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Time For Cendant To Shop Again?


For the past year and a half, Cendant Corp. (CD) Chairman and CEO Henry R. Silverman has been uncharacteristically quiet. After a string of deals that built Cendant into an $18 billion-a-year colossus of real estate and travel businesses, the 63-year-old chief executive took his foot off the gas and spent some money on his shareholders instead. Investors, burned by acquisition-driven companies and Cendant's own 1998 accounting scandal, were thrilled when Silverman began slashing Cendant's debt last year, spent $644 million to buy back stock, and initiated a 28 cents-per-share annual dividend. The result: The stock, now about $25, has risen 131% since the start of 2003.

But now the old Silverman is ready to reemerge. Cendant is throwing off billions in cash, and Silverman is likely to put some of it to work by ramping up the pace of acquisitions next year. He may have no choice: Some analysts warn that the company is almost certain to slow down in a few years as the housing market cools and the boost that Cendant is getting from a rebound in its hotel and car rental businesses plays out. At the same time, Silverman needs to bulk up in the online travel market, where Cendant risks falling further behind market leaders such as Expedia Inc. (IACI).

Silverman contends that Cendant doesn't need deals to maintain solid double-digit earnings growth. And he says the company will continue to buy back shares and will consider boosting its dividend. (The board has already responded to shareholder criticism of Silverman's $54.4 million pay package last year by cutting the length and changing the terms of his contract.) Still, he confirms that Cendant is likely to increase its acquisitions pace in 2005. He says the company will be on the hunt in three areas: real estate brokerages; the overseas vacation rental business; and international online travel. No doubt he will be less aggressive than he was earlier. He's looking for what he terms "tuck-in" acquisitions in his core travel and real estate businesses. No deal will exceed $1 billion. Big deals aren't necessary, Silverman says, because Cendant now has the size and diversity it needs.

There is no doubt that Silverman can afford to go shopping. Although Cendant's mortgage business is slowing, its real estate brokerage operations continue to benefit from a strong housing market. Lehman Brothers Inc. (LEH) analyst Jeffrey T. Kessler sees 2004 revenues growing 8%, to $19.7 billion, with net income before extraordinary items and a onetime tax benefit climbing 17%, to $1.7 billion. Cendant's powerful brands, including Coldwell Banker, Century 21, Ramada, Avis, and Budget Rent A Car, throw off $2 billion annually in free cash flow. The company will be done cutting its debt by the end of this year. And with plans to spin off its Jackson Hewitt tax-preparation unit and divest other noncore lines, Cendant could pull in $4 billion or more in coming years -- even without divesting the mortgage unit. Some analysts think that volatile unit could go, too.

Silverman is likely to garner support on Wall Street for deals in areas where Cendant has a successful record. So there is little controversy about plans to expand the European vacation rental or real estate brokerage operations. Silverman has already built a real estate empire with 12,700 owned or franchised brokerages. And Cendant's vertical integration of brokerage, settlement, and other services helps attract franchisees. New offices should help offset a slowing housing market and the growing reluctance of consumers to pay the standard 6% brokerage commission. Silverman also believes that forces like immigration will keep the housing markets robust: "We have a strong demographic wind at our back, and that is going to keep growing over the next 10 years at least."

ONLINE TRAVEL. Expanding Cendant's presence in online travel might pose a tougher challenge. Cendant made a big push into travel distribution in 2001, buying Galileo International (CD), a computer system linking travel agents to airlines, for $1.9 billion and paying $313 million for Cheap Tickets Inc. With online players growing more powerful, a hotel and rental car company like Cendant without a big Web presence could get squeezed. But Cendant has stumbled in travel distribution, says Forrester Research Vice-President Henry Harteveldt. For one thing, airlines are moving much of their reservation activity to their own Web sites and away from older reservation systems like Galileo. And Cendant still badly lags market leaders Expedia and Travelocity on the Internet. "They never had a cohesive, clear marketing strategy," says Harteveldt. "And now the gap is enormous."

The Henry Silverman of the 1990s might have made a run at Orbitz Inc. (ORBZ) or Priceline.com (PCLN), the two remaining independent online travel players. But while Silverman declines to comment on such speculation, analysts say for now the valuations of those players seem too rich. Silverman says acquisitions in online travel are likely to focus on areas outside the U.S., where he argues that Galileo's global reach gives the company an advantage. On Apr. 4, in fact, Cendant bought a small consumer online hotel player based in Sydney. Silverman argues that Galileo's relationships with overseas travel suppliers and knowledge of international markets gives it an edge. But Simon J. Breakwell, president of European travel operations at Barry Diller's InterActiveCorp (IAC) (IACI), which owns Expedia, says Galileo has no big advantage because online travel is so different from running an old-fashioned reservation system.

If Silverman did bust out with a billion-dollar-plus deal, he would play into the worst fears of some investors. They remember the accounting disaster that followed Silverman's hasty 1997 merger of HFS Inc. with CUC International Inc., to create Cendant. Additional blowups like Tyco International soured many shareholders on acquisition-driven companies. In 2002, Cendant shares fell 46.5%, vs. a 23% decline in the Standard & Poor's 500-stock index. "They are standing in front of a wave of free cash flow," says Timothy Fidler, director of research at Ariel Capital Management, which holds 14 million Cendant shares. "The real fear is they will destroy value" by doing deals that don't pay off.

Still, some observers think that if the market reacts well to the resumption of smaller deals next year, and if valuations fall, Cendant could make a play for either Orbitz or Priceline. But there are a lot of ifs in that proposition. That's why, even as Silverman prepares to rev up his deal machine, he has to keep one eye on the rear-view mirror. By Amy Barrett with Timothy J. Mullaney in New York


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