Sales: $3.93 billion (2000)
Stock Exchanges: New York
Ticker Symbol: CD
NAIC: 53121 Offices of Real Estate Agents and Brokers; 52231 Mortgage and Nonmortgage Loan Brokers; 72111 Hotels (Except Casino Hotels) and Motels; 532111 Passenger Car Rental; 81293 Parking Lots and Garages
Cendant Corporation was formed in December 1997 when Hospitality Franchise Systems, Inc. (HFS)—led by Henry Silverman—merged with CUC International Inc. Shortly after the $14 billion deal was completed, the company became involved in an accounting scandal, which led to a $2.83 billion settlement of a class action shareholder lawsuit in 1999. Since that time, Silverman has worked diligently to restore Cendant’s reputation.
Cendant operates as the world’s largest hotel franchiser through its Travel division with over 6,400 locations bearing the names AmeriHost Inn, Days Inn, Howard Johnson, Knights Inn, Ramada Inn, Super 8, Travelodge, Villager, Wingate Inn, and Fairfield Resorts. The company’s Vehicle Services division runs the second-largest rental car business in the world through its Avis brand. It also operates National Car Parks, the largest non-municipally owned car park in the U.K. These divisions were responsible for 32 percent of revenues during 2000.
Through its Real Estate Services division—which secured 39 percent of revenues in 2000—Cendant operates Century 21, Coldwell Banker, Coldwell Banker Commercial, and ERA, and also offers mortgage services through Cendant Mortgage. In 2001, one out of every four homes sold or purchased in the United States was done so through a Cendant affiliate. Cendant’s Diversified Services division includes the business of Jackson Hewitt Tax Services, the second-largest tax preparation company in the United States, along with business related to insurance and loyalty marketing. This division accounted for 29 percent of revenues during the 2000 fiscal year.
The History of CUC International
In the mid-1990s, CUC International Inc. offered individual consumers access to various services and discounts related to shopping, travel, insurance, automobiles, dining, vacationing, credit card enhancement packages, and various discount and coupon programs. The company offered its services primarily through memberships to clubs and programs. Entering 1996, CUC had about 40 million members who paid $5 to $250 per year. The company was growing rapidly in the mid-1990s through acquisitions and internal expansion.
CUC started out in 1973 as Comp-U-Card (Comp-U-Card of America, Inc.), a company launched to deliver shopping services, including home shopping, using computers and credit cards. The glaring flaw in the strategy—one that the company’s founder, Walter A. Forbes, acknowledged in retrospect—was that very few computers, particularly home computer systems, were accessible to shoppers at the time. Thus, Comp-U-Card, far ahead of its time, was destined to struggle in the dawning years of the information age, waiting for technology to catch up with its progenitor’s stratagem. Indeed, CUC would languish for a full decade before gradually emerging as a force in electronic commerce.
“It was a silly investment at the time because there were no home computers,” Forbes conceded in the April 24, 1995 Forbes. Nevertheless, he remained committed to the idea and continued to pour money into the flailing venture until its turnaround. Forbes was only 30 years old when he started Comp-U-Card. Only five years earlier he had graduated from the Harvard Business School before taking a comfortable job with a management consulting firm, helping other busines owners and managers to run their companies. Shortly after going to work for that firm, he came up with his own business idea: electronic merchandising.
Specifically, Forbes became convinced that there had to be a better way to get merchandise from the factory floor to people’s living rooms, rather than going through the traditional, torpid, costly distribution systems that incorporated numerous warehouses, retail stores, and brokers. He believed that computers could do the job much more efficiently. Buyers could simply place their order with a credit card using a computer terminal, which would immediately tell the factory or warehouse where to send the merchandise. Lower costs and lower prices, among other advantages of such a system, would effectively obsolete the traditional retail industry.
Forbes, with the help of several friends, launched Comp-U-Card in 1973 (they incorporated the business in 1974 as Comp-U-Card America, Inc.). For three years Forbes and the other investors dumped hundreds of thousands of dollars into the venture in an effort to create a sort of electronic retail store. Meanwhile, Forbes continued to toil at his job and help to manage Comp-U-Card on the side. Because few people had access to computers, Forbes decided to try the concept using television. He tried to create a home shopping network through which customers could view products, call in with a credit card number, and have the goods delivered. Forbes later tried in-store electronic kiosks, which featured pictures of items that passersby could order electronically. Both the television shopping and kiosk efforts ultimately failed.
