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Cendant strikes out anew
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November 20, 1998: 12:11 p.m. ET
Software sale marks beginning of comeback seven months after scandal
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NEW YORK (CNNfn) - Cendant Corp.'s decision on Friday to sell its software business to the French media concern Havas SA for as much as $1 billion is more than just another deal in the vast mix of mergers and acquisitions.
For Henry Silverman, the embattled company's chairman, the sale marks ground zero in a turnaround campaign on which his legacy may ultimately hinge when all the promised asset write-offs, stock buybacks and bottom-line bolstering are said and done.
Silverman himself acknowledged as much Friday when he declared in a statement that "for the foreseeable future we are no longer a buyer of companies…but rather a seller of companies, utilizing the proceeds of those sales to retire debt and equity."
The new tack is a sharp departure for Cendant, a marketing and franchising conglomerate created in December 1997 through the merger of CUC International Inc. and Silverman's HFS Inc.
Yet analysts say a radically altered course became a virtual necessity for the firm in April, after Cendant revealed massive accounting fraud at a former CUC unit.
The unit, Cendant found, had posted $500 million in phony revenue and pretax profit, and at least $200 million in accounting errors over a three-year period. The revelation sparked an internal house-cleaning investigation, completed in August at great cost to the company.
The scandal also punctured Cendant's stock price. During the virtual freefall that ensued, Cendant (CD) stock tumbled more than 70 percent from an April high of 41-3/8.
Charges to cover scandal costs
In its third fiscal quarter, for which results were posted on Nov. 4, Cendant said net income plunged 45 percent to $111 million from $203 million a year earlier.
Per-share profits were 13 cents on a diluted basis. They reflected a charge of 6 cents per share to cover expenses from the accounting investigation and a severance payment to Cendant's former chairman, who left the company under a cloud of scandal.
On Friday, the company's shares inched up 13/16 in early trading to 15-1/4. That is still well below the April high, but more than double its 52-week low of $6, hit in October. Also last month, Cendant abandoned a $3.1 buyout of American Bankers Insurance Group Inc. of Miami amid concerns about the wisdom of the deal.
A day after the merger backdown, Silverman vowed in an interview with CNN's "Moneyline News Hour with Lou Dobbs" to sell off Cendant's non-core businesses and raise cash to buy back shares.
Putting his personal finances on the line, Silverman said he planned to buy 1.5 million Cendant shares, a clear attempt to deflect criticism that he had sold his company-granted options.
In a pitch to shareholders to show forbearance in Cendant's time of troubles, Silverman pointed out that Pepsico needed 18 months to work out its financial difficulties in the late 1980s. He cautioned that his $4.7-billion company would require as much time.
With the announcement of Friday's software unit sale, some analysts say, the recovery clock has begun to tick.
"It looks like they're trying to right the ship," said Tom Burnett, an analyst with Merger Insight. "They deserved to suffer all those slings and arrows of their own outrageous fortune."
Noting that he views Cendant's predicament from a glass-is-half-full standpoint, Burnett said he preferred to focus on Cendant's recent comeback, rather than its highly publicized turbulence.
"Now I've seen a $6 stock that's more than doubled in two months," he said. "They had a couple of very unfortunate corporate events to worry about and they seem to be finally getting themselves ready."
A return to historical comfort levels
What they are getting ready for, said Mike Matty, a co-owner of the North Granby, Conn.-based institutional research firm Capital Reflections, is a return to "what they historically feel good doing" - discount services and hospitality franchising.
Cendant business interests in real estate include Century 21 and Coldwell Banker, as well as the HFS businesses -- Days Inn, Howard Johnson, Ramada hotels, and Avis rental cars.
Within this framework, the jettisoned Cendant Software business -- though profitable -- didn't fit ideally.
"It was a nice add-on, an after-thought," said Matty. "But there was no real synergy with what they did."
Cendant Software makes educational and entertainment software and includes number-two ranked electronic gaming giant Sierra Inc. and the Blizzard Entertainment computer games. Cendant said it expects to reap an aftertax gain of $450 million in the first quarter after the spinoff.
Matty said Silverman's move was intended as a signal to investors that the company had "cleared the decks" of its accounting problems and was ready to forge ahead on a profitable path.
In his October interview on CNN, Silverman said Cendant had been hard at work trying to diligently "resolve uncertainties" in the months since the scandal broke.
"We had a crisis," he said bluntly. "We had a management succession issue. We had a corporate governance issue. We had a divided board, as you know. We didn't have financial statements for six months. We had liquidity issues. We resolved that."
--By staff writer Douglas Herbert
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Cendant Corp.
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