Silverman, Henry R. 1940–
Henry R. Silverman
Chairman and chief executive officer, Cendant
Family: Son of Herbert Robert (chief executive of James Talcott) and Roslyn (Moskowitz) Silverman; married Susan H. Herson, June 13, 1965 (divorced January 1977); married Nancy Ann Kraner, January 1978; children: three (first marriage, two; second marriage, one).
Career: White, Weld & Company, 1965–1966, practice lawyer; Oppenheimer & Company, 1965–1966 general partner; Trans-York Securities Corporation, 1970–1972, founder and president; Ladenburg, Thalmann & Company, 1972, executive vice president and chairman; Vavasseur, 1973, president and chief executive officer; Brisbane Partners, 1974–1975, general partner; Silverman Energy Company, 1977–2004, principal; NBC Channel 20 (Springfield, Illinois) 1977–1983, principal; ABC Channel 9 (Syracuse, New York), 1977–1981, principal; Delta Queen Steamboat Company, 1977–1981, principal and director; outdoor advertising, music publication, motion picture production, radio broadcasting, and hardware manufacturing companies, 1977–1986, principal; Reliance Group Holdings, 1982; Reliance Capital Group, 1983–1989, president and chief executive officer; Telemundo Group, 1986–1990, president and chief executive officer; Blackstone Group, 1990–1991, partner; Cendant, 1997–, chairman and chief executive officer.
Address: Cendant, 9 West 57th Street, New York, New York 10019; http://www.cendant.com.
■ Henry R. Silverman's tenure at Cendant was marked by both lavish praise and sharp criticism; after acquiring numerous franchised brands that made him wealthy, Silverman recklessly led his company into a failed merger, and Cendant was
crippled by a serious accounting scandal. Rebuilding his company and his image, Silverman was driven by a powerful force: the future of his legacy. With 2003 sales of more than $18 billion, Cendant was involved in several businesses that cross-marketed to millions of customers worldwide. By 2003 Cendant had become the world's top hotel franchisor, with over 6,400 locations under the AmeriHost Inn, Days Inn, and Super 8 brands, among others. Cendant also owned Avis Group Holdings, Budget Rent A Car, and Fairfield Resorts (timeshare resorts). The company's Cendant Real Estate Franchise Group included such franchised brokerages as Century 21 and Coldwell Banker. It also provided mortgage and corporate relocation services and owned Jackson Hewitt (a tax preparation service).
A CHILDHOOD THAT AFFORDED BIG DREAMS
Silverman's childhood was privileged. He attended prep school and dreamed of one day playing baseball for the New York Yankees. When his athletic skills failed to match his dreams, he set his sights on the family business: commercial finance. Silverman accompanied his father on business trips, and after his father made one particular presentation to analysts, Silverman quizzed him on his approach. Said the elder Silverman, "For a 15-year-old, it was amazing" (BusinessWeek, February 28, 2000).
TIMING IS EVERYTHING
After graduating from the University of Pennsylvania Law School, Silverman joined the U.S. Naval Reserve to avoid going to Vietnam. Next he practiced tax law but ultimately left the safe legal world for corporate finance and specifically "deal making." The time was the 1980s: merger mania had swept the country, and Silverman wanted a piece of the action.
COACHED BY MOGULS
Silverman's father had good connections and put them to use for his son. Silverman secured a job as an assistant to Steve Ross, who was then assembling the future Warner Communications. But intent on emerging from his father's shadow, Silverman went to the investment banking firm White, Weld & Company. Silverman noted, "You want to be recognized for what you achieve rather than what your parents achieved" (BusinessWeek, February 28, 2000).
Following White, Weld & Company, Silverman branched out on his own in a series of ventures ranging from entertainment to hardware, working for diverse companies that prepared him to lead a business empire. In 1984 he landed a job as assistant to the corporate raider Saul Steinberg at Reliance Group Holdings. During his stint at Reliance, Silverman closed his first major deal, buying the Days Inn of America hotel chain, which then included about two hundred hotels, for $590 million. He sold it five years later for a $125 million profit.
SPOTTING VALUE IN AN OUT-OF-FAVOR BUSINESS
In 1990 Silverman was a partner in the investment firm Blackstone Group, and the hotel industry had fallen into a deep slump. Sensing value where others refused to look, Silverman bought well-known brands, including Ramada Inn and Howard Johnson, at ultracheap prices. He also bought Days Inn—for the second time. After the company filed for bankruptcy in 1991, Silverman purchased it for $290 million. He assembled these brands under the umbrella of Hospitality Franchise Systems (HFS) and took HFS public in 1992.
