<PAGE>
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
SCHEDULE 14D-1
(AMENDMENT NO. 7)
TENDER OFFER STATEMENT PURSUANT TO SECTION 14(D)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
AMERICAN BANKERS INSURANCE GROUP, INC.
--------------------
(NAME OF SUBJECT COMPANY)
SEASON ACQUISITION CORP.
CENDANT CORPORATION
--------------------
(Bidders)
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS)
--------------------
(Title of Class of Securities)
024456 10 5
--------------------
(CUSIP Number of Class of Securities)
JAMES E. BUCKMAN, ESQ.
SENIOR EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
CENDANT CORPORATION
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
TELEPHONE: (973) 428-9700
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf of Bidders)
WITH A COPY TO:
DAVID FOX, ESQ.
ERIC J. FRIEDMAN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 735-3000
- -----------------------------------------------------------------------------
<PAGE>
This Amendment No. 7 amends the Tender Offer Statement on Schedule 14D-1
initially filed on January 27, 1998 (as amended, the "Schedule 14D-1") by
Cendant Corporation, a Delaware corporation ("Parent"), and its wholly owned
subsidiary, Season Acquisition Corp., a New Jersey corporation ("Purchaser"),
relating to Purchaser's tender offer for 23,501,260 outstanding shares of
common stock, par value $1.00 per share, of American Bankers Insurance Group,
Inc., a Florida corporation (the "Company"). Unless otherwise defined herein,
all capitalized terms used herein shall have the respective meanings given
such terms in the Schedule 14D-1.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH SUBJECT COMPANY.
The information set forth in subsection (b) of the Schedule 14D-1 is
hereby amended and supplemented by the following information:
On February 7, 1998, Parent sent a letter conveying certain background
information relating to Parent and its management to the members of the
Company Board, a copy of which is included as an exhibit hereto and is
incorporated herein by reference.
ITEM 10. ADDITIONAL INFORMATION.
The information set forth in subsection (f) of Schedule 14D-1 is hereby
amended and supplemented by the following information:
According to the Company's Schedule 14D-9 Solicitation/Recommendation
Statement (the "Schedule 14D-9"), at a meeting on February 5, 1998, the
Company Board unanimously approved an amendment to the Rights Agreement
providing that the Company Board may extend a Distribution Date (as defined
in the Rights Agreement) beyond the dates set forth in the Rights Agreement,
upon approval by a majority of the Continuing Directors (as defined in the
Rights Agreement). Pursuant to the Rights Agreement, the Company Board
resolved that the Distribution Date shall not occur with respect to the Offer
until such date as may be determined by action of the Company Board in
accordance with the terms of the Rights Agreement, as amended.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
Item 11 is hereby amended as follows:
(a)(14) Newspaper Advertisement published February 10, 1998.
(a)(15) Letter from Parent to the members of the Company Board, dated
February 7, 1998, with attachments.
2
<PAGE>
SIGNATURE
After due inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this statement is
true, complete and correct.
Dated: February 10, 1998
CENDANT CORPORATION
By: /s/ James E. Buckman
-------------------------------
Name: James E. Buckman
Title: Senior Executive Vice
President
and General Counsel
SEASON ACQUISITION CORP.
By: /s/ James E. Buckman
-------------------------------
Name: James E. Buckman
Title: Executive Vice President
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- ---------------
<S> <C> <C>
(a)(14) Newspaper Advertisement published February 10, 1998.
(a)(15) Letter from Parent to the members of the Company Board, dated February 7,
1998, with attachments.
</TABLE>
4
<PAGE>
[Newspaper Advertisement]
AIG: YOU NEED YOUR CLAIMS
ADJUSTED
In an effort which we believe is clearly intended TO DEFLECT ATTENTION FROM ITS
FINANCIALLY INFERIOR OFFER FOR AMERICAN BANKERS INSURANCE GROUP, AIG has
undertaken a program of misinformation, attempting to disparage Cendant's
financial strength, track record, management and its ability to run an
insurance business.
AIG'S CLAIMS ARE DISTORTED, FAR-FETCHED AND OUTRAGEOUS.
But don't take just our word for it. AIG should ask Goldman, Sachs, its own
financial advisor, which has reaffirmed Cendant for its Priority List of most
highly recommended stocks.
HERE'S WHAT GOLDMAN'S ANALYST HAD TO SAY ABOUT CENDANT, HIS NUMBER ONE STOCK
PICK FOR 1998:
OVERALL EXCELLENCE: "By focusing exclusively on high growth, high
------------------ margin consistent consumer and business services
with a high percentage of recurring revenues and
modest capital expenditure needs, CENDANT HAS
CREATED ONE OF THE BEST BUSINESS MODELS WE HAVE
COME ACROSS..."(1)
GROWTH: "Cendant's internal growth opportunities are
------ significant with the tremendous synergies created
between the marketing capabilities of [its]
membership division and the expansive franchise
systems in both the travel and real estate
divisions."(2)
SUPERIOR MANAGEMENT: "We point out management has consistently
------------------- delivered better than expected results..."(2)
FINANCIAL STRENGTH: "Cendant is a cash flow machine currently
------------------ generating $1.3 billion in free cash
annually..."(2)
"There are very few [other] 25% growth stories in
the market with the liquidity of $31 billion
market cap that are insulated from the Asian
economic crisis."(2)
"The branded consumer dominance and earnings
consistency makes Cendant attractive..."(2)
In an ad in The Wall Street Journal (February 6, 1998) which attacked Cendant,
AIG touted its own track record. But let's take note of some of the things not
in the ad, but which The Wall Street Journal has had to say about AIG:
Focusing on AIG's "tighted-fisted" and "no-holds-barred" approach to paying
claims, which has led to numerous "bad faith awards" against AIG as well as
admonitions from the bench, a feature article in The Wall Street Journal
(January 15, 1996) offered the following quotes from AIG customers:
<PAGE>
"We're not buying from AIG, and I would seriously hope I didn't have to."*
--Risk Manager for State Industries, former customer which successfully
fought to keep AIG from avoiding responsibility for its portion of a
major award
"We just couldn't get along, and I was so happy when we no longer endorsed
them..."*
--General Counsel for the National School Boards Association
"There are days I'd just as soon shoot at them with a high-caliber weapon as
shake their hands."*
--Risk Manager for IMC Global
The Wall Street Journal also reported (September 10, 1992) how AIG's scandalous
attempt to use Hurricane Andrew, which devastated large parts of Florida and
the South in 1992, as an "opportunity to get price increases now," drew the
wrath of the attorneys general and insurance commissioners of several states.
As to financial strength, Cendant's "A" credit rating is higher than American
Bankers' ratings (which never kept American Bankers from succeeding in its
insurance business). We have all the financial strength and stability needed
to successfully build American Bankers' business in the future and we intend
to do so.
THOSE ARE THE FACTS.
-----
NOW LET'S GET BACK TO THE REAL ISSUE:
THAT CENDANT'S $58 OFFER IS CLEARLY SUPERIOR TO AIG's $47 OFFER.
[CENDANT LOGO]
- ---------------
(1) Report dated February 5, 1998
(2) Report dated January 22, 1998
Permission to use the quotes was neither sought nor obtained.
* Reprinted from the Wall Street Journal. Copyright 1998 Dow Jones
and Co. Inc.
Cendant and certain other persons named below may be deemed to be
participants in the solicitation of proxies in opposition to the proposed
merger of American Bankers and a subsidiary of AIG which will be sent to
shareholders of American Bankers promptly after it is finalized in
accordance with the Federal securities laws. The participants in the
solicitation of proxies in opposition to the proposed AIG merger include the
directors of Cendant: Walter A. Forbes, Henry R. Silverman, James E. Buckman,
Bartlett Burnap, Leonard S. Coleman, T. Barnes Donnelly, Martin L. Edelman,
Frederick D. Green, Stephen A. Greyser, Dr. Carole G. Hankin, Stephen P.
Holmes, Robert D. Kunisch, Christopher K. McLeod, Michael P. Monaco, The Rt.
Hon. Brian Mulroney, P.C., LL. D., Robert E. Nederlander, Burton C. Perfit,
Anthony G. Petrello, Robert W. Pittman, E. John Rosenwald, Jr., Robert P.
Rittereiser, Stanley M. Rumbough, Jr., Leonard Schutzman, E. Kirk Shelton,
Robert F. Smith, John D. Snodgrass, Craig R. Stapleton and Robert T. Tucker;
and the following officers of Cendant: Samuel L. Katz, Cosmo Corigliano,
John Fullmer, Laura T. Hamilton, Elliot Bloom, Ronen Stauber, Eric J. Bock
and Cindy C. Hodnett. Certain directors of Cendant are also officers of
Cendant. Cendant may contact holders of shares of American Bankers preferred
stock and common stock by mail, telephone, facsimile, telegraph, the
Internet, newspapers or other publications of general distribution and
personal interviews.
As of the date of this communication, the directors and executive officers of
Cendant do not beneficially own any of American Bankers' equity securities.
Cendant is the beneficial holder of 371,200 shares of American Bankers common
stock and 99,900 shares of American Bankers preferred stock.
<PAGE>
CENDANT LOGO
February 7, 1998
Board of Directors
American Bankers Insurance Group, Inc.
11222 Quail Roost Drive
Miami, Florida 33157
Attention: Mr. R. Kirk Landon, Chairman
Dear Members of the Board:
Today, we were quite gratified to read in a press release issued by
American Bankers that your Board of Directors is interested in learning more
about Cendant's higher valued offer to acquire American Bankers and about
Cendant's business plans for the company. As part of providing such information
to you, we thought we would take a brief opportunity, through the enclosed
items, to introduce ourselves further and to share some highlights of Cendant's
background with you. We will endeavor to furnish you with additional
information about Cendant and its offer in order to address any other concerns
which you have. We continue to be excited about the prospect of combining our
two exceptional companies.