By the late 1970s, Forbes and his fellow investors had dumped about $2 million into Comp-U-Card. The company showed little promise of returning the investment anytime soon, if at all. Still, Forbes was convinced of the merit of his concept. In 1979, in fact, he surprised coworkers when he left his job to devote all of his energy to Comp-U-Card. Forbes was hoping that, by the early 1980s, the number of consumers who had access to home computers would constitute a viable market for his electronic shopping concept. To that end, in 1979 Comp-U-Card launched its first online home shopping service, Comp-U-Store Online.
Forbes was finally forced to accept the fact that the electronic shopping market still had not materialized. By 1982, Comp-U-Card was generating only a few million dollars in annual sales and still showed no signs of recovering the millions of dollars invested since the 1973 start-up. Still undeterred, Forbes decided to adopt a new strategy. After deciding to focus on telephone sales, he found that Comp-U-Card was uniquely positioned to capitalize on a related, emerging trend in the credit card business—”affinity” programs that offered credit card customers incentives like memberships in shopping clubs. Credit card companies began offering memberships or discounts on memberships in Comp-U-Card’s discount shopping services as a lure to attract new customers.
Comp-U-Card’s first shopping service was dubbed “Shoppers Advantage.” Shoppers Advantage members paid an annual fee (about $40 in the early 1990s), which gave them access to a toll-free number that they could dial to place orders for merchandise. Members could purchase brand name items and have the goods delivered directly to their home. Aside from the convenience, the service was designed to deliver lower prices in comparison to typical retail channels. Comp-U-Card paid the credit card companies a percentage of the membership fees it collected and benefitted from access to the credit card companies’ mailing lists. Everybody involved benefitted, with the exception of competing retailers.
Comp-U-Card was able to offer low prices on its goods for several reasons. Aside from bypassing expensive brokers, Comp-U-Card took bids from numerous distributors. When a caller would phone in to purchase a pre-selected item, the Comp-U-Card representative would search the database to find the lowest bid from hundreds of distributors on the particular item. Comp-U-Card would effectively award the sale to the lowest bidder and add a mark-up of about five to ten percentage points to the price to cover its overhead (i.e. the toll-free phone call, shipping, and administrative costs). Many manufacturers initially refused to sell through Comp-U-Card for fear of irritating their retail customers, but Comp-U-Card was eventually able to convince most major manufacturers to use the channel, and the service grew to include more than 250,000 items by the early 1990s.
Thus, with its telephone shopping club marketed through credit card companies, Forbes had finally found a winning strategy for Comp-U-Card. Indeed, from about $4 million in 1983, Comp-U-Card’s annual revenue rose past $50 million in 1985. Realizing the viability of the new strategy, Forbes changed the company’s name to Comp-U-Card International in 1982 and in 1983 took it public to raise expansion capital. Comp-U-Card followed up with a second offering in 1984. Shortly before the first offering, moreover, Forbes sold licenses for its shopping clubs in Europe and Japan for about $6 million. The company’s membership base exceeded one million in 1984, signaling the beginning of growth that would swell Comp-U-Card’s membership ranks to 40 million by the mid-1990s.
By 1986, Comp-U-Card’s sales had increased to nearly $90 million. More important, the company was showing healthy profits by then (net income totaled nearly $30 million between 1986 and 1988). Comp-U-Card’s gains were also the result of complementary programs designed to piggy-back off of the success of the shopping club program. In 1985, for example, the company launched Travelers Advantage, a full-service travel club that guaranteed the lowest price for all travel arrangements to its members and returned five percent of every dollar spent through the service. Travelers Advantage eventually became an important profit center for the company.
As a renewed Cendant, we continue to build on our historical strengths in the travel and real estate service sectors. We are a leading architect of franchise systems and an innovative provider of outsourcing services. Today’s Cendant proves that strong leadership transcends time.
As it expanded its membership programs, Comp-U-Card began diversifying in the mid-1980s as part of an overall strategy to create a multifaceted marketing organization that profited from technological changes in the marketplace. In 1986, the company acquired two companies: Benefit Consultants, Inc., a marketer of accidental death insurance through credit unions and banks, and Madison Financial Corp. (FISI*Madison), the nation’s largest financial marketing organization and a provider of enhancement services (analogous to Comp-U-Card’s shoppers club enhancement service) to more than 6,000 financial institutions. The acquisitions helped push Comp-U-Card’s sales to $142 million in 1987 (fiscal year ended January 31, 1987), about $9 million of which was netted as income.
