Why Cendant Split


On Oct. 24, travel and real estate giant Cendant announced it was breaking into four pieces after years of a languishing stock price (see BW, 4/5/04, "Why Cendant is Resurgent"). Cendant (CD) Chairman and CEO Henry Silverman talked to Amy Barrett, BW's Philadelphia bureau chief, about why the company is being dismantled -- and what's in store for the veteran dealmaker now. Edited excerpts follow:

When did you begin looking at this break-up?

We engaged Evercore Partners [run by former Assistant Treasury Secretary Roger Altman] in November of 2004. This has been like an elephant -- a long gestation period. We then brought in J.P. Morgan (JPM) because we wanted to make sure whatever we wanted to do was feasible. You don't want to announce something you can't execute. Both firms came independently to the conclusion that what made the most sense was a breakup.

Did shareholders have any input?

Yes. We meet with over 300 shareholders a year. It was clear for the last year or so we had to do something. Doing nothing was not an option. So we looked at all the things we could do. That included a leveraged recap, a sale of some or all of the company. Last but not least, we looked at spinning off one, two, or three businesses.

The stock is down 6.5% today [Oct. 24]. Do you think that's because you lowered earnings guidance for the rest of this year and for 2006? Or do you think investors don't like the break-up plan?

There are shareholders who thought the only strategy that made sense was to do a leveraged recapitalization of the company. You borrow lots of money and you buy back millions of dollars in stock.

Our management, our board, and our advisers, having bought back $8 billion in stock over the last five years, felt that that strategy didn't work. Our stock price is about where it was seven years ago. Our advisers were quite adamant they couldn't recommend that. So those people who saw we weren't following the strategy they espoused are saying in many cases, "Have a good life."

We think this will deliver the most value. Today's stock price is irrelevant. We think we will have created billions of dollars in value for our shareholders. I would say you could look a year after the spin-off, and if the sum of the parts isn't greater than it is today, then we've failed.

And remember, none of the other options our shareholders wanted are precluded by this deal. After this spin-off, if somebody wants to buy one or more of these discrete businesses, the board [of that company] may decide that's the right thing to do. Or one or all could do a leveraged recap.

What about the notion that there was a lot of synergy between some of these businesses. Does that get lost now?

It will be preserved. For example, RCI (the timeshare-exchange business) and our vacation-rental group are distributed by our travel-distribution business. Content from RCI and our vacation-rental group is a big piece of the content sold by Orbitz and ebookers. (All those businesses will be together in the new travel network company.)

We think we can preserve most of the synergies within these corporate entities. And those that can't be preserved that way can be preserved by contract. You don't have to own the cow to get the milk.

You will be CEO of the new travel-network business. Why did you decide to go with that operation as opposed to the others?

Sam [Samuel Katz, who will be president of the travel network business] is 40. I'm 65. So I will do this for a year or two post-separation. And then, hopefully, Sam will be ready to take over. I expect not to be CEO after 2007 or 2008.

What will you do then?

I hope I'm healthy, and I'll worry about it then.

You have had quite a ride. After you merged your company, HFS, with direct marketer CUC International in 1997, major accounting irregularities at CUC were uncovered (see BW Online, 2/28/00, "Henry Silverman's Long Road Back"). You survived that only to now have to dismantle the company. Is that tough to swallow?

We're supposed to create shareholder value. It's clear to me this will create a lot of value for our shareholders over time. That's the sweet part of it.

But it's bittersweet. The bitter part is, having built this business over 15 years, disaggregating it is emotionally wrenching. Somebody said to me, "How do you feel?" I said it doesn't matter how I feel. Shareholders don't care about our emotions. The human interest story is not relevant.

You won't be taking compensation as CEO of the travel-network business. Why?

My current contract [with Cendant] will get terminated. It's considered constructive discharge [as a result of the break-up]. I don't know what [the payout under that] will be. But I didn't want to double dip, which is what I would be doing if I got paid even $1 [as CEO of the new company].

Did you do this because it's the right thing to do or because you didn't want to take a lot of heat publicly?

Both. It is the right thing to do. But frankly, I don't want to read about it [in the press] for the next few years.


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