Best regards,
/s/ Henry R. Silverman /s/ Walter A. Forbes
Henry R. Silverman Walter A. Forbes
President and Chief Chairman of the Board
Executive Officer
CENDANT CORPORATION
6 Sylvan Way, Parsippany, NJ 07054 Tel: 973 428-9700 Fax: 973 496-7325
707 Summer Street, Stamford, CT 06901 Tel: 203 324-9261 Fax: 203 348-4528
<PAGE>
OCTOBER 27, 1997
FORTUNE
GENIUSES
WHO THE HELL IS HENRY SILVERMAN?
He's the king of franchising, for one thing. He's also the CEO whose stock
has blown away Intel and Microsoft so far in the 1990s. Now he's going to try
something really big.
By Justin Fox
[Photo of Siverman at his New York City office]
Henry Silverman is making his way out of the meeting room at San
Francisco's Ritz-Carlton hotel, and it's taking forever. A standing-room-only
crowd of money managers has been on hand to hear him talk about his company at
Montgomery Securities' annual September investment conference, and at every
turn there's somebody who wants to offer congratulations or kind words.
"You're the only large-cap stock I own," says hedge fund manager Larry
Greenberg. Chimes in Fidelity Contrafund's Will Danoff: "Henry's the best."
Maybe it's just something in the air, just the giddy hype that permeates
what has become the must-attend investment event of the 1990s (Silverman calls
it "the Predators' Ball for equities"). But check in with people nowhere near
the conference, and you find that, if anything, the praise gets even thicker.
"Henry's a genius," says Steve Bollenbach, Hilton's hard-nosed chief executive.
Rainwater Inc. CEO Darla Moore, proclaimed by this very magazine to be "the
toughest babe in business," melts at the mention of Silverman's name. "He's
one of my heroes," she gushes. "He's a great capitalist." Says Morgan Stanley
money manager Kurt Feuerman, who at one point this year had 20% of one of his
mutual funds invested in Silverman's company: "Henry
- ----------------------------------------------------------------------------
REPORTER ASSOCIATE Rajiv M. Rao
PHOTOGRAPHY BY JOHN ABBOTT
<PAGE>
GENIUSES
is one of the great businessmen of the era."
Wow, What a guy. But wait a minute, you say. Who the hell is Henry
Silverman?
Henry Silverman is a 57-year-old grandfather who lives on Manhattan's Upper
East Side and works in a swell 41st-floor midtown office with a Central Park
view. In the 1980s he was a leveraged buyout artist of modest repute--a regular
at the original Beverly Hills "Predators' Balls" hosted by junk-bond house
Drexel Burnham Lambert, but not quite a big enough deal to rate a mention in
Connie Bruck's chronicle of those days, The Predators' Ball. Then, when stock
replaced high-yield bonds as the cheapest way to build a company, Silverman
adapted his tactics to fit the times. He assembled a corporation that seemed to
perfectly suit the sensibilities of the modern mutual fund manager, and built
it into one of the greatest stock market success stories of the 1990s.
[CHART DISPLAYED HERE]
[Horizontal line represents time in years from December 9, 1992 -
October 1, 1997]
[vertical line represents share price ($0 - $80)]
Big Deals
HFS Stock Price
Weekly, adjusted for splits
Date Announcement Price
---- ------------ -----
12/9/92 HFS goes public $4
[Days Inn Logo] [Howard Johnson Logo] [Ramada Logo]
2/16/93 Super 8 purchase $6-1/8
[Super 8 Logo]
6/7/95 Century 21 purchase $14-1/4
[Century 21 Logo]
12/20/95 Travelodge purchase $36-3/8
[Travelodge Logo]
12/21/95 Electronic Realty Associates purchase $37-15/16
[Electronic Realty Associates Logo]
5/2/96 Coldwell Banker purchase $55
[Coldwell Banker Logo]
7/1/96 Avis purchase $69-1/2
[Avis Logo]
10/7/96 Resorts Condominium International purchase $78-3/8
[Resorts Condominium International Logo]
11/11/96 PHH Merger $72-7/8
[PHH Logo]
5/27/97 CUC Merger $59
[CUC Logo]
10/1/97 Shareholders approve HFS-CUC Merger $73-3/8
[Cendant Logo]
[Chart ends here]
HFS, the company Silverman started in 1990, went public in December 1992
at a price, adjusted for subsequent splits, of $4 a share. Less than four years
later--a couple of weeks after Silverman spoke at last year's Montgomery
investment conference--it hit 79 7/8. That's a return of almost 2,000%.
During that period, only two sizable companies, disk drive maker Iomega and
telecom equipment manufacturer Tellabs, topped that performance, according to
Zacks Investment Research. Since then HFS's stock has struggled; only in late
September did it again begin to approach last fall's levels. But its return to
investors during its five years as a public company still puts all but a few
others--Dell Computer being the only one larger than HFS--to shame.
If you agree that a 2,000% return to investors is amazing, you'd have to
call the return to founder stupendous. At the start, says Silverman, he
invested "several hundred thousand dollars" of his own money in HFS; his
company stock and options are now worth some $700 million.
HFS achieved these prodigious results without having anything to do with
computer networking or health care or any of the other famously hot industries
of the decade. Instead the company's growth secret has been chiefly this: It
buys other companies, preferably ones with well-known brands, few assets, and
lots of customers.
It all started in 1990 when Silverman, then head of the leveraged buyout
fund at the Blackstone Group, a New York merchant bank, spent $170 million to
purchase the franchising rights to two tired hotel brand names: Ramada and
Howard Johnson. Hospitality Franchise Systems, as the company he formed came to
be called, went on to buy five more hotel brands--Days Inn, Travelodge, Super
8, Village Lodge, and Knights Inn--making it the world's largest hotel
franchiser. Then, after a wrong turn into the gambling business, the company
shortened its name to HFS and became the world's biggest franchiser of real
estate brokerages, buying Century 21, Coldwell Banker, and ERA. Last year it
bought Avis (this September it spun off most of the car rental company, keeping
only the brand name and the reservations system). Next was Resort Condominiums
International, which dominates the business of vacation time-share exchanges.
Then PHH, the leading corporate relocation company as well as a big name in
vehicle fleet management and a smaller one in residential mortgages.
In the process, HFS profits rose from $18 million (21 cents per share) in
1992 to $170 million ($1.29 per share) in 1996. That seems impressive, but in a
time of rising stock prices and credulous investors--a time like the 1990s,
that is--anybody with a high enough P/E ratio can cobble together big
earnings increases with a flurry of acquisitions. That's what the conglomerates
of the 1960s did, only to collide with economic reality when the stock market
began imploding in the early 1970s. Silverman does-
<PAGE>
GENIUSES
n't deny this. "Any dope with a checkbook can buy a company," he likes to say.
"It's what you do afterward that matters."
True enough. And for Silverman, the moment of truth has arrived. Up to now,
he's been able to argue with justification that his company is no conglomerate
but a simple, focused franchising machine. Yes, running a hotel is different
from renting a car, but HFS doesn't run any hotels or car rental agencies, it
just sells the franchises and handles the reservations. With the PHH merger,
however, that business model began to change. Now, with Silverman in the midst
of his biggest deal yet -- a $12 billion merger of equals with direct marketing
giant CUC International -- it is changing a lot.
[Photos displayed here]
[Telemundo Spanish-language television network shown here with van displaying
network Logo]
[City bus shelter shown here]
[Yoo-hoo chocolate drink bottle shown here]
[Side view of the Delta Queen steamboat shown here]
[PICTURE: CLOCKWISE FROM TOP RIGHT: EVAN KAFKA, ALLEN GREEN -- SYGMA, JESSICA
WECKER, NAJLAH FEANNY -- SABA]
Rememberence of deals past: Silverman's ventures though the years included (in
chronological order, counterclockwise from bottom left) faux-chocolate-milk
maker Yoo Hoo; the Delta Queen steamboat; city bus shelters; and the Telemundo
Spanish-language television network.
The new corporation will be called Cendant ("Every name we liked, either
somebody already had it or it wasn't trademarkable or it meant something
pornographic in another language," Silverman says.) Cendant will be big, with
revenues that place it smack in the middle of the FORTUNE 500, and a market
capitalization that as of Sept. 29 would rank it 72nd among American companies,
just ahead of Merrill Lynch. It will be complicated, with 30,000 employees and
an enormous array of businesses. It will also be pretty much complete --
neither Silverman nor his new business partner, CUC's CEO Walter Forbes,
foresees big acquisitions as part of Cendant's near-term business plan. (There
is one major deal already in the works: If Hilton's Bollenbach succeeds in his
bid for ITT, he will let Silverman license the franchising rights for ITT's
Sheraton hotels.)
So how will this giant that is Cendant grow? Well, that's where the story
gets interesting. Silverman, who thus far has seemed so in tune with the times
in his choice of business strategies, is now staking his future on something so
dated, so passe, so unbearably 1960s as synergy. You know, as in: selling CUC
travel club memberships to people who stay in Days Inns; selling PHH mortgages
to people who buy houses from Century 21; renting Avis cars to Coldwell Banker
agents who stay in RCI-arranged time-shares on vacations paid for by selling
houses to people relocated by PHH.