Reflecting its growing diversity, Comp-U-Card changed its name in 1987 to CUC International, Inc. It also launched another membership service, Auto Vantage, which offered a variety of products and services for every phase of car ownership. Going into 1988, CUC was boasting about ten million members in all of its clubs combined. During that year, CUC bought a short-notice travel business and opened new satellite centers for its auto, travel, and shopping club services. Those efforts helped the company to boost sales to nearly $200 million in 1988, earning Walter Forbes a spot on the Business Week “CEO 1000” list. By the end of the 1980s the company was pulling in sales of close to $300 million and offering a growing diversity of discount products and services to its millions of members.
After rocketing throughout most of the mid- and late-1980s, CUC’s stock price lurched downward in 1989, and shortsellers lined up to cash in on what many analysts expected would be a big drop in the company’s value. The problem stemmed largely from questions about CUC’s accounting methods, which seemed to artificially inflate earnings and emasculate cash flow. CUC executives acknowledged the problem and changed their accounting methods, adding credence to critics’ claims that the company risked a downturn in profits if its customers didn’t continue to resubscribe to its clubs. The critics had a point. If a significant portion of CUC’s members did not resubscribe to its clubs, the company would have to incur huge marketing costs trying to replace them.
In fact, CUC achieved a membership renewal rate of about 70 percent that made it the envy of the industry. That meant that CUC, unlike many other subscriber services, could more easily profit from membership growth rather than maintaining an existing membership base. That benefit was reflected in sustained sales and profit gains; sales rose to $450 million in 1991 and $644 million in 1992, while net income climbed to $16 million annually. That growth was partly the result of more acquisitions and the start of new membership clubs. In 1989, for example, CUC launched Premier Dining, a national discount dining program. In 1991, the company started HealthSaver, which offered discounts on drugs, eyewear, and other health-related merchandise. Incredibly, by 1992 CUC was employing 5,000 workers and operating its network (mostly through licensees) in 36 countries.
During the early and mid-1990s, CUC expanded greatly with significant acquisitions. In 1992, for instance, it acquired the venerable Entertainment Publications, the leading publisher of discount coupon books and promotions in North America. Similarly, in 1995 CUC bought Welcome Wagon International Inc. In addition, the company continued to add new services and membership clubs, including a new Home Shopping Travel Club and PrivacyGuard, which provided access to personal credit rating, driving, medical, and Social Security records. Furthermore, CUC entered into potentially lucrative partnerships to provide services with such big companies as Intel, Time Warner, and American Airlines.
- Walter A. Forbes creates Comp-U-Card, an electronic shopping company.
- Forbes quits his day job to focus is efforts on Comp-U-Card; the company launches Comp-U-Store Online.
- The company’s name changes to Comp-U-Card International.
- Comp-U-Card goes public.
- The firm launches its Travelers Advantage program.
- Revenues reach $90 million upon the success of its telephone shopping club; the company acquires Benefit Consultants Inc. and Madison Financial Corp.
- Comp-U-Card officially adopts the name CUC International Inc.
- Hospitality Franchise Systems Inc. (HFS) is created by The Blackstone Group and immediately acquires the Howard Johnson franchise system and the U.S.-based Ramada franchise system.
- CUC acquires Entertainment Publications; HFS purchases Days Inn of America.
- HFS becomes the largest corporate hotel chain operator in the world with the purchase of the rights to Super 8 Motels Inc.
- CUC purchases Welcome Wagon International Inc.
- HFS purchases Century 21, Knights Inn, Travelodge, Coldwell Banker, Avis Inc., and RCI; CUC acquires Davidson & Associates Inc. and Sierra Online.
- HFS purchases CUC for $14 billion; the two companies merge together and form Cendant Corp.
- Shareholders file suit against Cendant for accounting irregularities and fraud; negative publicity surrounds the company.
- Cedant reaches a $2.8 billion settlement in the shareholder class action lawsuit.
- Ernst & Young agrees to pay Cendant shareholders $335 million to settle the accounting fraud suit; Cendant acquires the AmeriHost Inn and AmeriHost Inn Suites brand names and franchising rights.
- Cendant purchases Galileo International and Cheap Tickets Inc.
