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Winning the spinoff game?
August 5, 1998: 12:06 p.m. ET

Analysts say possible offering of Cendant software unit makes sense
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NEW YORK (CNNfn) - While Cendant Corp. continues to weigh its options on restoring lost credibility, analysts are bullish over the prospect of a public spinoff of the Sierra On-Line and Davidson & Associates computer software divisions.
     Cendant's new chairman and chief executive officer, Henry Silverman, has said he is considering the offering in the wake of the conglomerate's recent upheaval. The company also has received an unsolicited offer for the units, though it won't name the bidder.
     Sierra has long been one of the gaming industry's most recognized and respected names. Davidson (which does business as Knowledge Adventure) has a similarly strong reputation among educational software developers and users.
     "In the computer software market, investors are looking for predictable earnings. Sierra would certainly be in that category," said Michael Wallace, an Internet and new media software analyst with UBS Securities.
     Sierra and Davidson both were publicly traded until early-1996, when they were acquired by CUC International in a $2.2 billion deal. CUC merged with HFS in 1997 to create Cendant (CD).
     Bob Peterson, a vice president and senior analyst at Piper Jaffray, estimates the current total value of the two divisions to be between $1 and $1.5 billion.
     "They'll never get what they paid for it, but it's a chance to start with a clean slate," he said. "Investors have never understood how (the software division) fit in the equation. With the management shakeup, this is the perfect opportunity for Silverman to get rid of it."
     In recent months, two computer gaming companies have gone public, with rather tepid responses. Interplay (IPLY), a well known developer, opened at $6 per share. Early Wednesday, it was stuck at $6.25. Interactive Magic (IMGK), a smaller developer known more for its Internet games, opened at $10, jumped to $14.75, then retreated. Shares were trading at $9.62 Wednesday morning.
     This lack of investor enthusiasm raises the question: Is Wall St. ready for another computer gaming company? Peterson says yes.
     "There's certainly a market for it," he said. "People want to invest in it, but all at the right price."
     There's also the question of what form any spinoff would take. Sierra and Davidson might be combined into a single entity. Or one unit might be sold and the other taken public. Peterson says he doesn't expect to see two separate spinoffs, however.
     Sierra and Davidson both are among the leaders in their fields. Analysts mention Sierra in the same breath as Electronic Arts (ERTS), one of the most praised publicly traded gaming companies.
     Like EA, Sierra has established a diversified title line. It also owns several smaller developers, including Blizzard Entertainment (makers of the popular Diablo title), Berkeley Systems (best known for its You Don't Know Jack line of games), racing simulator developer Papyrus and six other companies.
     What it doesn't currently have is a presence in the console gaming field. The company has no Nintendo64 games and plans to issue its first PlayStation release later this year.
     The lack of a multi-platform presence could come back to haunt Sierra. PlayStation and, increasingly, Nintendo have claimed a majority share of the electronic gaming field, according to PC Data, a Reston, Va., based company that tracks trends in the computer industry.
     Davidson, meanwhile, has reached its position in the education software field by aligning itself with such well-known names as Fisher Price and Kaplan.
     The software unit has always been an unusual division at Cendant, a marketer and franchiser of travel and real estate services based in Stamford, Conn., and Parsippany, N.J.
     In April, Cendant disclosed "accounting irregularities" at CUC that it said would reduce 1997 net income by 11 cents to 13 cents a share. But in mid-July, the company revised the impact estimate, saying the problems were much larger than thought and included $300 million in fabricated revenues over a three-year period.
     On July 28, chairman Walter Forbes bowed to calls from senior executives and resigned. Eight other board members also agreed to step down. A ninth plans to leave by the end of the year.
     Cendant reported 1997 earnings of $1 a share before one-time charges. The company's shares were up 5/16 at 15-5/8 at midday Wednesday. Back to top
     -- by staff writer Chris Morris


Gaming company stocks can be winning investments - June 23, 1998

CUC, HFS in $11B deal - May 27, 1997


Sierra On-Line

Cendant Corp.

Knowledge Adventure

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