This is a hard sell to 1990s investors -- which is why news of the PHH and
CUC mergers sent HFS's stock prices reeling (as the chart on the previous page
shows). The skeptics' argument is simple enough: Don't these people know that
cross-selling has been tried before, in the same industries, with some of the
same companies? Don't they remember ITT's failed attempt to combine Avis and
Sheraton into a travel juggernaut? Don't they remember Sears Roebuck's fervent
(and misplaced) hopes that Allstate, Dean Witter, and Coldwell Banker would
synergize happily to turn around the company's sagging fortunes? Don't they
remember Allegis?
In fact Silverman vividly remembers Allegis, United Airlines' ill-fated
mid-1980s bid to corner the travel market by buying Hertz, the overseas Hilton
hotels, and Westin. He was part owner of a few Westin hotels at the time, and
noticed they were getting tons of bookings from United and sending Hertz lots
of customers.
"I, from personal experience, was a true believer in the benefits of
cross-marketing," he says. "If you actually do your homework, which none of
these children
<PAGE>
GENIUSES
who manage money ever do, you'll see that it did work at Allegis." So what
broke up the company? According to Silverman, it was a pilots' strike, a sharp
rise in jet fuel costs, and bad investor relations by the company's CEO. Three
things, that is, that will never plague a company that Silverman has anything
to do with.
For one thing, Silverman has learned not to buy anything so fraught with
hassles and risks and capital expenditures as an airline. "I've always dreamed
of franchising an airline," he says, "but I haven't been able to figure out how
to do it." As for investor relations, if there is one thing Henry Silverman has
learned in his long and sometimes weird career, it's that you need to be nice to
your big shareholders.
Consider whom he had to answer to in his highest-profile venture before
HFS, running the leveraged buy-out fund at corporate raider Saul Steinberg's
Reliance Group Holdings in the 1980s. Investors in the $120 million fund
included a group assembled by Drexel Burnham Lambert junk bond king Michael
Milken--among them Milken himself, Seema Boesky (then the wife of arbitrageur
Ivan), financier Carl Lindner, and casino magnate Steven Wynn. "It was like
playing the violin in front of Isaac Stern," Silverman says. "I had all these
sharks masquerading as barracudas as my investors."
[Photo of Mutual Fund Manager, John Ballen]
[Picture DANA SMITH -- BLACKSTAR]
Mutual fund manager John Ballen bought HFS early and held on for monster
gains. He's not selling now.
Before Reliance, Silverman--whose father was CEO in the 1960s and early
1970s of Talcott National Corp., then a leading commercial finance company --
had spent most of his career as a freelance dealmaker of sorts. His first job
after graduating from the University of Pennsylvania law school in 1964 was as
an assistant to Steve Ross, then in the early stages of assembling the empire
that eventually became Time Warner. Silverman went on to work in investment
banking, then ran and dismantled a miniconglomerate called ITI Corp., then
started doing deals on his own.
He'd gather investors, buy a smallish company, tweak its business plan,
then sell it. He went through several radio and TV stations, Yoo Hoo Chocolate
Beverage, and the Delta Queen Steamboat Co.--a deal he did with vulture
investor Sam Zell, who still owns most of the company. Together with Steinberg
he went into the bus-shelter business. That turned into a near disaster when
their unsuccessful attempts to land a New York City contract became the subject
of a grand jury investigation; but the two were never charged with anything and
ended up winning contracts in Philadelphia, Miami, and other cities.
Silverman made pretty good money but achieved nowhere near the prominence
of the people he did deals with. He was, he jokes, "the Zelig of the corporate
world." (Zelig, a Woody Allen movie character, was a nobody who repeatedly
found himself next to famous people in the middle of historic events.) It
was the $120 million buyout fund at Reliance--and the availability of hundreds
of millions of dollars more in Drexel junk bond funding--that gave him his
first opportunity to perform on a larger stage.
The Reliance buyout fund bought a family-owned Southern motel chain called
Days Inn in 1984, quickly expanded it into a national brand through aggressive
franchising, took it public, took it private again, and finally sold it in 1989.
Critics in the hotel industry said Days let quality standards slip in order to
land more franchisees. Silverman's barracuda investors had no reason to
complain--the Days deals turned a $30 million investment into $180 million in
just five years. But the hotel chain, laden with high-interest debt, went
bankrupt two years after he sold it.
While running the Reliance buyout fund, Silverman also bought a handful of
TV stations in cities with large Hispanic populations and cobbled them together
into the country's No. 2 Spanish-language TV network, Telemundo. Telemundo
struggled during Silverman's tenure as corporate advertisers shunned the
Hispanic market, and went bankrupt three years after he left Reliance in 1990
to run the Blackstone Group's buyout fund. (Telemundo is now a money-making
public company.)
This wasn't a spectacular record, and it appears to have left a lot of
casual observers on Wall Street deeply suspicious of Silverman's subsequent
accomplishments. Silverman's years of experience did endow him with a unique
set of qualifications: He knew more about running company than just about
any dealmaker on Wall Street. And he knew more about Wall Street than just
about any CEO. But even his friends had no inkling that he was about to
become one of the more spectacular late bloomers in business history.
Bollenbach, who had gotten to know Silverman in the mid-1980s when he
was CFO at Holiday Corp. and Silverman was running Days Inn, stopped by
Silverman's office after leaving Donald Trump's employ in 1991. Silverman
offered to make him a partner in his fledgling venture, with the two of them
splitting everything fifty-fifty. Bollenbach turned him down. "There went
$200 million," the Hilton CEO now says. (Actually, it's more like $350
million.)
At Days Inn in the 1980s, Silverman had made an important discovery.
"What he found was that the predictable earnings of a franchise business were
music to the ears of Wall Street," says Mike Leven, who was president of the
chain during most of Silverman's time as CEO and went on to be president of
Holiday Inn and founder of an HFS wannabe called U.S. Franchise Systems.
"It's not burdened by depreciation; it's not burdened by the cyclical nature of
the hotel business."
That was the initial genius of HFS--the first major hotel company that
didn't own or even manage any hotels. Not that it looked so smart at first.
Forty-five days after Silverman bought the Ramada and Howard Johnson brands
from the largest owner of both chains' hotels, Prime Motor Inns, the
<PAGE>
GENIUSES
Gulf war broke out. Americans stopped traveling, and before long Prime filed
for bankruptcy. Then the company that had bought Days Inn from Silverman
in 1989 went belly up, and Silverman swooped in and bought the Days brand
as well.
[Photo of Walter Forbes shown here]
[Picture: JOHN ABBOTT]
CUC International's Walter Forbes saw HFS as a threat to the
direct marketing giant he'd founded in 1973. He couldn't afford to buy
Silverman, so now he's joining him.
Throwing hundreds of millions of dollars at a bankrupt industry was not
popular with most of Silverman's new partners at Blackstone. But before long
it became clear that it didn't matter if hotel owners were bankrupt, or
even if they'd been foreclosed on by the bank--somebody still had to pay the
franchise fees. What's more, in times of trouble, many independent motel owners
switch to franchise operations in hopes that a brand name will bring in more
business. Earnings rose sharply. Silverman had created a growth company out of
the ruins of a stagnant, cyclical industry. It was clearly time to go public.
Over the years, Silverman had developed a knack for telling investors
exactly what they wanted to hear without seeming to pander to them. This
give became apparent during the pre-IPO road show in November and December of
1992. At first the Merrill Lynch investment bankers had big trouble lining up
money managers willing to listen to Silverman--Are you kidding, a hotel
company? One that doesn't even own any hotels?--but by the time the tour
reached its end in the country's mutual fund capital, Boston, the word of
mouth about Silverman's spiel had made Hospitality Franchise Systems into if
not a hot IPO, at least a warm one. Boston fund companies like Fidelity,
Scudder, and Massachusetts Financial Services ended up buying much of the IPO.
"Basically, I walked out of the room knowing that this was gonna be a
successful business model," says MFS Emerging Growth's John Ballen, who snapped
up more than 15% of the offering. "That is not the impression that you often
get." Ballen was even more impressed when, the day after the SEC-imposed post-
IPO quiet period ended, his phone rang and Henry Silverman was on the other end,
calling to give him an update on developments at the company.
Silverman's investor-relations behavior is still as aggressive today,
and he doesn't just talk--he delivers. Never in its five years as a public
company has HFS missed the consensus quarterly earnings estimates made by
brokerage analysts and compiled by I/B/E/S.
It is of such touches, coupled with rising earnings, that a high stock
price is made. And for an acquisitive corporation, stock price is of the
essence. Essentially, the higher your P/E ratio is, the smarter your
acquisitions look--and HFS has in recent years generally been able to keep
its P/E well above 30.
Still, just because a deal looks smart doesn't mean it is. Many a
company has squandered the seemingly magical accounting benefits of a high P/E
by making dumb acquisitions or mismanaging the companies it buys.
Silverman structured HFS to minimize such dangers. The company's practice
of avoiding tangible assets--be they hotels or rental cars or real estate
brokerage offices--is sometimes derided as financial gimmickry. But it's more
than that: HFS is giving up potential profits in return for protection from
potential losses. So even a mistake, such as HFS's tentative 1994 foray
into the gaming business, ends up not being all that painful--because HFS
never actually bought a casino. What's more, by focusing on selling franchises
instead of running hotels or car rental operations, HFS is less likely to
overtax its managers.
These managers are led by John Snodgrass, a 40-year-old Tennessean who
headed up the franchise sales operation at Days Inn in the 1980s and is now
president of HFS. While CEO Silverman works out of Manhattan and spends much
of his day dealing with investors, Snodgrass is based at HFS headquarters in
Parsippany, N.J., leading what is essentially one big sales force. Office
space at the company's two Parsippany buildings is parceled out between brands
- --Century 21 and Coldwell Banker are on the same floor; Howard Johnson and
Ramada in the same room--whose executives compete with each other to sell
franchises. Compensation is based heavily on meeting performance quotas,
and those who repeatedly fail to make their numbers don't stick around.
