Leasing

1

Primus Automation Division, 2002

In early 2002, Tom Baumann, an analyst in the Marketing and Sales Group of the Factory Automation Division of Primus Corporation, had to recommend to the division sales manager, Jim Feldman, the terms under which Primus would lease one of its advanced systems to Avantjet Corporation, a manufacturer of corporate-jet aircraft. Specifically, Baumann was weighing a choice among four alternative sets of lease terms. The problem of analyzing and setting lease terms was relatively new to Baumann and had arisen only a month earlier, when Avantjet informed Baumann and Feldman that its pending purchase of the factory-automation system had been put on indefinite hold. Avantjet’s CEO had just ordered a moratorium on any capital expenditures that might negatively affect Avantjet’s income statement and balance sheet. Baumann was not completely surprised by Avantjet’s decision. Just recently, the Wall Street Journal had singled out Avantjet’s declining stock price and worsening balance sheet as an example of manufacturers’ deteriorating condition during the economic recession. Only three months earlier, Baumann and Feldman had won an apparent competition for Avantjet’s business over Primus’s leading competitors, Faulhaber Gmbh of Germany and Honshu Heavy Industries of Japan. Baumann feared that Avantjet’s temporizing would give those two competitors an opportunity to renew their selling efforts to Avantjet. Feldman challenged Baumann to find a way to make the sale: “Help me salvage this deal or we won’t make our sales budget for the year. Also, given the steep competition, we might lose the customer altogether on future sales.” Baumann explored a range of creative financing terms, such as leasing, that might remove Avantjet’s reluctance to proceed. He concluded that structuring the transaction as a lease might save the deal. Now, choosing the annual lease payment remained the only detail to be settled before returning to Avantjet with a...