The Leasing Game

One of the recent surprises of the computer business has been the swift rise of middlemen who buy the machines from manufacturers and lease them to users. The middlemen operate with vast sums of other people's money, depend on federal antitrust pressure against dominant IBM for survival and on favorable income tax breaks for much of their profit. Yet a dozen companies, none more than 15 years old, have thrived so splendidly that computer-leasing stocks were among Wall Street's hottest glamor issues this spring.

Naturally, the competition is warming up. Last week Manhattan Management Consultant John Diebold, a leading evangelist of the computer and its potential, joined with Commercial Credit Co. and Bankers Leasing Corp., a subsidiary of the Southern Pacific railroad, to form Diebold Computer Leasing Co. The firm, which will specialize in leasing the latest third-generation computer equipment in the U.S. and Europe, starts with an impressive $85 million bankroll, of which Commercial Credit put up $75 million as a revolving loan. "We are set up to be the General Motors-in this field," says Diebold. "The whole thing is structured around desirable financing. We don't see any other limit to the market."

Cheaper Rates. The demand for computers in the U.S. is indeed soaring: last year computer makers installed some 13,000 systems worth some $5 billion, double their output in 1962. By the early '70s, Diebold predicts, the business will triple to $15 billion a year. Though 80% of the nation's computers are leased, most are on direct rental from manufacturers. The computer-leasing firms have been able to elbow their way in by the classic route of price cutting. They generally charge at least 10% less than the manufacturer's rental fee. In doing so, they are betting that they can keep their costly machines continuously leased for as long as ten years, or about double the payoff time on which manufacturers base their own rents.

The bargain rentals have attracted scores of prominent customers, among them, General Motors, General Foods, A.T. & T., Boeing, Monsanto, Aerojet-General, Mobil and Sinclair Oil. The scheme involves merely a financial juggle, and the equipment is often picked by the user to fit his own needs. Strange as it seems, computer makers regard the leasing companies as welcome intruders, partly because their purchases help meet the manufacturers' need for vast amounts of cash to pay for research and development. IBM, with 70% of the U.S. computer market, dares not use its size to crush the dis count lessors, because of a 1956 antitrust consent decree.

Beyond Control? With the 7% investment tax credit plus fast tax writeoff on their equipment, most leasing companies show quick profits in their early years. GC Computer, a Greyhound Corp. subsidiary and largest of the five leasing concerns listed on the American Stock Exchange, reported a 47% gain in earnings last year; the price of its stock jumped from 91 to 41 at one point during the spring surge. Levin-Townsend's earnings climbed mightily in the fiscal year ended in March, and its stock price rose from 12 at the end of December to as high as 54 in May.

Despite such signs of investor confidence, many critics consider the leasing companies highly vulnerable to risks beyond their control. Admits President W. Carroll Bumpers of GC Computer: "The independents have to fathom when to slow down leasing of third-generation equipment because of obsolescence." There is little agreement among experts as to when that stage will arrive. While the immediate prospects for the computer-leasing companies seem bright, their profits could plunge, leaving them with a mountain of debt, if the fourth generation of computers reaches the marketplace sooner than they expect. The crucial time will probably arrive in the mid '70s.

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