By 1995 HFS had become the nation's largest hotel franchisor, topping Holiday Inn Worldwide with its 4,226 hotels—about one of every nine hotel rooms in the United States. Hotel owners purchased the brand name from HFS for a flat fee ranging from $20,000 to $36,000 plus 7.5 percent of per-night revenues in royalties and fees. Said Mike Leven, CEO of Holiday Inn and former president of Days Inn, "Henry has changed the basics of the hotel industry. No one has had a greater impact on this number of hotels" (USA Today, January 16, 1995).
FOCUSING ON FRANCHISES, NOT CUSTOMERS
Ultimately HFS became a group of brands in such related services as cars and hotels and real estate and mortgages. But while outsiders viewed these as separate entities—the hotel business or real estate—Silverman thought differently. He felt he was in the business of building franchises. He earned his money not from customers who bought his services but from franchisees who paid royalties to use his coveted brands. In other words, filling beds and cars was not Silverman's concern. That was the problem of his franchisees. HFS franchise owners received such support services as national advertising campaigns, discounts on computers, and even help in setting up employee retirement plans.
Silverman's tactics had their critics. Some saw him as a greedy executive who lined up interested hotel owners with little regard for the quality of their businesses. Consumer Reports even rated a few of his brands as some of the worst in value and condition in the moderately priced category. Said one hotel owner, "At some point Mr. Silverman will know when to get out, and he'll leave the rest of the stockholders holding the bag" (USA Today, January 16, 1995). Silverman conceded that he had let in a few slackers in the name of growth, but the hotels still delivered superior quality for the customers they served.
IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS
HFS exploded from sales of $413 million in 1995 to around $1.8 billion just two years later. The Smith Barney analyst Michael Rietbrock observed, "You'd have a lot of difficulty finding another company this size that is growing this fast" (Time, March 17, 1997).
Wall Street rewarded Silverman for a track record of delivering exceptional earnings and stock price gains through a series of acquisitions. After years of building wealth quietly, he was suddenly a Wall Street celebrity. Said Lawrence Auriana, a portfolio comanager of the Kaufman Fund, "He was golden. It's like a guy who is 40 years old being asked to pitch the opening game of the World Series, and he pitches a shutout" (BusinessWeek, February 28, 2000). The metaphor was not lost on Silverman, a baseball fan.
HFS had grown to include such brands as the real estate brokerage Century 21 and the Avis car rental system. The company's stock soared from an initial public offering price of 4 in late 1992 to 77 in 1998. Silverman relished the validation: "Any CEO who says he doesn't enjoy running a successful company is lying. It's very ego gratifying. The market instantly grades you. It either buys you or throws up on you by selling your shares" (USA Today, January 16, 1995).
WOOING WALL STREET WITH A MERGER
Like a rookie of the year trying to prove that he is no fluke, Silverman was still hungry for more action. He identified a deal that would leave Wall Street drooling: combining HFS with the direct marketing company CUC, which sold memberships in discount buying clubs, such as Shoppers Advantage and Travelers Advantage. His strategy was that HFS customers could be funneled into the CUC direct marketing machine, which would bombard these customers with offers to buy memberships in its discount buying clubs and eventually financial services, such as insurance.
But more than synergy, Silverman was interested in the effect the deal would have on his stock price. In the early years of the company, HFS had generated 10 to 15 percent in annual earnings growth. But much of that growth was driven from acquisitions, and the HFS buying spree had tapered off. With a bigger company, HFS could once again generate the numbers that were rewarded with stellar price-earnings ratios. It would also show Wall Street that the company was recession proof since discount clubs were seen as countercyclical. With those advantages too tantalizing to pass up, Silverman forged ahead and formed a new company, Cendant Corporation, in a $14 billion deal that closed in December 1997.
Finally, Cendant was designed to allow Silverman to take a much-needed break. In January 2000 he would assume the post of chairman, handing over the reins to the CUC founder Walter A. Forbes.
WALL STREET KING LOSES HIS CROWN
But Silverman's stock would soon fall. In April 1998 Cendant uncovered massive accounting improprieties that wiped out $13 billion of the company's market capitalization. According to an investigation by Cendant's auditing committee, CUC executives used "creative" accounting methods to inflate earnings before charges by $500 million over three years. Errors accounted for an additional $200 million. The scandal, which involved 17 of the company's 22 business units and 20 CUC comptrollers, was the biggest to hit the 1990s—the opening act to the Enron saga that would mark the next decade. Said Silverman, "My own sense of self-worth was diminished" (BusinessWeek, February 28, 2000).
