Avco Financial Services Inc.

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Avco Financial Services Inc.

P.O. Box 19701
Irvine, California 92713-9701
U.S.A.
(714) 553-1200

Wholly Owned Subsidiary of Textron Inc.
Incorporated: 1971
Employees: 7,100
Sales: $1.03 billion
SICs: 6141 Personal Credit Institutions

A subsidiary of Textron Inc., Avco Financial Services Inc. is a leading U.S. provider of consumer loans for real estate and personal property. In addition, its insurance division provides life, disability, and casualty insurance. Avco grew primarily through mergers and acquisitions during the mid-1900s before expanding rapidly in the 1980s. Going into the mid-1990s, Avco was operating about 1,200 offices throughout the United States and in parts of Australia, New Zealand, the United Kingdom, and Spain.

Incorporated in 1971, Avco Financial Services was the culmination of several decades of mergers and acquisitions involving various companies. Delta Acceptance Corporation Limited, one of the progenitors, was founded in 1954 in London by Reginald Palmer and Ninian Sanderson to finance the receivables of Palmer’s appliance store. A group of U.S. investors who were associated with the Paul Revere Life Company soon became interested in Delta and made an equity investment. That cash injection spurred Delta’s growth in the United Kingdom, which prompted the U.S. investors to purchase the company in 1956.

Delta’s new owners installed an experienced management team which devised an ambitious plan to turn the company into a coast-to-coast North American provider of diversified financial services. To that end, Delta acquired the Canada-based Crescent Finance Corporation in 1957 and Consolidated Finance Corporation in 1958. It opened several new branches throughout Canada and began making consumer loans for major purchases like cars, appliances, and furniture. In 1960, Delta formed an insurance division called Adanac General Insurance Company. The aim of this subsidiary was to provide credit-related insurance services. Two years later, Delta expanded this enterprise with the purchase of the London and Midland General Insurance Company.

Delta continued to expand in North America during the mid-1960s with the purchase of a group of industrial banks, a home improvement finance company, and other finance-related companies. Delta was operating 212 branches and generating annual sales of about $250 million by 1964, when it became an acquisition target. In December of 1964, Delta was purchased by Avco Corporation, a New York-based firm active in the aerospace industry. Avco renamed the new subsidiary Avco Delta Corp. and continued to expand its financial network throughout North America. In 1965, for example, Avco Delta acquired the Iowa Finance Company and the Citizens Finance Company. This financial arm of the Avco Corp. continued to flourish through the late 1960s.

In 1969, Avco Delta acquired the Seaboard Finance Company. Seaboard was a leading west coast consumer finance institution which had opened its first office in Los Angeles in 1927. Although still based in Los Angeles at the time of its acquisition by Avco Delta, Seaboard was expanding internationally. The merger between Seaboard and Avco Delta was completed in 1971, at which time Avco Corp. named the resulting division Avco Financial Services Inc. During the 1970s, Avco Financial’s ongoing global expansion efforts included a renewed emphasis on the United Kingdom market, where Delta had commenced operations in the 1950s. Meanwhile, Avco’s loan volume in North America continued to swell. By the end of the decade, Avco Financial was boasting more than $2 billion in receivables from its consumer loans.

During the economic downturn of the early 1980s, several of Avco Financial’s operations languished. In 1984, the subsidiary’s parent organization, Avco Corp., became the acquisition target of Textron Inc., a $3.2 billion conglomerate active in textile and defense industries, among other businesses. The buyout was not surprising given Textron’s history of diversification. In fact, the founder of the company, Royal Little, is credited with pioneering the concept of the diversified conglomerate in the United States. Little began broadening Textron’s corporate scope in 1952, buying up companies in unrelated industries in an effort to counter the boom-and-bust cycles that plagued his textiles business. Chief among his acquisitions was Bell Aircraft Corporation, for which he paid $32 million in 1962.

The Avco Corp. purchase was a significant accomplishment for Textron in that it nearly doubled Textron’s size and guided the conglomerate into the growing financial services industry. The merger was engineered by Beverly F. Dolan, who had joined Textron years earlier as a result of an acquisition. Dolan and his brother, natives of Augusta, Georgia, had started the golf cart manufacturing company E-Z-Go in 1956. Six years later, Little bought their company for $1 million, although Dolan stayed on board as president of the division. By the 1980s, Dolan had worked his way through the ranks to a top-level executive slot at Textron. Following the Avco buyout he was named chief executive of Textron Inc.

Under Dolan’s leadership, Textron continued to acquire new companies and jettison some ailing divisions. However, not all of the acquisitions proved to be profitable for the conglomerate. In fact, the aerospace arm of Avco Corp. faltered after it was taken over by the Textron corporate umbrella. Previously, Textron (formerly Avco) Aerostructures had prospered under Avco’s direction by building wings for the B-1B bomber. Textron managers hoped to replace the expiring B-1B contract in 1986 with another contract to build wings for a military transport plane. Unfortunately, the new contract never materialized. Although Textron was able to keep the company afloat with some civilian contracts, it had to slash the division’s work force from 7,100 to just 2,600 between 1986 and 1988.