For the hotel industry, this single-minded focus on franchise sales is
new but not revolutionary. And HFS's performance in that business has been
good, but not spectacular--revenues are rising at a rate of around 9% a year.
In real estate, the company has set itself a more daunting task: transforming
an industry now dominated by local agents who rely on personal connections
into one ruled by national brands. Some in the industry
<PAGE>
GENIUSES
doubt the effort will succeed--"I think what they have is a problem with
brand-name importance," says Dave Liniger, founder and chairman of rival
RE/MAX--but if it does, the rewards could be huge.
The future of HFS (Cendant, that is), however, isn't just about selling
more franchises. It's a future Silverman first glimpsed while reading the
New York Times one Wednesday morning back in January 1992. Buried inside the
paper was an article about a new deal between Pepsi and Pennsylvania State
University: Pepsi would pay the university $14 million in order to become
its exclusive cola supplier (and chief athletic sponsor). If Penn State's
70,000-odd students were a valuable enough resource to get Pepsi to fork
over millions, Silverman figured, then the people staying in HFS's 150,000
hotel rooms (the number is now almost 530,000) ought to be worth something
too. It turned out they were worth a lot less--Silverman says after he
negotiated with both Pepsi and Coca-Cola, Coke agreed to pay HFS "several
hundred thousand dollars" to become the "preferred" provider of vending
machines to HFS hotels--but it was the first trickle of what has become the
company's fastest-growing profit stream.
After Coke came a deal with AT&T to offer better-than-usual rates to
HFS hotel franchisees and to give HFS a share of the new revenue AT&T took
in from the program. Now there are 85 such preferred alliances. To give an
idea of their size and importance: The world's second-largest insurance
broker is a company named Aon. HFS, with which it has a preferred provider
agreement, is its single-largest account.
The discounts that franchisees get from these deals make HFS brands more
attractive to them; the money that providers pay HFS to land the deals is
almost pure profit. Not surprisingly, the company's executives have
increasingly begun thinking of its franchisees, and its franchisees' customers,
as valuable resources to be mined. The value is most apparent in real estate:
When people buy a house, they're often also in the market for a refrigerator,
painting services, homeowner's insurance, and the like. The problem is, real
estate agents making $5,000 commissions aren't all that interested in the
$20 bonus they might get for steering a customer to a fridge made by an HFS
preferred provider.
That's where CUC comes in. Started in 1973 by a Cambridge, Mass.,
management consultant named Walter Forbes, who believed computers would be the
next wave in shopping convenience, CUC (it stands for Comp-U-Card) evolved
into a telephone-marketing juggernaut that sells memberships and then offers
its members low prices on a huge array of products. This may sound a little
iffy as a business plan, but in fact it has turned out to be rock solid:
Members, who pay an average of $49 to belong to CUC clubs like Shoppers
Advantage and Travelers Advantage, renew at a rate of more than 70% a year.
And because CUC makes its money from member dues, not product sales, its
earnings are far steadier and easier to predict than retailers' profits
usually are.
[The future of HFS isn't just about selling more franchises. It's a future
Silverman first glimpsed reading the New York Times one morning back in
1992 . . .]
CUC lured most of its 71 million members through mailings to credit card
holders. And while technological progress means Forbes' initial dream of
selling via computers is coming true--CUC is already one of the Internet's
biggest merchants--finding potential members to recruit is still CUC's top
priority. That, and making sure no one else is moving in on its extremely
lucrative territory. "We've always kept a very wary eye on any company that
comes near our space," says Forbes. "HFS came out of nowhere."
At first CUC thought about buying HFS, but HFS's rapid growth and high
stock price quickly rendered that out of the question. In 1995 the two companies
entered into an agreement through which people calling HFS hotel reservations
centers were asked if they were interested in certain travel discounts and,
if they answered yes, were transferred to CUC operators. The venture netted
CUC a million new members in its first year.
HFS executives, meanwhile, became convinced that the company needed
direct-marketing help if it was going to sell its hotel and rental car and
real estate customers something more than rental cars, hotel rooms, and houses.
So, after flirting with Signature, a Montgomery Ward division that's the No. 2
direct marketer, Silverman decided to merge with No. 1.
The merger, announced May 27, was not immediately popular with Wall Street.
Although faithful HFS investors like John Ballen of MFS, who has also owned
CUC since 1986, saw it as a logical next step--"They were either going to be
fierce competitors or end up together," he says--the general reaction was one
of puzzlement.
Over the past couple of months, Silverman has been doing his best to
explain himself. At September's Montgomery conference he offered the first
concrete evidence that Cendant will deliver at least some of those synergies
he's banking on. By selling to customers of HFS real estate brokerages, PHH
Mortgage has already nearly doubled its monthly volume since joining HFS.
In 1998, Silverman predicted, PHH will be the second- or third-biggest
mortgage originator in the country--up from 13th in the first six months of
this year. In June, he continued, HFS handed over to CUC 1.6 million names off
its customer lists. So far, CUC has been selling memberships to them at
twice the rate it achieves on the names it gets from banks. That improvement
could boost Cendant's pretax earnings 40% if it continues for the other 78.4
million names HFS will pass on to CUC marketers over the next four years.
All very impressive. But there's another worry. Last year, when Silverman
announced that he would begin selling up to 5% of his HFS holdings each year,
some investors fretted that he might be easing his way out. But Silverman
says Cendant is his "final frontier." He and Forbes will share power, with
Forbes focusing on CUC's international and Internet businesses and Silverman
in charge of everything else. After their employment contracts run out in
five years, Silverman figures both he and Forbes will step aside and let
someone younger run things.
If HFS, and by extension Cendant, is nothing but a fluffy concoction of
Silverman's cleverness and the 1990s bull market, this could bring disaster.
But if Henry Silverman really is the genius all those people say he is, he
might just be able to look forward to a relatively peaceful--and wildly
prosperous--retirement.
REPRINTED THROUGH THE COURTESY OF THE EDITORS OF FORTUNE (COPYRIGHT) 1997
TIME INC.
FOR INFORMATION ON ORDERING FORTUNE REPRINTS, PLEASE CALL (212) 522-2582
MINIMUM ORDER: 1,000 COPIES
<PAGE>
IT'S! NOT! RETAIL!
WITH 1 MILLION PRODUCTS ONLINE, HANDLING $100 MILLION IN TRANSACTIONS A MONTH,
WALTER FORBES AND CUC ARE INVENTING THE FUTURE OF RETAILING, OR WHATEVER
THEY CALL IT.
By Evan I. Schwartz
[PHOTO: WALTER A. FORBES BEHIND HIS DESK]
(Copyright) 1997-1998 Wired Magazine Group, Inc. All rights reserved.
Reprinted by permission. Subscriptions are available at
[email protected] or at 1-800-SO-WIRED.
One evening in 1973, Walter Forbes found himself in a Cambridge,
Massachusetts, restaurant with colleagues from his small consulting company
and a group of Harvard professors. The conversation turned to the future of
retail. Back in the 1960s, Forbes had been a long-haired journalism student,
but by that evening the shorn ex-scribe was a recent Harvard Business School
graduate who was just a shade more radical than most of his former
classmates. "Someone said, 'Wouldn't it be neat if we could bypass stores,'"
Forbes recalls, "'and send products from the manufacturer to the home, and
people would use computers to shop.'"
There was a simple yet magnificent beauty to the plan: no stores also
meant no real estate. For Forbes, that night marked the start of a lengthy
effort to redesign the basic business model for selling and delivering
consumer goods.
The major problem in the early 1970s, however, was that the invention of
the personal computer was years off. The easy availability of today's
Internet was even further removed. So the subject was dropped from the dinner
conversation. "Everyone forgot about what we talked about that night," Forbes
says. "Except me."
DATA, NOT DISHES
Later that year, Forbes founded Comp-U-Card Inc. with the intent of
executing what he now refers to as the "online dream." But even though the
first PC - the partial-assembly-required Altair - was invented a year later
in an Albuquerque electronics store, Forbes was still way too early. The new
company went nowhere. He even tried to make a go of it in the 1980s in the
embryonic and potentially lucrative videotext business. Forbes raised US$14
million from blue-chip investors to develop alternate forms of retailing,
including an online shopping service, with the goal of delivering
advertising-sponsored news and information from central mainframes to
far-flung consumers with home terminals. Then, the videotext market took a
giant belly-flop, and Forbes quickly lost every dollar of that venture money.
He did some rethinking. The PC, he figured, was only part of the equation.
Instead of waiting for people to buy PCs for home use, he chose what he
believed would be the next-best, at-home shopping technology: telephones and
catalogs. The new model would simply replace the old middleman, the retailer,
with a new middleman - CUC.
[BOX: THE FUTURE OF ONLINE RETAIL STARTS HERE (ARROW)
- ------------------------------------------------------
CUC HAS MORE THAN 1 MILLION PRODUCTS AVAILABLE ONLINE.
- -------------------------------------------------------]
Traditionally, manufacturers would pack their products in crates, load
them into trucks, and ship them to retailers, who would then advertise the
goods, mark them up, and hold the customer's hand as he or she went through
the buying process. Under Forbes's new scheme, manufacturers would simply
send information about their products to a database company, which would
aggregate the data, organize it,
WIRED NOVEMBER 1997
<PAGE>
and then present it to consumers in an engaging way. When a shopper ordered
something, the manufacturer would be notified to ship it directly to that
consumer's home. Since no retailer would be involved, the customer would
simply pay the wholesale price, plus shipping charges. The database company
would make virtually no money on the transactions. Rather, it would make its
money by charging the consumer a flat annual membership fee - typically $49
- - for access to the data and the chance to buy at such low prices.
