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Just When Cendant Seemed to Be Mending


For a while this year, it seemed almost like the good old days for Henry R. Silverman. The 61-year-old chairman and CEO of travel-and-real-estate giant Cendant Corp. (CD) finally had put a devastating accounting scandal behind him. He was striking a series of high-profile deals. And his company's stock price had enjoyed a nice runup, going from $9.63 in January to $21.53 in July.

Then came September 11. Silverman's dealmaking had focused on expanding a travel empire that includes franchised Days Inns, Howard Johnsons, and other hotels; the Avis rental-car company; time-share properties; and an Internet travel portal. The hijackings of four commercial jets, however, sent the travel industry into a tailspin and probably put the economy into recession. Travel businesses normally provide half the revenues of New York-based Cendant--but the airlines and highways aren't delivering the usual number of customers to the company's rental-car counters and hotels. A couple of days after the attack, Cendant had 35 people signed up to see a time-share in Williamsburg, Va. Only one showed up. Already, Silverman has said he will cut Avis' fleet and lay off 20% of its staff. The turmoil has sent the stock price on a sickening slide, to as low as $11.03 before rebounding to a recent $12.18.

That's bad, but it gets worse. A weak stock price threatens Silverman's strategy for fueling growth: making more and more acquisitions, increasingly financed with stock. Cendant's core businesses usually generate revenue growth of 6% to 8% and earnings growth in the low teens, according to J.P. Morgan Securities Inc. analyst Amanda Tepper. That's decent. But investors had been betting that Silverman's prowess with deals would generate much faster growth. After all, between 1992 and 1997, rapid-fire dealmaking drove earnings up 63% a year at HFS Inc., the company Silverman founded and then merged with CUC International Inc. to form Cendant. "Henry is trying to recreate the aura of the old HFS, and to do that he has to do deals," says Gregory L. Jackson, an analyst at Cendant investor Harris Associates. The slide in Cendant's stock price "makes his life more difficult," he says.

"WE'LL REV UP." Silverman acknowledges that the attacks have derailed his merger machine for now. He says Cendant needs to be more cautious than ever about maintaining its liquidity. And he is in no rush to go bargain hunting. "We'll be patient and wait until there is some stability and return to normalcy," Silverman promises. But when that happens, "we'll rev up the motors again."

The extent of Cendant's difficulties became clear on Sept. 28. Silverman warned Wall Street that Cendant would not meet third- and fourth-quarter earnings projections, saying the company now expects to earn 15 cents to 19 cents a share in the fourth quarter instead of 24 cents. Silverman also said that 2002 wouldn't meet expectations but that the company would aggressively cut costs to keep earnings from falling even more. Jolson Merchant Partners analyst James F. Wilson now expects Cendant's sales to rise 76% this year, to $8.3 billion, instead of $8.9 billion, while income will climb 59%, to $958 million, instead of nearly $1.1 billion. The big increases are largely due to acquisitions. For 2002, Wilson figures that sales will climb 14%, to $9.4 billion, instead of $11.2 billion, while income will climb 32%, to $1.3 billion, instead of $1.6 billion.

Certainly, not all the news is grim. Cendant's real estate operations, which include a large mortgage company and the franchise rights to brands such as Century 21, should hold up as interest rates continue to fall. At the same time, Silverman's franchised hotel chains are mostly in the budget category, which is likely to take less of a hit than high-end properties as the economy weakens. And if travel stabilizes, the company may be able to use its healthy cash position to prime the deal machine. (It has $2.8 billion in cash and cash equivalents on its balance sheet and businesses that generate about $1.8 billion a year in free cash flow.)

Many of the travel businesses that Silverman may have his eye on, including another rental-car operation, should be cheaper now. "There will be a [buying] opportunity for people with a strong balance sheet," says Michael A. Leven, chairman and CEO of U.S. Franchise Systems Inc., a competitor that franchises brands such as Hawthorn Suites, a lodging chain.

Despite the turmoil, Silverman shows no sign of backing off from his effort to create a travel powerhouse. In the past year, he has gobbled up time-share operator Fairfield Communities Inc. for $690 million and global-reservation-system operator Galileo International Inc. (GLC) for $1.8 billion, a deal that closed on Oct. 1. The $280 million acquisition of online discount travel agency Cheap Tickets Inc. (CTIX) is pending. Galileo, whose reservation network is second only to Sabre Inc. (TSG), provides airline, hotel, and rental-car booking services to some 43,000 travel agencies and other subscribers. That network could feed business to Silverman's 500,000 hotel rooms and to Avis, as well as to his time-share operation. At the same time, Galileo's Internet travel portal, Trip.com, will be the center of a major effort to build an online operation.

PLAYING CATCH-UP. It isn't clear, however, that Cendant will be a winner on the Web anytime soon. Henry H. Harteveldt, a senior analyst at Forrester Research Inc., warns that Cendant's budget-oriented hotel brands might not appeal to the travelers who book hotels online; they tend to be better-heeled and stay in more upscale accommodations. And he points out that the time-share market has generated little online interest, with just 1.6% of travelers booking a time-share reservation over the Internet in the past 12 months. At the same time, Cendant must play catch-up with established Internet players such as Expedia Inc. (EXPE) and Travelocity.com Inc. (TVLY), as well as with the airline-backed travel agency Orbitz. But Silverman contends that combining Trip.com and Cheap Tickets with his existing travel properties immediately gives Cendant a formidable Web presence. And he expects to make deals to sell excess inventory for other travel providers, including airlines and other hotel chains.

The promise of all this dealmaking is that somehow Cendant will tap a bonanza of cross-marketing. That strategy was central to the ill-fated HFS and CUC merger in 1997 that formed Cendant. Silverman, who had spent years as a dealmaker at Reliance Group Holdings Inc. and Blackstone Group, had earned HFS a wide following on Wall Street with a steady stream of acquisitions that sharply boosted earnings. In merging with CUC, the goal was to feed the huge HFS customer base into CUC's direct-marketing machine, which sold memberships in discount buying clubs such as Travelers Advantage. That effort crumbled when massive accounting irregularities were found at the businesses of the former CUC.

The scandal obliterated much of Cendant's market capitalization and with it Silverman's reputation as a modern-day Midas. Silverman has sold virtually all of CUC's businesses. Walter A. Forbes, founder of CUC and former chairman of Cendant, was indicted on conspiracy and wire-fraud charges and has pleaded not guilty.

Although shaken by the CUC debacle, Silverman remains determined to make the cross-marketing strategy work. He has shown he can do it in the real estate business, where more than 20% of the company's mortgage-origination business comes from its franchised real-estate offices. With travel, for example, Cheap Tickets will switch from the Sabre reservation system to Galileo. Trip.com and Galileo also could help move hotel rooms or rental cars at a discount when business is slow. Still, some investors aren't convinced that Silverman can squeeze a lot more out of cross-selling. "That would be wonderful, but it is easier said than done," says Monica Logani, a senior investment analyst at Cendant shareholder Federated Investors. "I take it with a grain of salt."

First, however, Silverman will have to weather the storm in the travel business. And no one is predicting how long that will last. "You're looking at a window covered with black paint at the moment," says Barry S. Sternlicht, chairman and CEO of Starwood Hotels & Resorts Worldwide, which owns Sheraton, Westin, and other brands. It looks as if Silverman's bid to regain the luster of his old HFS days may take longer than he hoped. By Amy Barrett in Philadelphia, with Diane Brady in New York


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