Meanwhile, CUC continued to market its existing clubs geared mostly for shoppers, travelers, and other consumers. Indeed, by 1995 the company was sporting roughly 40 million members in its clubs and still achieving average resubscription rates of more than 60 percent. Interestingly, CUC returned to its roots in 1994 when it purchased the NetMarket Company, a leader in bringing commerce to the Internet. Finally, it appeared as though the interactive market for home shopping by compute was finally emerging as a viable distribution channel, just as Forbes had envisioned it more than 20 years earlier.
CUC sustained its blistering expansion drive into the mid-1990s, doubling revenues from $738 million in 1993 (fiscal year ended January 31, 1993) to $1.4 billion in 1996. During the same period, CUC’s net income rose from $25 million to $163 million, making CUC a major force in its niche of the membership/electronic marketing industry. Signaling Forbes’s intent to pursue his original dream of electronic commerce, CUC began pitching its clubs on the Internet and various online services in 1995. More important, early in 1996 CUC surprised observers when it announced plans to pay nearly $2 billion to acquire Sierra On-Line and Davidson & Associates, education and entertainment software manufacturers. CUC claimed that the purchase represented its first big move in a bid to become the biggest provider of online content in the world. The deal was completed that year, and CUC went on to purchase RentNet, Ideon, and Book Stacks, an online bookseller. In November 1996, the company paid $86.1 million to acquire software company Knowledge Adventure Inc. In 1997, Berkeley Systems, a screen-saver and game developer, was also purchased.
The History of Hospitality Franchise Systems (HFS)
In the mid-1990s, Hospitality Franchise Systems, Inc., (HFS) was the world’s largest hotel franchiser, as measured by number of rooms and properties. Its chief franchise systems included Days Inns, Ramada, Howard Johnson, Super 8, Park Inns, and Village Lodges. It also engaged in the gambling industry and offered various lodging-related fee services. The company’s short history was characterized by rampant growth.
HFS was formed in 1990 by The Blackstone Group, a New York-based investment bank. Blackstone hired 50-year-old Henry Silverman, an attorney and investment banker with experience in the lodging industry, to run its merchant banking group. Blackstone formed HFS with the intent of purchasing ailing or undervalued franchise brands or the rights to those chain’s brand names. It planned to generate profits by charging its member hotels up-front and annual franchise fees. Rather than own the hotels, it would simply provide marketing, reservation, and other value-added administrative services. In addition, it would target hotels that offered moderate- and low-priced rooms.
To the casual observer, Blackstone’s entry into the lodging market may have seemed poorly timed. The U.S. hotel industry had just experienced its greatest period of expansion in history. By the early 1990s, in fact, there were more than three million hotel rooms in the nation, and about 30 percent of those had been built since the early 1980s. By the late 1980s, it was clear to hotel industry participants that the market was quickly fading. Indeed, after increasing at a rate of approximately four percent a year throughout the middle and late 1980s, the number of newly constructed hotel rooms plummeted. By the early 1990s, the growth rate had plunged to less than one percent, and most of the new rooms were built in the Las Vegas area.
The decline of the U.S. lodging industry was the result of several factors. First, the Tax Reform Act of 1986 gradually diminished the tax-favored status of commercial real estate developments, such as hotels, and decreased investment capital for new construction. Second, and more important, was a decline in demand. As the economy slowed in the late 1980s and early 1990s, both business and personal traveling declined. Many hoteliers that had expanded their chains during the 1980s with expectations of high demand and a preferred tax status suddenly found themselves burdened with half-empty, unprofitable properties that they could not sell.
By forming HFS, The Blackstone Group hoped to exploit what it viewed as opportunities amidst turmoil in the lodging industry. Fewer than one-third of all U.S. hotels going into the 1990s were affiliated with a national or regional chain. As a result, their operating costs were generally very high compared to members of national chains, which benefitted from economies of scale. National chains could provide national advertising campaigns, centralized and automated reservation and billing departments, quality assurance programs, administrative support, and management training. Furthermore, HFS believed that the majority of the hotels that were affiliated with a chain could benefit from joining an even larger organization. Because so many hoteliers were strapped for cash by the early 1990s, HFS reasoned that it could sell large numbers of franchised rooms at low prices and profit, despite sluggish demand for hotel rooms.