[BOX:
- ------------------------------------------------------
BY 1997, CUC WAS MOVING MORE MERCHANDISE ONLINE THAN
ANY OTHER COMPANY.
- -------------------------------------------------------]
The concept of the home shoppers club had promise. Like a postindustrial
Sears, Forbes would aggregate information on good, old-fashioned consumer
staples ranging from refrigerators to TVs to cameras to air conditioners to
stereos to washers and dryers to dishes, pots, and pans. Later, he expanded
into creating buyers clubs for frequent travelers and diners as well as car
buyers. In 1983, Morgan Stanley took CUC public - one of its first IPOs
staged for a firm without any profits in sight. The company then had $4
million in sales, a loss of $2 million, and - suddenly, incredibly - a
market value of $100 million.
<TABLE>
<CAPTION>
MARKET VALUATION: CUC INTERNATIONAL $0 $0 $100 MILLION
<S> <C> <C> <C> <C>
'73 '76 '83
Walter Forbes and CUC International is CUC goes public in a
several venture formed; Forbes is named Morgan Stanley-led
THE MAKING OF CENDANT capitalists begin CEO. IPO.
Comp-U-Card Inc., a
computer-based
shopping service.
</TABLE>
A decade later, Forbes had very quietly built CUC into a $2 billion
direct-marketing giant with more than 50 million members buying from a
database of more than 250,000 products. The market value of its stock soared
to $10 billion. Still, since many of its memberships were sold through
partners such as Citibank and Sears, many of Forbes's own customers had never
even heard of CUC.
The original epiphany, the online dream, came flashing back in Forbes's
mind in 1994, at a Sun Valley, Idaho, conference for CEOs featuring
Microsoft's Bill Gates, Intel's Andy Grove, and Disney's Michael Eisner. "I
came back and said this is finally going to happen," Forbes recalls.
The company stepped up investment in its online shopping experiments on
America Online and delved into developing its own Web site, Shoppers
Advantage, launched in the fall of 1995. Without any advertising to promote
it, online or otherwise, Shoppers Advantage and CUC's presence on AOL,
Prodigy, and CompuServe proceeded to sell $400 million in products in 1996,
some $90 million in sales in December alone. No other company was moving as
much merchandise online. But since all that money goes to the manufacturers,
CUC doesn't have to report those figures publicly. Due to the covert nature
of its business, few were talking about CUC in electronic commerce circles.
And that's just the way Forbes likes it. "It would be fun," he says, "to
remain low profile and get another year down the path."
THE INVISIBLE STORE
Unlike Forbes, Henry Silverman is known not as a technological visionary, but
rather a consummate dealmaker. Trained as a lawyer, Silverman has not been a
builder of companies, but rather a buyer and seller of them. But like Forbes,
Silverman also started an outfit that does business with tens of millions of
consumers, yet is all but completely unknown to those same consumers.
[BOX:
- ------------------------------------------------------
HFS HAS COMPREHENSIVE DEMOGRAPHIC TRANSACTION DATA ON
100 MILLION CONSUMERS--IN OTHER WORDS, ABOUT HALF OF
AMERICAN HOUSEHOLDS.
- -------------------------------------------------------]
In the early 1990s, while a partner at the New York investment house
Blackstone Group, Silverman engineered the acquisitions of the Ramada and
Howard Johnson hotel franchises for $170 million and Days Inn for $295
million. In 1992, Blackstone took this portfolio public on the New York Stock
Exchange as Hospitality Franchise Systems Inc. (HFS). Silverman became its
chair, CEO, and largest shareholder. Over the next
Evan I. Schwartz (www.webonomics.com/) is the author of Webonomics (Broadway
Books).
WIRED NOVEMBER 1997
<PAGE>
few years, with the acquisition of Super 8, Travelodge, and several other
chains, HFS became the largest franchisor of overnight lodgings in the world.
The beauty of being a franchisor rather than an operator, Silverman
believes, is lost on some people. A company that operates hotels must worry
about the value of its real estate; it must constantly maintain and upgrade
its properties; its revenue and profits can fluctuate wildly depending on how
good or bad business is; it has to train employees and provide them with
health insurance; and those workers must clean dirty toilets and change
soiled sheets day in and day out. By contrast, a franchisor simply collects
steady, predictable, and hefty fees from those hotel operators, in return for
advertising the brand name, running the reservation systems, training
franchisees, and dispatching a few inspectors to make sure all the properties
meet certain quality and cleanliness standards. In short, a franchisor skirts
most of the mess and risk of doing business in the real world.
<TABLE>
<CAPTION>
$136 MILLION $240 MILLION $307 MILLION $302 MILLION* $496 MILLION
<S> <C> <C> <C> <C>
'85 '86 '87 '89 '90
CUC launches Travelers CUC acquires Madison CUC launches CUC launches Premier Hospitality Franchise
Advantage, a Financial Corporation AutoVantage, offering dining, its first Systems founded by
full-service travel for $30 million-plus, services including national discount Henry Silverman with
club. now FISI Madison, the car purchase and dining program. his purchase of Howard
world's largest maintenance. *Reflects Johnson and Ramada
financial marketing recapitalization. chains.
organization; acquires
Benefit Consultants
insurance group for $50
million-plus.
HOSPITALITY FRANCHISE SYSTEMS INC. $0
</TABLE>
Sensing this was a pretty good deal, Silverman expanded the scope of HFS
in 1995 and 1996, acquiring Century 21, ERA, and Coldwell Banker, making the
company the world's largest franchisor of residential real estate. But the
quintessential HFS deal was Silverman's purchase of Avis for $800 million.
Even before the deal closed, it was announced that he would be taking the car
rental giant public. Cars, after all, can crash. By selling off most of the
company, he wouldn't have to worry much about Avis's 174,000 vehicles, 20,000
employees, and 540 rental car locations. Public shareholders would take the
risk of owning all that stuff. HFS would instead turn around and begin
charging Avis fees for operating its computers and reservations systems and
for licensing four key assets that HFS kept all to itself: A-V-I-S.
Wall Street loved the concept: own computer networks, customer data, and
brand names, but get rid of everything else. From fiscal 1992 through 1997,
HFS's revenue is expected to have increased tenfold to about $2 billion, net
profits nearly twentyfold to more than $475 million, and the market value of
its stock shot up to $10 billion - the same as that of CUC.
[PHOTO
Walter Forbes
AGE: 54
TITLE: CEO, Cendant Corporation.
SALARY: US$1.5 Million
CHILDHOOD: Born and raised in Rockford, Illinois. Family owned small foundry,
producing metal parts, for about 100 years.
EDUCATION: BS in journalism, Northwestern University, 1965; MS in journalism,
Northwestern University, 1966; MBA, Harvard Business School, 1968.
EARLY CAREER: Consultant with Management Analysis Center, 1968-1976. Founded
Comp-U-Card Inc. in 1973, joining CUC International as full-time CEO in 1976.
STOCK HOLDINGS: Owns about 1.5 million shares of CUC common stock, valued at
$40 million; 4 million shares to be received upon completion of the CUC-HFS
merger are valued at $100 million.
LESSON LEARNED: The Internet is not a haven for today's retail economy -
"The last thing retailers want is perfect information."
Silverman, 57, and Forbes, 54, got to know each other in 1995 when their
two companies entered a partnership. Under the deal, CUC would market its
travel, shopping, dining, and auto clubs to the tens of millions of HFS hotel
guests. Although it's a direct marketer, CUC didn't use the opportunity to
push mindless junk mail, cold calling, or spam. Instead, when a consumer
phones, say, the Ramada for reservations, after the booking is complete the
clerk will ask callers if they are interested in joining a discount travel
club, offering $20 in free gas coupons as an incentive. If so, they are
transferred to a CUC operator. The idea is simple but effective: pinpoint the
exact times when consumers are most receptive to a certain pitch. Some 30
percent of callers who agree to hear these pitches are subsequently converted
into customers, as compared with the 1 or 2 percent typical of direct
marketing. The company quickly signed up more than a million new members this
way.
<PAGE>
[BOX
- ----------------------------------------------------------------
AS HFS CEO AND CHAIR, HENRY SILVERMAN HOLDS STOCK WORTH CLOSE TO
$1 BILLION.
- ------------------------------------------------------------------]
A big, bright light went off above the heads of both CEOs. HFS had
demographic, psychographic, and transaction data on 100 million consumers,
covering about half of households in the US. The idea of enrolling those
people in more of CUC's membership programs amounted to, in Forbes's words,
"one huge marketing opportunity." People buying houses through Century
WIRED NOVEMBER 1997
<PAGE>
21 might be receptive to climbing on CUC's Welcome Wagon, a service that
delivers coupons for local products and merchants to new homeowners. Renters
of Avis cars could encounter a marketing message for the Entertainment
discount book dangling on a piece of cardboard from their rearview mirrors.
CUC had about 20 membership programs, and HFS had about 15 consumer brands.
Hundreds of potential cross-marketing matchups could be created. Like a
Rubik's Cube, the possibilities were multidimensional.
[BOX
- ---------------------------------------------------------------
THE NETMARKET WEB SITE AVERAGES $100 MILLION IN TRANSACTIONS
A MONTH.
- -----------------------------------------------------------------]
But when the two CEOs announced, in May 1997, that CUC and HFS were to
merge in an $11 billion stock swap, Wall Street analysts were befuddled. Why
were companies from two completely separate industries merging? Why would a
company leading the charge in electronic commerce want to tie the knot with a
company that didn't even have its own Web site? Investors couldn't grasp the
logic. Within three days, HFS and CUC stock each dropped 8 percent.
