. But, mindful of the Newcourt Credit disaster, he decided to forgo major acquisitions. Instead, he sought to expand into new and faster-growing businesses, such as health care finance and student lending, through fresh hires and small deals.
While Gamper was still CEO, Peek traveled all over to meet CIT staff and clients. When he became CEO in July 2004, Peek hired management consultants Bain & Co. to evaluate CIT's businesses. He soon had a detailed plan in place: Reorganize the company's diverse business lines to promote cross-selling; reallocate capital to encourage growth; bring in lots of new blood to inculcate a more aggressive, sales-minded culture; and diversify into new business lines and funding sources. The reorganization was completed early last year.
The nearly fourscore senior executives that Peek has hired have come in large part from GE. Among them are commercial finance chief Wolfert, who previously was CEO of GE Healthcare Financial Services; and sales and marketing head Owens, former chief marketing officer for GE Commercial Finance. Owens said no five times to a headhunter before agreeing to talk. Peek, Leone and Marsiello quickly sold him on the idea that CIT was more entrepreneurial than GE.
The new hires are allowing CIT to expand into new businesses. Gregg Smith, formerly CEO of Deloitte & Touche Corporate Finance, has started a 15-strong mergers and acquisitions group. Last month Peek hired Paul Petrylak as president of global insurance services. The former CEO of Chase Insurance Group will inherit CIT's minuscule insurance business with a mandate to pitch casualty, indemnity and workers' compensation policies to CIT's corporate clients.
Timothy Eichenlaub, another GE recruit, joined in June as head of global sponsor finance, the new group that caters to the top 200 U.S. private equity firms. CIT now has $5.5 billion in lending commitments to financial sponsors looking to buy companies. Last May, CIT provided $300 million to Chicago-based private equity firm One Equity Partners, which used the money to buy Oncology Therapeutics Network from Bristol-Myers Squibb Co. Peek's relationship with Richard Cashin, chairman of One Equity, helped CIT win the deal.
"Jeff is one of the best marketing guys we have in the company," says Wolfert.
"It's a natural extension for a CEO that used to run an investment banking business," says Craig Maurer, an analyst with research firm Fulcrum Soleil. "They are trying to offer all services to their clients, leveraging their existing relationships."
Peek has shaken up CIT's sales force. The ranks of those pitching loans, leasing, vendor finance and other services have grown from 1,081 to 1,276, in just the past year, even as 300 underperformers were shown the door.
Peek's most significant act, though, has been rethinking how working capital should be divvied up. CIT had always parceled it out according to the size of a business, which meant faster-growing divisions subsidized the laggards. Now allocations vary with growth. Booming sectors like media, telecommunications and investment banking receive a bigger share.
This approach will help the company identify underperformers to unload. So far Peek has disposed of $290 million in real estate, aerospace and manufactured-housing assets. Goldman, Sachs & Co. and Cerberus Capital Management bought CIT's credit-card-transaction-terminal leasing business, for example, in November for an undisclosed price.
"When you come in new, you don't have the same emotional attachment to the businesses as someone who has been there a decade," Peek explains.
The CEO is making small, targeted acquisitions to build businesses in which CIT has lagged. In the past year the company has tripled assets devoted to health care, to $1.5 billion, largely through the $550 million purchase of Mount Laurel, New Jerseybased Healthcare Business Credit Corp. That boosted CIT's health care staff from 35 to 145. In July 2004, CIT bought Citigroup's European vendor finance leasing business, acquiring $950 million of leases and loans. Peek merged it into CIT's vendor finance unit and consolidated the back-office operations in Dublin, a move that cut the acquired business's costs by 75 percent.
"They've been able to make lemonade out of other people's lemons," says Bear Stearns' Hochstim.
But Peek also paid $381 million for Educational Lending Group, a student lender with a $4 billion portfolio, and skeptics warn that CIT is buying the No. 4 company in a highly competitive market.
Diversifying funding sources is as much an imperative for CIT as diversifying revenue streams. Peek has adopted Gamper's idea of growing CIT Bank, a Utah-based subsidiary set up in 2000. Today this piggybank holds $400 million, mostly from vendor finance clients. The goal: $2.5 billion in assets by the end of 2006. By harvesting deposits CIT can fund more of its loans through the bank, rather than rely on the capital markets -- which nearly killed the company during the Tyco debacle. Peek wants to fund 10 percent of loans this way in the next few years.
CIT's market funding, though, is in pretty good shape. Even after separating from Tyco, it paid 150 basis points more than GE to borrow money. That made it hard for CIT to extend credit on competitive terms and make a profit. But now the cost differential is a negligible 20 basis points, says Marsiello.
With his makeover of CIT still a work in progress, Peek faces some potential obstacles beyond his control. Deterioration of the health of the deficit-ridden U.S. economy and the credit environment could stymie the best-laid plans. Leverage at middle-market companies has risen to the highest levels seen since the late 1990s, according to Standard & Poor's, and that could cause more defaults, contributing to loan losses at CIT.
"Leverage has been stretched," admits Peek. "There will be some ugly consequences." But he is confident that CIT's diverse businesses will carry it through cyclical problems.
And what of Peek's own future? Some people close to him wonder whether he'll want to make a triumphant return to Wall Street, either by selling CIT in a deal that positions him to be CEO of the combined company or by parlaying his turnaround of CIT into the securities firm CEO job he has long coveted.
For his part, Peek will say only that he's relishing his chance to lead CIT and to disprove lingering suspicions that he's not tough enough.
"People think I have this comme ci, comme ça, mañana view of the world," says Peek. "I don't think they understand how competitive I am. That's fine, I think it's worked for me."