In July of 1990, HFS made its first acquisitions by purchasing the Howard Johnson franchise system and the rights to operate the domestic U.S. Ramada franchise system. HFS bought the troubled properties from Prime Motor Inns for a scant $170 million. Prime Motor Inns was one of the fastest growing hotel chains in the nation during the 1980s and had accrued an impressive list of holdings by the end of the decade. However, it had also racked up over $500 million in debt, causing it to seek refuge in bankruptcy court when the market finally soured. The profitability of its Ramada and Howard Johnson subsidiaries had deteriorated significantly by 1990—the Ramada chain was even losing money.
With its first purchase, HFS immediately became a major player in the U.S. lodging industry. The Ramada chain brought 472 hotels with more than 77,608 rooms under HFS’s corporate umbrella. Howard Johnson added 417 properties with about 51,786 rooms. HFS incurred about $91 million in debt during its first year of operation, but was able to recoup approximately $50 million in franchise fees for a net loss of about $1.9 million—not a bad outcome considering the company’s start-up costs. HFS lost about $5 million in 1991 as it bolstered marketing efforts for its chains, began to establish a consolidated infrastructure that could also support future acquisitions, and pared its debt by about 15 percent.
In addition to trying to improve the efficiency of the hotels already in its chain, HFS sought to generate additional profits by adding independent hotels, other chain’s hotels, and new construction to the Ramada and Howard Johnson chains. During 1990 and 1991, in fact, HFS added about 22,000 rooms to the two hotel chains. It profited immediately from the additions of these properties because hotel owners that joined the franchises paid HFS an up-front fee, typically around $20,000 to $30,000. In addition, the owners agreed to pay an annual franchise fee of six percent to ten percent of gross receipts. The hotel owners benefitted, of course, from access to a brand name and the reservation and marketing support proffered by HFS.
HFS’s initial success prompted its second major acquisition in January of 1992. Also in January of that year it purchased Days Inn of America, Inc., from the troubled Tollman-Hundley Lodging Corp. for $259 million. Days Inn was started by Cecil B. Day in 1970 and had quickly grown into the third largest hotel brand in the world by 1992. It added about 1,220 hotels with about 133,127 rooms to HFS, thus almost doubling HFS’s size. The Days Inn purchase proved to be a savvy buy for Silverman and his management team. Although HFS piled up a load of debt, it posted its first profit in 1992—net income (after-taxes) leaped to more than $20 million from revenues of about $200 million. By the end of 1992, HFS’s three chains included almost 2,500 hotels with about 300,000 rooms. After fewer than three years of operation, HFS had become one of the largest hotel franchisers in the world.
In addition to praise from many of its investors, Silverman and HFS also drew criticism following their rapid climb in 1992. The Days Inn acquisition represented the third time that a group associated with Silverman had purchased the chain in less than eight years, resulting in a profit of more than $100 million for him and his investors. The first purchase occurred in 1984 by an investment fund headed by Silverman and supported by felons-to-be Ivan Boesky, Michael Milken, and Victor Posner. They sold part of the chain to public investors at a 200 percent profit, bought it back in 1988 following the 1987 stock market crash, and then sold it a year later to Tollman-Hundley for a large profit. Now, Silverman was borrowing heavily, critics said, to buy the chain again.
Although Silverman’s deals were all legal, his detractors argued that HFS was engaging in questionable strategies. For example, its practice of growing quickly by lowering franchise fees to attract independent hotels into the chain (instead of building new ones) suggested a possible lowering of chain standards in order to generate short-term royalties. In addition, critics derided HFS’s financing strategy, claiming that it benefitted certain top executives but reduced the long-term viability of the organization.
Despite criticism from a few analysts, HFS management and investors alike placed faith in the franchiser’s growth strategy. The company’s success throughout 1992 and into 1993 seemed to support their optimism. In April of 1993, in fact, HFS edged out Holiday Inns as the largest corporate hotel chain operator in the world when it purchased the rights to hotels owned by Super 8 Motels, Inc. Super 8 comprised 971 hotels totaling 59,532 rooms, for which HFS paid $125 million. Super 8 focused on serving government, senior, and family travelers, thus augmenting HFS’s strength in the economy/limited service hotel niche. Because most of its franchises were located in the Midwest, HFS believed it offered significant potential for expansion into other regions of the United States.