"I was skeptical when the deal was announced," says Karen Ficker, senior
analyst with New York investment house Furman Selz. At the time, she says,
CUC's stock had been in the doghouse for about a year, mainly because
investors were also skeptical about the acquisition of several education and
entertainment software during a period of high volatility. The HFS deal, she
says, made the picture even murkier. Now that she's had the logic explained
to her, however, Ficker calls it a "seamless fit" and says that "it would
cause mismanagement for this deal not to work."
<TABLE>
<CAPTION>
$2 BILLION $4 BILLION $6.2 BILLION $9.6 BILLION $10 BILLION
<S> <C> <C> <C> <C>
'92 '93 '95 '96 '97
CUC partners with AOL to
provide membership
CUC acquires CUC acquires Davidson & clubs; Shoppers
Entertainment Associates and software Advantage is folded into
Publications, publisher maker Sierra On-Line netMarket.
of discount books and CUC launches Shoppers for $1 billion each.
promotions, for $250 Advantage Web site; HFS acquires PHH
million. HFS acquires acquires European HFS acquires Avis for Corporation, a
Super 8 for $120 Licensee. $800 million; buys conglomeration of
HFS acquires Days Inn for million, making HFS the Coldwell Banker for corporate relocation and
$295 million; goes world's largest hotel HFS buys Century 21 for $740 million and ERA banking services, for
public. franchisor. $392 million. for $40 million. $1.8 billion.
$395 MILLION $1.2 BILLION $4.7 BILLION $8.1 BILLION $10 BILLION
</TABLE>
THE 20-20 ELITE
COMPANIES WITH A MARKET VALUE GREATER THAN $20 BILLION AND ANNUAL GROWTH
EARNINGS OF MORE THAN 20 PERCENT.
<TABLE>
<CAPTION>
MARKET VALUATION
PROJECTED % (US$
5-YEAR GROWTH* BILLIONS)(1)
-------------- ----------------
<S> <C> <C>
Cisco Systems 30 53
Oracle 30 36
Microsoft 27 170
Intel 25 150
Disney 20 55
Compaq 20 40
Motorola 20 48
Cendant 20 22
</TABLE>
- ------------
* Top seven growth percentages provided by IBES Bloomberg; Cendant
percentage provided by Robertson Stephens & Company. Percentages
reflect growth in earnings per share as of August '97.
(1) Valuation of companies as of July 1997.
But here's the big-picture explanation: both companies deliver a wide
range of tangible goods and services to tens of millions of people, yet never
handle those goods or see those customers. CUC's headquarters in Stamford,
Connecticut, and HFS's headquarters in Parsippany, New Jersey, are both
nondescript buildings that house cubicled employees answering phones and
working on computers. Likening CUC to a MASH unit, Forbes says, "the company
can move out of here tomorrow."
Silverman, meanwhile, doesn't even work in Parsippany, preferring to plant
his desk and secretary in posh offices in Manhattan. While both CEOs intend
to stay put and retain all of their combined 50,000 employees, Forbes is
certain that the merged CUC-HFS entity will continue to shun owning any
capital assets such as real estate, plants, and machinery that clog up other
businesses' balance sheets and depreciate over time. The grand plan is to
keep the combined corporation completely virtual, while greatly expanding its
scope. "I feel very comfortable," Forbes explains, "working in a company
where you can't touch anything."
[BOX
- -----------------------------------------------------------
BY FALL 1999, FORBES EXPECTS NETMARKET TO OFFER 95 PERCENT
OF ALL PRODUCTS SOLD TO THE AVERAGE AMERICAN HOUSEHOLD.
- ------------------------------------------------------------]
The merged virtual entity has been christened Cendant Corporation. The
name, invented from thin air by a consulting company, draws on a Latin root
meaning "to ascend," and the new corporate identity is supposed to gain
recognition, awareness, and meaning over time. But if the past is any guide,
profits will slope upward much more quickly than the company's public
profile. Most people will continue to be unaware of Cendant's existence, even
though the conglomerate will be collecting detailed, intimate data on
hundreds of millions of consumers around the world.
WIRED NOVEMBER 1997
<PAGE>
ONE-CLICK SHOPPING
Back in the early 1980s, during the ill-fated videotext craze, Forbes learned
some basic lessons about doing business in a purely information-based
economy, including one that many Web entrepreneurs are now learning the hard
way. He saw that when big department-store chains put their catalogs online,
complete with price listings, a funny thing happened. "Five guys selling TVs
post their prices, then one guy goes down in price, then the other goes down,
then they all pull out because no one can make any money," Forbes says. "The
last thing retailers want is perfect information. Retail transactions can
work for physical stores in a town. Even if I know that there may be a lower
price 10 miles away, I may not drive there." But when comparative price
shopping involves just a few clicks of the mouse, the consumer will almost
always find the best deal.
[BOX:
- ---------------------------------------------------------
FORBES'S ONLINE PRICING PHILOSOPHY:
"IT'S WHOLESALE AND UNDER."
- ----------------------------------------------------------]
<TABLE>
<CAPTION>
$22 BILLION $32 BILLION* $38 BILLION* $136 BILLION*
<S> <C> <C> <C>
'97 '99 '00 '07
CUC agrees to merge with netMarket sells 95 Forbes and Silverman, Electronic commerce,
HFS in an $11 billion percent of the now chair and CEO, according to Forbes,
stock swap. After the products a typical switch jobs. accounts for more than 20
merger is completed in American family would percent of the retail
October, the newly buy. industry.
formed Cendant has a
combined valuation of
$22 billion.
</TABLE>
- ------------
* Analyst projections assume a 20 percent annual growth rate.
Most entrepreneurs now on the Web still seem to believe that prices for
goods sold online should be about the same as they are elsewhere. Forbes,
meanwhile, is working under an entirely different assumption. "It's! Not!
Retail!" he declares. "Not as long as we're there. It's wholesale and under."
There may be a few opportunities for selling specialty items, such as
choice wines, at premium prices. But, Forbes says, when it comes to the more
well-known, commodity purchases that make up most of the current retail
economy, competition in electronic commerce will be brutal. "The Internet
will not be an entrepreneurs' haven," he asserts. "There may not be any
barriers to entry on the Web, but there are huge barriers to profits. It will
make the restaurant business look stable by comparison."
He predicts that sales in the Web economy will be even more concentrated
than they currently are in the increasingly concentrated retail marketplace."
At most, 10 companies will have 80 percent of all the business. It could even
be five companies, because scale, as materialized by price, is going to be so
incredibly important."
This past summer, Forbes took a giant step toward making good on his
prediction. With hardly any hype, promotion, or advertising, CUC relaunched
its Web site as netMarket, an aggregation of many previously separate sites
and buyers clubs including the AutoVantage car shopping service and Travelers
Advantage, its comprehensive virtual travel agency. Instead of just 250,000
items ranging from home appliances to computers to luggage to electronics to
sporting goods to gifts to home improvement and gardening items, Forbes
boosted the total number of products to more than 1 million.
New under the netMarket umbrella is CUC's online bookstore, called Book
Stacks, along with an expansive record store, Musicspot, and a live auction
site. Access to everything is now available for a single $69 annual
membership fee.
By fall 1999, Forbes says, netMarket expects to offer "95 percent of the
products that a typical household would buy," up from about 20 percent now.
"That means we have to get into the grocery, clothing, and drugstore
business, too. A whole family should be able to go in there and be able to
find most anything they'd like at the best price."
[BOX:
- ---------------------------------------------------------
TO REINFORCE SHOPPER LOYALTY, CUC INTRODUCED ITS OWN
CURRENCY, NETMARKET CASH, A FREQUENT-BUYER DISCOUNT ON
FUTURE PURCHASES.
- ----------------------------------------------------------]
To reinforce loyalty among its shoppers, CUC introduced its own currency,
based on the premise of frequent-flyer points. Called netMarket Cash, it's a
system under which shoppers get back about 5 percent of their purchase as
points in their account. If someone spends, say, $300 for a camcorder, 15
points are added to their balance. Customers can look up their balances
online and, of course, use those accumulated points to buy more merchandise.
This new, proprietary currency fortifies the basic mechanism behind
netMarket: Instead of
WIRED NOVEMBER 1997
<PAGE>
CUC
making sales pitches, the service provides consumers with incentives. CUC not
only makes virtually no money on the transactions, the company doesn't care
what you buy or even if you buy. So, while most of the millions of Web sites
have serious trouble attracting repeat visitors, CUC provides a reason for
repeat visits. If you have already paid for your membership, you now have an
incentive to use it as much as possible. The attention problem that plagues
most online ventures is solved.
It's why Forbes is quick to dismiss a suggestion that what he's creating
is a Web version of Wal-Mart. "The average Wal-Mart sells, what, 50,000
items?" he asks, with a hint of indignation in his voice. "We are over 1
million, growing to 2 or 3 million. Wal-Mart is a retailer. They sell. We
don't sell. You pay us a membership fee, and we help you buy. We're on your
side. They have inventory. We don't. If, as a retailer, I have 100 Panasonics
sitting in my back room, I'm going to say, 'Hey guys, push the Panasonics.'
We don't do that. No one is going to pay a membership fee if they get the
hard sell."
