Cendant

HENRY SILVERMAN WAS the toast of Wall Street in late 1997 as he prepared to merge his company HFS, successful franchiser of Avis, Ramada Inns, and real estate brokerage Century 21, with high flying CUC International, a company that sold memberships in discount buying clubs through direct-marketing to form Cendant.

Like many popular Wall Street companies, Silverman's HFS had delivered a 20-percent-plus growth rate through a program of continuous acquisitions. Wall Street rewarded the new deal with a rising stock price for Cendant, with the sexy concept of synergies from feeding HFS customer names into CUC's direct marketing channels. It was not until April 1998 that the new Cendant management discovered that former CUC executives had massively overstated earnings by $500 million over three years.

Subsequently, Cendant's stock dropped, erasing $13 billion in market capitalization, and CUC founder Walter A. Forbes resigned. As one commentator noted “once CUC's massive irregularities were uncovered it became clear that its core business, selling memberships was not the profit engine originally expected.” Stockholders sued Cendant, asking how they could have believed the hype, and whether Silverman, known as a savvy deal maker, could have so massively stumbled? Did his due diligence actually fail to uncover the fraud ahead of time, or was he a part of the problem? Inexperienced shareholders, if not professional money managers, were dismayed to discover that because the deal was structured as a merger of equals, HFS did not, in fact, have unlimited access to CUC's accounting books.

So, in effect, it was the ultimate “trust me” deal. Also, sharing at least moral responsibility would seem to be CUC's former accountants Ernst & Young, and investment bankers Bear Sterns which received $30 million as financial advisers on the merger.

Cendant has come to stand for the system of belief that enabled the growth of the Wall Street “bubble” in the 1990s. HFS wanted to believe that direct marketing of memberships was profitable. Wall Street wanted to believe that a 20 percent growth rate was sustainable, and that with the effect of synergy, Cendant, under its star CEO Silverman, would go on making money at that rate. Cendant settled with shareholders by agreeing in December 1999 to pay $2.83 billion, without admitting liability, and Silverman went on to rebuild the Cendant company.

Then, as the Enron bankruptcy debacle hit, it became public that like Enron, Cendant also relied on off-balance sheet partnerships, which further tarnished the stock in 2002.