The business strategy adopted by HFS in the early 1990s was to significantly expand each of its franchise systems while maintaining or improving their reputation and to offer high-quality, value-added services to each chain. By accomplishing these goals, HFS expected to continually increase revenues from franchise fees, thus generating capital for new acquisitions and forays into related businesses. An integral component of HFS’s overall strategy was its state-of-the-art national reservation systems. Customers that called any of HFS’s chains were channeled to one of four national clearinghouses, where an operator would process the hotel reservation and also link customer travel requests with related services, such as airlines and rental cars. HFS provided each of its franchisees with specialized reports tracking call patterns and reservation trends, thus allowing them to improve occupancy.
In addition to its reservation system, HFS boosted the value of its franchises through marketing programs. Each of its companies had a separate marketing team to research and develop national and regional marketing initiatives, but the teams all benefitted from lower shared costs related to volume purchases of printed materials and media advertising. HFS developed a quality assurance program to complement its marketing efforts by insuring that all franchise members adhered to brand-specific quality controls that created consistency for all hotels within each brand. HFS’s training system educated each of its franchisees on how to get the most out of its reservation system and marketing programs.
One of the most important means of luring new hotels into its franchise system was its preferred vendor arrangements. Through volume buying, HFS allowed many of its franchise members to slash costs related to goods and services for everything from toilet paper to food. HFS also provided telephone support, via toll-free numbers, for each of its franchisees. In addition, it assisted existing hotels that were converting to a franchise with the design and construction services necessary to bring the unit up to its standards. The end result of HFS’s various support services was that its hotel owners were typically able to improve occupancy and reduce operating costs, thus improving profitability compared to most independent hoteliers.
In June 1993, shortly after acquiring Super 8, HFS added Park Inn International to its line-up. With 39 properties and 4,683 rooms in 13 states, Park Inn was a relatively small chain. HFS planned to market Super 8 and Park Inn chains separately and hoped to realize strong national growth for both brand names. Its expansion strategy resulted in an increase in the number of Super 8 franchisees of more than 12 percent during 1993, to more than 1,060. Meanwhile, HFS successfully enlarged its other chains, as well. The Ramada chain, for example, swelled to 676 hotels with 107,000 rooms by the end of 1993, and Howard Johnson increased to 566 properties with 63,000 rooms. Days Inn grew similarly, expanding to 1,441 hotels with 145,000 rooms.
By the end of 1993, HFS had 3,783 hotels with 383,931 rooms in its systems. Although it had accrued a weighty $350 million in long-term debt, HFS managed to boost sales 27 percent in 1993, to $257 million, as net income climbed 34 percent to $21.5 million. Also during 1993, Silverman and co-managers took HFS truly public, selling all ownership shares held by The Blackstone Group on the stock market. It also increased the average occupancy rate of its hotels and was able to boost royalty fees for new members of its franchises.
HFS continued to grow each of its franchises early in 1994; by April it had about 4,000 hotels sending franchise fees to the home office. Furthermore, the company began branching out into new arenas. It formed several strategic alliances with transportation and food service companies in 1993 and 1994, such as Greyhound, Pizza Hut, and Carlson Hospitality Group, which owned several restaurants and hotels. The agreements provided services to franchise members, such as free in-room pizza delivery and reduced bus rates for HFS franchise guests. Also notable was HFS’s entry into the gaming (gambling) market in 1993 and 1994. It began using its existing infrastructure to provide marketing and financing services to casino operators. In addition to those services, HFS was investing in several gambling-related ventures. In late 1994, HFS formed National Gaming Corp. to handle the company’s casino and entertainment projects. National Gaming was responsible for the financing, development, and operation of casino gaming and entertainment facilities.
As it entered the mid-1990s, HFS appeared well positioned to benefit from a projected increase in hotel room rates resulting from a dearth of new development in the early 1990s. Silverman continued on an acquisition spree, purchasing Century 21, Coldwell Banker, and ERA Real Estate. HFS also acquired Knights Inn and Travelodge, and the car rental business of Avis Inc. for $800 million in 1996.
The 1997 Merger
During 1996, HFS and CUC began courting the idea of a merger. According to a 1997 Journal of Business Strategy article, both companies held beliefs that “merging will allow them to exploit their customer databases more fully, adding an estimated $250 million in annual incremental pretax earnings to their combined balance sheet over the next few years, and allow them to continue their swift growth—25 percent to 30 percent—for longer than either could manage alone.” Sure enough, in May 1997, HFS announced its plans to merge with CUC to create a $4.3 billion consumer services powerhouse. CUC was given marketing access to HFS’s 80-million customer list, while HFS eyed CUC’s Internet businesses as potentially lucrative distribution channels. The deal was completed in December 1997, and the two companies were folded into a new business entity entitled Cendant Corp.