And CUC has collecting membership fees down to a science. In its
traditional telephone/catalog shopping business, CUC doesn't make any money
on the $49 fee in the first year. It costs $49 in marketing costs to obtain
that customer, plus another $9 to service that customer through 800-number
sales and support lines. But in the second year, because the initial
marketing costs go away, that initial loss (the service fee plus an
additional $10 commission) turns into a $30 profit. And 70 percent of its
members renew every year, in part because the fee is cleverly and
automatically billed to their credit card. If a customer takes the trouble to
call and quit, the CUC telephone operator goes into what any football fan
would recognize as a prevent defense. The operator frantically starts
explaining the value of the service, then often sacrifices a $20 coupon or
check as a bribe to stick around. They will give up ground, but do anything
to keep you from reaching that goal line.
Electronically, the economics are even better. Forbes expects to have more
than 1 million online members by the fall of 1998, up from 350,000 at the
beginning of 1997. But the company hasn't been spending any money to recruit
these interactive shopping club members. (Although it did promise $50 million
in deferred commissions to America Online for exclusive placement as an
anchor tenant in AOL's online shopping area.)
For now, CUC simply plans on encouraging its existing telephone members to
switch over to its Web or AOL services. Online shoppers, CUC has found, buy
as much as three times more than traditional members. Also, their renewal
rate, at 77 percent, is higher. And since the costs of servicing them are
less than half - between $2 to $3 each per year - the revenue generated
from online commerce is almost pure profit.
So far, netMarket has produced some startling results. Forrester Research
had forecast that total online sales of goods and services to US consumers
would amount to $1.1 billion in 1997. That prediction, it turns out, was
woefully off base, as netMarket's sales alone will surpass the entire
industry forecast. With monthly online volume now averaging $100 million, and
with CUC expecting a strong Christmas season, netMarket should handle $1.5
billion in transactions this year, according to Forbes, nearly triple its
1996 total.
"THINK OF A PHYSICAL RETAILER AS THE COMPETITOR, WHICH IS FUN, BECAUSE
THEY'RE NOT TOUGH. THEIR COSTS ARE UP, WHILE OURS ARE DOWN."
The largest chunk of that money is the brokering of car purchases through
AutoVantage, which is now generating 4,000 new vehicle referrals per month.
(Add that to the projected sales driven by online competitor Auto-By-Tel, and
US consumers will have purchased more than $5 billion in new vehicles using
the Internet this year.)
Forbes's years of persistence finally seem to be paying off. The online
dream, he insists, is now an inevitability. "It's a sure thing," he says. "If
you think of a physical retailer as the competitor, which is fun to do,
because they're not very tough, their basic costs - bricks, mortar, real
estate, people, taxes, health care - are all going up. Our basic costs -
communications, database, hardware - are all going down. The advantages of
interactive shopping are getting greater."
If the future Forbes predicts comes to pass, it has serious implications
for the economy at large: he foresees electronic commerce capturing 20 to 25
percent of the gargantuan, $2 trillion-plus retail-industrial complex within
10 years.
What will happen to conventional stores? "Twenty to 25 percent of them
just go away," he says, pointing to a list of recent bankruptcies and
closings, such as Montgomery Ward, Woolworth's, Caldor, and Bradlees. "Or
they adapt," he says. "Malls are already becoming entertainment, baby-sitting
sorts of places. The amount of food and fun is going up, and the amount of
product is going down. They are already responding to a future that's not
even here yet."
<PAGE>
Meanwhile, cyberspace becomes the place where more and more people
actually do comparison shopping and purchasing. Instead of a retail economy
in which value is added on a physical level, we're shifting to a wholesale
economy in which value is added on a digital level. It's a completely
different animal.
CO-CEOS?
On a personal level, what seems to drive Walter Forbes is winning the
respect and admiration of his fellow CEOs. Like an ace pitcher who most
relishes playing in the All-Star Game, Forbes is constantly mentioning how he
golfs, dines, and rubs elbows with the corporate elite. He likes to drop the
fact that he and his wife socialize with Mr. and Mrs. Jack Welch, of General
Electric fame. His favorite high-powered powwow is gadfly Herbert A. Allen's
annual Sun Valley conference - a summer camp for CEOs. "When I first
introduced the netMarket concept in
WIRED NOVEMBER 1997
<PAGE>
CUC
a Sun Valley speech a couple years ago," he reminisces, "Bill Gates was in
the audience rocking back and forth, taking notes."
With the HFS merger, Forbes now considers himself in the big leagues, a
bona fide member of what could be called the 20-20 club. "There are only
seven companies in the US with market caps greater than $20 billion that are
able to grow their earnings 20 percent or better each year," Forbes crows,
referring to a list that includes Microsoft, Intel, Disney, Cisco, and
Oracle. "Now we're the eighth."
But the CUC-HFS marriage could be rocky, especially if Forbes and
Silverman end up disagreeing on major points of strategy. One possible
sticking point is acquisitions. Forbes believes that Cendant should be able
to generate plenty of internal growth, and will therefore do "fewer and
smaller" acquisitions. In the past, Forbes has done small deals, mainly for
strategic purposes. For instance, he recently purchased the leading position
in entertainment and education software, buying Sierra On-Line, Davidson,
Knowledge Adventure, and Blizzard Entertainment in rapid succession. Forbes
sees CD-ROMs as an interim medium for games and programs such as Battle.net,
Diablo, Math Blaster, and JumpStart Preschool.
THE EASY MELDING OF CUC AND HFS IS FAR FROM CERTAIN. BOTH CEOS ARE
STRONG-WILLED. ONE POTENTIAL STICKING POINT: ACQUISITIONS.
The plan is to make such software available at mega-Web sites for both the
education and entertainment industries. "We're consolidating commerce right
now," he says. "The next thing we'll do is consolidate entertainment."
By contrast, Silverman seems to love the pure art of the deal. On the day
that the CUC-HFS merger was announced, an exuberant Silverman appeared live
with Forbes on CNN's Moneyline, in an interview shot from the offices of Bear
Stearns, which has made a mint doing Silverman's investment banking. "We are
now twice as big," Silverman told host Lou Dobbs, "which means we can make
acquisitions that are twice as large."
A potential two-headed monster, Cendant will not only retain dual
headquarters but will have two Number One executives. Under a highly unusual
arrangement, Forbes becomes chair and Silverman becomes CEO. Then, come
January 1, 2000, they switch jobs.
Meanwhile, the combined Cendant board of directors, comprising 15 members
from each side, promises to be an unwieldy mammoth in and of itself. All big
decisions must first be approved by an 80 percent majority of the board,
essentially giving both sides veto power over the other. If Silverman and
Forbes can't come to terms on whether to do a major deal, this could very
well be a formula for boardroom gridlock.
If history is any quide, however, Forbes will overcome any conflict or
obstacle the way he always has - with sheer persistence. It's been nearly a
quarter century since his original epiphany about doing away with traditional
retail. Now, the netMarket plan is "exactly what we talked about at dinner in
Cambridge that night," he says.
But he's still a ways away. After all, he says, most of the consumers he
wants to do business with online have yet to even log on to the Internet. And
HFS's Middle American customers, the ones who stay at HoJo and Super 8, don't
even own personal computers yet.
At the end of a long day at his Stamford office, Forbes is late for an
important dinner engagement. Yet he doesn't seem in a hurry. Sporting short
silvery hair, he saunters over to the third-floor elevator, drops down to the
parking level, climbs into his white Range Rover, and zips out into the warm
summer evening, only to be stopped cold at red light aback a long line of
rush-hour traffic, where he waits patiently for his chance to move.
WIRED NOVEMBER 1997
<PAGE>
Goldman, Sachs & Co. Investment Research
Cendant Corporation (Part 1 of 3)
* * Great Entry Point in Front of Positive Catalysts * *
Steven Kent, CFA (New York) 1-212 902-6752 - NY Equity Research
Victor E. Mandel, CFA (New York) 1-212 902-6789 - NY Equity Research
====================== NOTE 2:34 PM January 22, 1998 ==========================
Stk Latest 52 Week Mkt Cap YTD Pr Cur
Rtg Close Range (mm $) Change Yield
--- ------ ------- ------- ------ -----
Cendant Corporation PL 34.81 35-19 28207.8 1% 0.0%
------------------ Earnings Per Share ---------------------
CD Mar Jun Sep Dec FY CY
1998 FY 1.28
1997 FY 0.19A 0.25A 0.28A 0.27 1.00
1996 FY(A) 0.14 0.17 0.21 0.18 0.70
-Abs P/E on- -Rel P/E on-- P/NxtFY LT EPS
Cur Nxt Cur Nxt EBITDA GROWTH
------ ------- ------ ------- -------- --------
CD FY 34.8X 27.2X 1.7X 1.4X NA X 25%
===============================================================================
* We maintain our Priority List rating on shares of Cendant. Our 1997, 1998
and 1999 estimates are $1.00, $1.28, and $1.58, respectively, and our
12-month price target is $43.
* We are reiterating our favorable rating on Cendant as it is a high growth,
high margin business with internal growth of 20-25% and low valuation
relative to other large-cap consumer products/services companies. At a P/E
to growth multiple of 1.4, we believe the shares are very attractive.
* Near term catalysts for share outperformance include: 1) an expectation that
Q4 results may exceed estimates; 2) management will become much more
visible to investors over the next couple months; 3) our expectation of a
potential share repurchase given the company's cash flow characteristics
and undervaluation; 4) additional additive acquisitions are possible
given management's affinity towards earnings positive transactions; and 5)
minimal exposure to Asia.
* Cendant's internal growth opportunities are significant with the tremendous
synergies created between the marketing capabilities of membership division
and the expansive franchise systems in both the travel and real estate
divisions. In addition, the margin expansion potential is significant across
all lines with a high level of operating leverage.
