To Buy or not to Buy? Once a Last Resort, Leasing now is often the
Best Method of Acquiring Capital Equipment or Real Estate.
Source: Industry Week, 17 November 1997
LATE IN 1996 A CUSTOMER APPROACHED
Beacon Group, asking whether the Bloomfield,
Conn.-based manufacturer of aircraft engine parts
would be interested in providing a new type of ma-
chining. In order to obtain the order and handle the
work, Beacon would have to add several CNC turn-
ing centers to its shop floor.
Beacon wanted to respond quickly, as the opportunity
to enter a new market--client in hand--would not last
forever. However, prudence was imperative. "The
aerospace industry has long-term business cycles,"
controller Dana Maker says. "Right now, it's doing
quite well. But we can only look ahead a couple of
years." In addition, entering a new market presented
some business risk, although management was confi-
dent of its ability to succeed.
To meet the dual requirements of speed and safety,
Beacon worked with AT&T Capital Corp. to struc-
ture a six-year lease for the machines. The size of the
deal exceeded $1 million. Maker says the turning
centers were up and running four months after the
company first decided to acquire them. In addition,
by leasing the machines instead of buying them, the
company was able to match its cash flow to the fore-
casted duration of the business cycle.
At the same time, the cost of the deal was comparable
to Beacon's other financing alternatives, which in-
cluded buying the machines outright or borrowing
funds to purchase them. "On a cost-of-capital basis,
leasing was the cheapest," Maker says. "Leasing
companies have access to capital less expensively
than we do." The deal marked the first significant
leasing transaction for the 50-year-old company.
Many other firms are finding that leasing can be a
cost-effective way to acquire capital equipment and
real estate. Once considered by some a financial tool
of last resort, leasing has gained credibility.
Leases accounted for approximately 30%, or $169
billion, of the amount that businesses invested in pro-
ductive assets in 1996, reports the Equipment Leas-
ing Assn., an Arlington, Va.-based trade association.
That number is expected to rise to $176 billion in
1997. More than three-quarters of U.S.-companies
lease at least part of their equipment.
There are several reasons why leasing can be a cost-
effective means of acquiring an asset. Often a lessor
is better able to take advantage of the deduction for
depreciation expense that comes with ownership. The
savings are passed on to the lessee through lower
Mobil Corp. has been able to benefit from a transfer
of depreciation benefits, says Richard Sliwinski, sen-
ior financial adviser with the Fairfax, Va.-based en-
ergy and petrochemicals giant. Mobil has completed
several sizable leasing deals. The most recent one
was a transaction with Sumitomo Bank Leasing &
Finance Inc. for a commercial tanker. The size of the
deal was in the tens of millions of dollars.
Sliwinski says that Mobil has been subject to the al-