Perhaps Silverman's self-worth was not as diminished as the empty portfolios of misled investors. Cendant's stock sank to 7 1/2 and investors were not ready to let Silverman off the hook for his part in the debacle. Some wondered whether Silverman, in his rush to please Wall Street, had done his homework. John W. Ballen, a portfolio manager of MFS Emerging Growth Fund, who bought into HFS's initial public offering in 1992, noted, "Obviously the due diligence wasn't there" (BusinessWeek, February 28, 2000). Silverman countered that no amount of due diligence would have uncovered the fraud.
But the condemnation did not end there. Investors sharply criticized how a board stocked with directors who had ties to Cendant or Forbes could maintain proper governance. And they lambasted the board's decision to reprice 17.2 million of Silverman's shares to his benefit in 1998, calling it egregious.
IN OVER HIS HEAD?
The focus on the accounting scandal and the incredible amount of market capitalization that was lost in the process proved that trying too hard to impress Wall Street leads to trouble. In his quest for a bigger market cap, Silverman found himself at the center of what Fortune called the "decade's dum-best deal" (Fortune, November 9, 1998).
Silverman ignored the warning signs of a merger headed for disaster. The company's corporate cultures—one unwieldy and entrepreneurial, the other buttoned up and obsessed with measuring performance—clashed. Forbes was reluctant to share hard numbers about his business with HFS executives, flatly denying access to important nonpublic financials. Deep mistrust quickly grew between Forbes and Silverman. Yet Silverman plugged ahead with the merger. Silverman remarked, "Every time I was nervous, they would show up with another quarter of spectacular earnings" (Fortune, November 9, 1998).
REBUILDING HIS IMAGE
Still, Silverman survived. After the scandal broke, Silverman ultimately forced Forbes out the door. Scarred from the experience, he was intent on redemption. Not long after Forbes's departure, Silverman told a money manager, "I'm going to get my reputation back" (BusinessWeek, February 28, 2000).
To put the company back on solid ground, he sold 18 non-core assets to help finance a $3 billion stock repurchase plan. In December 1999 he struck a deal with Liberty Media Corporation that would enable Cendant to play catch-up with its paltry Internet presence as well as boost the company's reputation. Liberty's chairman, John Malone, was a discerning investor, and the deal was a vote of confidence for Cendant's comeback. In 2002 and 2003 Cendant's stock outperformed market indexes by more than 10 percent.
A SYMBOL OF CORPORATE EXCESS
Despite his obligation to turn around the company he nearly destroyed, Silverman generated more negative attention in early 2004 over his pay. In 2003 he received a compensation package worth $60.1 million, including a $13.8 million bonus, $4.6 million in premiums on a $100 million life insurance policy, and $37.2 million in exercised stock options. According to a 10-year contract, signed in July 2002, lifetime benefits included medical and welfare, office support, use of corporate aircraft, access to a company car and a driver, and security when traveling on company business. Paul Hodgson, a research associate at the Corporate Library, a governance research organization, remarked, "This level of benefits is more appropriate for a lord and his fiefdom, rather than the C.E.O. of a publicly held company" (New York Times, April 4, 2004).
After a shareholder lawsuit placed pressure on Cendant's board to rein in the exorbitant package, Silverman's benefits and contract were sharply cut. Said Mark M. Reilly, a partner with Compensation Consulting Consortium LLC of Chicago, "I think this case will continue to encourage other shareholder suits against executive compensation that is significantly above peer compensation levels" (Wall Street Journal, April 20, 2004).
See also entries on Cendant Corporation and Hospitality Franchise Systems, Inc. in International Directory of Company Histories.
sources for further information
Barrett, Amy, "Henry Silverman's Long Road Back," BusinessWeek, February 28, 2000, p. 126.
Chittum, Ryan, "Cendant Cuts Silverman's Benefits," Wall Street Journal, April 20, 2004.
Elkind, Peter, "A Merger Made in Hell," Fortune, November 9, 1998, p. 134.
Greenwald, John, "HFS Stands for Growth," Time, March 17, 1997, p. 40.
Morgenson, Gretchen, "Executive Pay: A Special Report; Two Pay Packages, Two Different Galaxies," New York Times, April 4, 2004.
Schmit, Julie, "He Built a Fortune from Inexpensive Lodging," USA Today, January 16, 1995.