Cendant Corporation (US)

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Troubled Cendant spent years restructuring before finally breaking itself up into four separate businesses in 2006. It was created in 1997 from the merger of franchise and marketing companies HFS and CUC. Just four months after completion, CUC was found to have inflated its accounts in what was then the biggest fraud in US corporate history. As a result, Cendant spent several years divesting non-core assets in order to appease shareholders before focusing on a new strategic direction. In 2005 the group began moves to break itself up into four separate units: real estate broker Realogy; hotel group Wyndham Worldwide; travel services operator Travelport; and car rental group Avis Budget. The demerger was completed in August 2006.

Cendant was created in 1997 from the merger of two companies with very different histories, but a common dependence on information technology systems. CUC International originally launched in 1973 under the name Comp-U-Card America. Initially the company devised a high-tech system to sell merchandise to users of the emerging range of home computers via an electronic catalogue. But this concept was several years (if not decades) ahead of its time, and when the original service failed to take off, the business came under the control of one of its founding investors, Walter Forbes. He dropped the electronic catalogue idea and instead transformed Comp-U-Card into a discount shopping club which managed sales over the telephone network. Customers browsing through Comp-U-Card's printed catalogue could call up a telesales operator who then searched the company's computerised database to find the retailer offering the best price on any particular item and then placed the order for direct delivery to the customer. As the middle man, Comp-U-Card made its money from the customer's annual subscription dues as well as commission on each sale. The revised business plan worked well, and the company had accumulated 100,000 members by 1983, when it went public as CUC International.

CUC also diversified, acquiring a string of other businesses involved in direct marketing, insurance and financial services, as well as other membership programs. Gradually it also established operations in several international markets. It launched spin-off clubs of its own, such as Shoppers Advantage and Travelers Advantage, as well as private label clubs for other companies, such as Citibank's CitiTravel service or the Sears Discount Travel Club, and partnerships with emerging internet companies such as America Online and Compuserve. At its peak CUC served over 30m members with more than 250,000 product lines, and a sales team numbering 4,000 telephone operators. Forbes' ambitions also grew and during the 1990s, he shifted CUC in a new direction, agreeing to purchase a series of publishers of computer games and educational software. In 1996, in the biggest such deal, CUC paid a staggering $2.2bn to buy games designers Davidson & Associates and Sierra Online. At the same time the group formed a tentative strategic alliance with another company which specialised in intermediary brokerage, HFS.

HFS was the creation of investment banker Henry Silverman, who had launched the company in 1990 as Hospitality Franchise Systems, while serving as a partner in private equity investor Blackstone Group. Like Forbes, Silverman saw substantial opportunities in operating as an intermediary. In this case, he set out to acquire well-known hospitality brands and then managed the highly lucrative franchise rights. His first purchase was Howard Johnson, already regarded one of the pioneers of brand franchising, as well as the economy division of Ramada hotels. In 1992, he added the Days Inn brand and took the expanding business public as HFS. The Super 8 motel brand was acquired in 1993. In 1995, Silverman added Knights Inn, and also launched a new hotel brand, Wingate Inns. The same year, he moved the group into a different direction, acquiring control of another lucrative franchise, Century 21 real estate brokerages. In 1996 he acquired Travelodge, as well as the Avis car rental service, timeshare specialist Resort Condominiums International and mortgage lender PHH. By 1996, this series of smart deals had earned Silverman a reputation as a skilled dealmaker, and one of the heroes of Wall Street.

At first HFS and CUC seemed ideal partners. Each managed a huge database of customers, who could now be cross-sold the other company's services. After a year of getting to know one another, Forbes and Silverman agreed to pool their resources, merging at the end of 1997 to create a $4bn franchise and marketing giant under the new name Cendant. Almost simultaneously they launched a push in a new direction, agreeing to acquire NCP, the UK's leading operator of public car parking facilities and owner of Green Flag breakdown services, for $1.3bn.

Yet just four months after completion of the Cendant merger, serious problems emerged. During consolidation of the two businesses, the new group's accountants uncovered extensive irregularities in CUC's accounts, including fictitious revenues, overstatement of assets and delayed recognition of cancelled CUC memberships. A subsequent investigation revealed that CUC executives had used a variety of methods to inflate earnings by as much $500m, while errors had compounded the figure by an additional $200m. At the time it was the biggest accounting fraud in US corporate history. Cendant's stock price plunged by more than 46% in a single day, wiping an estimated $20bn off the group's market capitalisation. Shareholders launched a substantial lawsuit to reclaim their lost wealth (eventually settled by Cendant in 2002 at a cost of around $2.9bn). Walter Forbes resigned in July 1998, and was later charged with fraud, along with other senior officers of CUC. But the affair was a huge blot on Silverman's hitherto sparkling reputation, and one which he has laboured to remove ever since.

His first move was to sell off many of the group's non-core businesses, raising funds for $3bn worth of stock repurchases. Sales included the entire software division (much of it to the equally ill-fated Vivendi Universal), as well as the former CUC coupon marketing business. At the same time, the group bolstered its core assets in hotel franchising, car rental and travel services with a string of further acquisitions. An attempt to bolster Green Flag rescue with the acquisition of another roadside services association, the RAC, was blocked by regulators in 1999. Green Flag was later sold to Direct Line; NCP to private equity. Tax preparation agency Jackson Hewitt was floated off in 2004; various mortgage lending and fleet management units were spun off as PHH Corporation in 2005, as was fuel card business Wright Express. The remainder of CUC's loyalty and incentives business was licensed to Trilegiant, a separate company run by its former management team, in 2001.

In early 2005, the group announced a realignment of its remaining operations into two divisions of Travel and Real Estate, both of which relied heavily on core strategies of franchise marketing and the development of central information processing systems. Later the same year, the group unveiled an even more ambitious plan to break up the group altogether by splitting into four independent companies, focused on real estate, travel, hotels and car rentals respectively.

In preparation for break-up, Cendant was restructured in 2005 as four divisions. The Real Estate business, comprising Coldwell Banker, Century 21 and other brands, was later spun off as Realogy. The hospitality business, comprising Howard Johnson, Ramada, Super 8 and other brands, was floated as Wyndham Worldwide; Travelport, which managed the Galileo reservation system as well as consumer portals Orbitz and ebookers, was acquired by Blackstone Group. What remained of Cendant was renamed Avis Budget Group. For 2005, its last year as a single company, Cendant's combined revenues were $15.8bn, with pretax income of $1.5bn. The split was completed in August 2006, at which point Silverman became chairman & CEO of the Realogy division. He later left to work in private equity.

Walter Forbes and CUC's former vice chairman Kirk Shelton were tried for fraud and conspiracy in 2004. Shelton was found guilty on several counts in 2005 and was sentenced to 10 years in prison. The Forbes jury twice failed to reach a verdict. He was finally found guilty in October 2006, and was sentenced to 12 years' imprisonment.

Last full revision 24th June 2016


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