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Cendant's woes slam stock
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April 16, 1998: 4:17 p.m. ET
Investor concern about accounting irregularities cuts market cap in half
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NEW YORK (CNNfn) - Cendant Corp.'s chief deal maker Henry Silverman was clearly outraged during a conference call late Wednesday - but investors were equally upset with the marketing company, which has seen its stock price sliced in half on Thursday.
The Parsippany, N.J.-based company, formed late last year by the $14 billion merger of CUC International Inc. and HFS Inc., has taken a trouncing, with its stock (CD) plummeting 17-1/4 points to 18-3/8 on torrid trading volume.
The reaction came after the company -- which markets everything from homes to travel services -- late Wednesday said it discovered potential accounting irregularities at its membership services unit that will lead to sharply lower restated earnings.
"He's always prided himself on never having these kinds of events happen. So he's frustrated and somewhat embarrassed," said Robert Gendleman, co-portfolio manager for Neuberger & Berman's Partners fund who particpated in the company's conference call with investors.
Apart from the conference call, Cendant's officials have declined to further comment on the specifics of the nature of the irregularities.
But at least one analyst believes alleged fraud relates to liberal accounting standards applied toward booking revenue from the member services business.
"A lot of the potential issues are areas that can be subject to different interpretation by accountants," said Craig Bibb, an analyst at PaineWebber.
To aid its investigation, the Cendant board's audit committee has engaged Willkie Farr & Gallagher as special legal counsel in addition to its usual law firm, Skadden Arps Slate Meagher & Flom. The board has also tapped Arthur Andersen to perform an independent audit.
Cendant's Alliance Marketing unit provides a variety of services through its millions of members worldwide. The business - developed by CUC International and its founding chairman Walter Forbes - was one of the driving motivations for Silverman's urge to merge.
The company said it discovered the irregularities in the course of transferring accounting responsibilities from former CUC executives to their HFS counterparts.
Some analysts indicated that the problems stem from executives who resigned just last week. On April 9, Cendant confirmed the resignation of Amy Lipton, deputy general counsel, Kirk Shelton, one of six vice chairmen, and Cosmo Corigliano, executive vice president.
"Cosmo was well-thought off. So people were surprised and took it as something was going on when he resigned," said one analyst who requested anonymity.
As a result of the plunging stock, Cendant has been slammed by a shareholder lawsuit that is seeking class-action status.
The new problems may put in jeopardy Cendant's planned $3.1 billion purchase of American Bankers Insurance Group Inc. -- a transaction which is partially financed with Cendant's shares. Shares of American Bankers (ABI) fell sharply Thursday, down 6-1/8 at 58-3/4.
Cendant reached an agreement to acquire the Miami-based insurance marketing company in March after a hard-fought battle with American International Group. and its chairman, Maurice "Hank" Greenberg.
Under the terms of the deal, the company has until Dec. 31, 1998, unless otherwise amended.
Cendant said it remains committed to completing the American Bankers deal as well as other acquisitions, such as National Parking Corp. and Providian Insurance.
Of greater concern for some investors, though, is the original merger that created Cendant. Because of the vacancies in the executive suites, some analysts like Bibb believe Forbes, currently Cendant's chairman, will lack the leverage to effectively lead the company.
"I don't think it would be very comfortable for him to remain...The marriage is definitely on the rocks," the PaineWebber analyst said.
As for Silverman, the investment community appears more optimistic. "Silverman is a very smart and capable man. I think he will rebound from this episode," Gendleman said.
"I guess he can be somewhat faulted for the (lack in) due diligence, but it wasn't his company," the portfolio manager added.
-- by staff writer Robert Liu
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