While Textron endured setbacks caused by Avco’s military contract division, the company nevertheless validated its diversification strategy by achieving significant gains with Avco Financial Services. During this period, Textron brought in Charles Rinehart to head up Avco Financial. Rinehart was a California native who had worked his way through the ranks at San Francisco-based Fireman’s Fund Insurance Co. before joining Avco at its Irvine headquarters. During the mid-1980s, Rinehart and other executives labored to revive Avco Financial from the effects of the recent recession. Importantly, they reduced the amount of nonperforming and high-risk loans and initiated an aggressive quality campaign to improve operations. “They [Textron] did a good job of cleaning up the finance company,” surmised analyst Howard A. Rubel in 1989 in the Providence Journal-Bulletin.

A symbol of the changes taking place at Avco was the adoption of a new company logo. In 1987, Avco discarded its old emblem—a Delta sign—and replaced it with a heart-shaped symbol that was intended to convey a sense of caring. Although critics derided the logo as inappropriate for a finance company, favorable consumer test results convinced Avco executives to adopt it. Apparently, the new logo did not damage Avco’s financial performance during the late 1980s. In fact, by the end of the decade Avco Financial was ringing up record sales of $1.15 billion, about $108 million of which was netted as income. Those figures represented steady gains during much of the mid-1980s of more than 10 percent annually.

Going into the 1990s, Avco Financial was accounting for roughly 27 percent of Textron’s revenues. The bulk of Avco Financial’s profits was derived from its core consumer finance businesses, whereas about 15 percent was coming from unrelated sales of life, disability, and casualty insurance. Indeed, as Textron’s military contracting divisions faced cutbacks in defense spending, Avco Financial was engaged in a growing and lucrative industry. Most of the company’s consumer loans, for example, were bringing in a lofty effective interest of around 20 percent, compared to the rate of roughly 10 percent that Avco was paying for the money to finance the loans.

Although Avco Financial’s success during the late 1980s was largely attributable to its improved balance sheet and loan portfolios, gains were also a corollary of management’s efforts to instill a culture of quality. The positive impact of quality efforts was evidenced most clearly at Avco’s surging Canada division. In 1985, Avco executives in the United States pressed the head of the Canada division to adopt a formal quality initiative. Canadian executives, after visiting Japan to study companies with quality programs, implemented what they called the Quality Improvement Process (QIP). In essence, QIP discarded authoritarian management styles in favor of a team-based decision-making process that involved employees in every level of the company. Although the transition was somewhat turbulent, the end results were impressive. Avco’s Canadian division achieved a growth rate of 11 percent annually between 1985 and 1989, in contrast to just five percent growth throughout the early 1980s. Furthermore, operating costs declined and profit margins improved. Because of its quality drive, Avco Canada was awarded the Canada Award for Business Excellence in 1990.

Also bolstering Avco Financial’s sales and profits during the late 1980s and early 1990s was its ongoing program of global diversification. By 1989, only 64 percent of Avco’s sales and 50 percent of its pre-tax income was coming from its U.S. division. About 20 percent of revenues were attributable to Canada, 7.5 percent to the United Kingdom, and 11 percent to Australia and New Zealand. During the early 1990s, international sales growth continued to outpace Avco’s gains in the United States. Most importantly, Avco’s British division realized sales and income gains of 40 percent and 30 percent respectively between 1989 and 1993. Avco also commenced a consumer finance division in Spain in 1992 and was operating four offices in that country by 1994.

By the early 1990s, both Rinehart and Dolan had left their posts at Avco and Textron—Dolan retired and Rinehart accepted a position at H.F. Ahmanson & Co., the nation’s largest savings and loan institution. Rinehart handed off leadership of Avco Financial to Warren R. Lyons. Under Lyons’s direction, Avco’s financial performance continued to improve steadily. Sales increased from $1.28 billion in 1990 to $1.36 billion in 1992. Although revenue dipped to $1.35 billion in 1993, Avco’s income rose to a record $225 million—a 20 percent increase over 1990. Likewise, Avco’s global asset base swelled from $5.09 billion in 1990 to $6.12 billion in 1993. Those gains occurred despite the stagnant performance of Avco’s insurance-related business, which accounted for about 10 percent of revenues. Avco attempted to sell some of the poorly performing insurance businesses in 1992, but was still running them by the middle of the decade.

Going into the mid-1990s, Avco was one of the largest consumer finance companies in the United States. It was primarily engaged in providing relatively high-interest rate loans of usually short duration for purchases of cars, consumer goods, and real estate. Avco boosted sales and net income by about 2.8 percent and 14 percent, respectively, in 1994. By that time, the company was employing more than 7,000 workers in 1,200 offices, about 750 of which were located in the United States. International operations included Canada (215 branch offices), Australia (122), the United Kingdom (92), New Zealand (10), and Spain (4). In February of 1994, Avco opened an office in Hong Kong, reflecting the management’s intent to penetrate the burgeoning Pacific Rim market for consumer finance services. Avco’s long-term prospects were positive given projected growth rates for the financial services industry, Avco’s market diversity, and the company’s healthy balance sheet in comparison to industry averages.