The new company appeared to be well positioned for the growth that both Silverman and Forbes expected from the deal. By January 1998, stock hovered at $33 per share and reached $41 per share just three months later. Disaster struck in April however, when Cendant was forced to admit that 1997 earnings were overstated by $100 million. On April 16, 1998, stock price fell to $19 per share—a market value loss of $13 billion—and then fell to $11 per share in August.
Shareholders filed suit against Cendant for accounting fraud related to years of accounting inaccuracies at CUC. A 1998 audit by Arthur Andersen and law firm Wilkie Farr & Gallagher discovered that CUC had reported overstated revenues and pretax income of over $500 million during the past three years. Cendant then filed suit against accounting firm Ernst & Young, who had been CUC’s accountants at the time, claiming that the firm knew about the discrepancies and failed to report the wrongdoing. Ernst & Young put the blame on CUC executives, including CFO Cosmo Corigliano and Forbes—the pair were fired during the scandal.
In December 1999, Cendant reached a $2.8 billion settlement with its shareholders, the largest recovery awarded in a securities class action case at the time. In February 2000, Ernst & Young agreed to a $335 million settlement with Cendant shareholders. In June of that year, three CUC executives— Corigliano, Casper Sabatino, and Anne Pember—pleaded guilty to accounting fraud. Throughout the entire litigation process, Silverman claimed that HFS knew nothing of CUC’s fraudulent accounting practices before the merger. He stated in a 2000 winter edition of Directors & Boards that as a firm involved in frequent merger and acquisition activity, “We expect the numbers in financial statements certified by a Big Five accounting firm to be true. We expect management to be aggressive in projecting growth but we don’t expect them to lie about the base from which they are growing. We expect optimism regarding the return on capital but we don’t expect the capital to be fictitious.”
Overcoming the Scandal in the New Millennium
Silverman pledged to restore shareholder confidence in Cendant, not only to boost the company’s image, but that of his own. Having spent most of his career as a highly regarded and well respected businessman in financial circles, Silverman spent most of 1999 and 2000 re-establishing Cendant as a leading consumer services firm. During 2000, the company began to resume acquisition activity and purchased the AmeriHost Inn and AmeriHost Inn and Suites brand names and franchising rights. The firm also began to aggressively pursue e-commerce ventures and formed the Cendant Internet Group, which was created to oversee the evolution of Cendant businesses into successful online e-businesses. Despite the company’s efforts, share price closed in 2000 at an unremarkable $9.63.
By Spring of 2001 however, there appeared to be a light at the end of Cendant’s tunnel. Share price rose by nearly 50 percent. The company made several key moves that year, including the $900 million sale of its Move.com unit to HomeStore.com. The deal left Cendant with a 19 percent stake in HomeStore.com, the largest real estate site on the Web. The company also acquired online travel site Cheap Tickets Inc., ticket reservation system Galileo International, and purchased the remaining shares of Avis Group Holdings.
Just as Cendant appeared to have recovered from the scandal of the past two years, a factor beyond its control shook the travel industry—an industry responsible for over 30 percent of company revenues. The terrorist attacks of September 11, 2001, caused a dramatic slowdown in the travel sector and sent Cendant’s share price tumbling back down to the $13 range. The fact that the company was well diversified however, left management confident that it would successfully ride out the economic downturn. With Silverman at the helm, Cendant pledged to continue its growth efforts well into the future.
Cendant Mobility; Cendant Mortgage; Century 21; Coldwell Banker; Coldwell Banker Commercial; ERA; AmeriHost Inns & Suites; Avis; Days Inn; Fairfield Communities; Howard Johnson; Knights Inn; Phh Arval; Ramada; Resort Condominiums International; Super 8; Travelodge; Villager Lodge; Wingate Inn; Wright Express; AutoVantage; Benefit Consultants Inc.; Cendant Incentives; Cims; Fisi-Madison Financial; Jackson Hewitt Tax Service; Long Term Preferred Care; National Car Parks; Privacy Guard; Shoppers Advantage; Travelers Advantage; WixCom.
Real Estate; Travel; Diversified Services.
The Hertz Corporation; Prudential Financial; Six Continents Hotels Inc.
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—update: Christina M. Stansell