===============================================================================
1) INVESTMENT SUMMARY - BUY CENDANT. We continue to recommend purchase of
<PAGE>
Cendant and it remains on our Priority List. Our 1997, 1998 and 1999 EPS
estimates are $1.00, 1.28 and $1.58, respectively. By focusing exclusively
on high growth, high margin, consistent consumer and business services with
a high percentage of recurring revenues and modest capital expenditure needs,
Cendant has created one of the best business models we have come across. We
expect the company to sustain internal growth of 20-25% over the next few
years, but with share buybacks and acquisitions expected an additional 5-10%
to growth is likely.
We would use the current pause in the stock's trajectory to build and initiate
positions in Cendant. There are a number of near term positive catalysts
ahead, and with the stock at 27 times 1998 EPS, the shares look attractive.
The stock is trading at 1.4 times its growth rate which is low in contrast
to a peer group of large cap consumer growth stocks which are trading at 1.9
to 3 times their growth rates. CU and HFS historically traded at multiples
of 30 times forward earnings and we expect the combined entity multiple to
expand to this historic level, however our conservative 12-month price target
of $43 assumes that we apply the current multiple to our 1999 forecast.
VALUATION OF LARGE CAP CONSUMER PRODUCT COMPANIES
Price P/E Growth P/E to
1/21/98 1997 1998 Rate Growth
------- ---- ---- ------ ------
CD $34.81 34.8X 27.2X 25% 1.4
KO 65.50 44.9 39.2 15 3.0
PEP 37.00 33.6 27.4 15 2.2
PG 81.00 31.0 27.7 13 2.4
MCD 47.38 20.2 18.2 11 1.8
CL 70.00 28.9 25.5 13 2.2
GE 75.56 30.1 26.5 13 2.3
We point out management has consistently delivered better than expected results
and Cendant is a cash flow machine currently generating $1.3 billion in free
cash annually and an expected ROE above 25%. We continue advocate aggressive
purchase of Cendant shares, and it is our number one stock pick for 1998.
2)KEY REASONS FOR SIGNIFICANT NEAR TERM OUTPERFORMANCE. There are a number of
reasons for our expectation of significant outperformance. First, we expect
fourth quarter results (release date February 4) to be modestly better than
current estimates ($0.27 vs. $0.18) and investors will be surprised by the
strength of the combined results. This will be the first quarter that Cendant
results will reflect the merger and it will allow investors to clearly see
the combined HFS/CUC earnings power and growth model. In addition to a
potentially better than expected earnings release, there are a number of other
positive catalysts ahead.
A second positive catalyst is management will be speaking at a number of
investor conferences over the next two months including the Goldman Sachs
Technology conference on Feb 13, 1998. Third, they will likely be holding an
investor day in NY sometime during the first quarter. Fourth, given the cash
flow generation and low valuation we believe they could initiate a share
buyback sometime in first half of 1998. Fifth, new additive acquisitions
could be also be announced during 1998 given management's penchant for
earnings positive transactions. These activities raise the company's
profile and/or increase earnings estimates.
<PAGE>
Cendant's Internet commerce site, NetMarket, ended 1997 with approximately
700,000 members. We believe last month's announcement of Cendant's Netscape
alliance to drive Internet traffic to NetMarket is an indication that Cendant
will start to support NetMarket with an aggressive marketing campaign. This
will highlight NetMarket's very competitive and compelling offering to both
consumers and investors.
3) UNDERESTIMATING INTERNAL GROWTH POTENTIAL. Investors are underestimating
the internally-generated top-line growth story. They still believe this is
a growth-by-acquisition story. But it is clear by doing a detailed model
(which we can send to interested investors) that a 18-22% growth rate can
be achieved with current operating segments. A key driver of revenues is
new membership product introductions, new distribution channels, and increased
penetration of customer lists. The 'free access' to the 100 million lodging,
rental car, mortgage, and real estate customers generated by Cendant's real
estate and travel division will be a significant source of new revenues for
its membership divisions.
Other sources of near term growth for Cendant Mortgage (PHH) is the massive
amount of refinancing activity due to lower interest rates along with referrals
from Cendant's real estate brokerage franchisees. Hotel franchise sales will
also increase as times get tougher in the lodging sector and as independents
and hotels affiliated with less dominant brands search out the stronger
Cendant brands. Finally, Cendant's Avis rental car is benefiting from some of
the highest rate increases in 20 years, according to our auto rental analyst
Meg Saegebarth.
All in all, we believe Cendant has the recurring revenue potential, unit
growth opportunities, and positive industry dynamics to allow it to sustain
top line growth.
4) CROSS MARKETING OPPORTUNITIES. The combination of CUC and HFS into Cendant
has created a direct marketing powerhouse with CUC now able to sell its services
that have so far attracted almost 75 million annual members to the 100 million
customers of HFS' different brands. Cendant will now mine its direct marketing
approach by focusing on each individual to better coordinate the marketing of
all its services. Most importantly, the ability of Cendant to now market
directly to its hotel customers will save Cendant 20% of the membership fee
previously paid to the affinity partner.
New marketing approaches that we expect Cendant to pursue include greater
use of continuity offers (i.e. the book of the month club) and soliciting
customers when they call to activate their credit card, book a hotel room or
buy a house. New distribution channels that are promising over the next 12-24
months include the local telephone market, utilities, European and Asian
banks. We also expect Cendant to market its many services during most aspects
of one's stay at a Cendant franchisee's hotel.
The following are some examples of new marketing, distribution and product
initiatives that Cendant has implemented or is actively exploring:
(A) Customers making a reservation checking into Cendant franchised Ramada,
Super 8, Howard Johnson or Days Inn will be offered in opportunity to sign
up for Cendant's travel club. Invitations/promotions on the room key (such
as a free hotel night or $20 gas for calling sign up number) may be another
way to access the travel customer. So far, Cendant has found that customers
calling for a reservation or checking in have a higher penchant for signing
up for the service and renewal rates have been better. These customers
already have shown they have an interest in traveling and likely have their
credit card available if they are making a reservation or checking in.
<PAGE>
(B)We expect Cendant to roll out a family software continuity program, a
'business advantage' program targeting small businesses, and low-cost trial
software CD's which need to be 'unlocked' at full price for full functionality.
(C) Project Powerup is a $70 million investment in distributing front desk and
property management programs to Cendant's hotel franchisees. The computer
will be free to the franchisee and will assist the hotel owner in ordering
product, yield management, reservations, labor management and other operating
activities. Cendant will be able to gather more information on customers as they
check-in. Previously, Cendant only consistently gathered information on
individuals making reservations and did not capture walk-in/drive-in customers
who consistently are a significant portion of guests. A similar real estate
franchisee office system may also be rolled out.
(D)There appears to be no shortage of unique distribution channel
opportunities. For example, pursuing customers who call in for product
registration, credit card activation, confirmation of receipt of personal
check or who are put on hold waiting for a customer service representative
are all potential areas for Cendant to engage the customer and try to sell
them memberships.
5)HIGH MARGIN EXPANSION POTENTIAL. Cendant has an almost infinite margin
expansion story that is not widely recognized, which again following the
first combined earnings release will become apparent. There is substantial
operating leverage in the franchise business. Royalty revenues are nearly
pure profit with little expense associated with either same store sales or
unit growth.
The membership business, because of the high percentage of recurring revenues
due to renewals, also has significant operating leverage. Given the economics
of these operations, EBITDA margins are expected to grow 480 basis points in
1997 and 200 basis points in 1998. This is the best margin expansion story in
our universe.
6)INSULATED FROM ASIA. Cendant's earnings are generated predominantly in the US
with international only accounting for 5-10% of revenues. As investors search
for primarily US-based earnings given the difficult economic environment in
Asia, we suspect they will be attracted to Cendant. There are very few 25%
growth stories in the market with the liquidity of $31 billion market cap that
are as insulated from the Asian economic crisis.
7)HIGH CONSUMER AWARENESS AND LEAD POSITION IN MARKET. Cendant has terrific
consumer presence with some of the most recognized brands in the marketplace
(Avis, Century 21, Ramada, Days Inn). Furthermore, they are the dominant player
(the number-one or -two spot) as they are largest hotel company, second
largest car rental company, number-one in-bound mortgage marketer and number-
one timeshare-exchange company.
8)RELATIVE VALUATION IS ATTRACTIVE. We believe Cendant shares are attractively
valued relative to its growth prospects and stock comparables. The shares
are trading at 27 times our 1998 estimate which is 1.4 times its expected
growth rate of 25%. In contrast, large cap consumer product/growth stocks like
Gillette, Coca-Cola, PepsiCo, Procter and Gamble, McDonald's and General
Electric trade at 1.9 to 3 times their growth rate. Cendant free cash
generation (estimated to be $1.2-$1.3 billion in 1998) and ROE of over 25% is
even stronger than its peer group.
<PAGE>
9)CONCLUSION - BUY CENDANT. This is one of the best business models we have
come across with high internal growth, high margins, high cash flow and no
cap ex. Management is as driven and focused on stock price and earnings growth
as ever before. Both CU/HFS shares lagged the market in 1997 and its valuation
is low relative to its peers and historic range. The branded consumer dominance
and earnings consistency makes Cendant attractive for large cap growth managers.
With positive catalysts ahead, we would begin building and adding to positions
now.
Important Disclosures (code definitions attached or available upon request)
CD : M, CF, CD
=================== Further Information ================
This investment commentary was made available on the Goldman, Sachs & Co.
Research Xpress at 14:37 New York time on 1/22/98.
Please contact your Goldman Sachs representative for additional details.
(C) Copyright 1998 Goldman, Sachs & Co.
<PAGE>
For Immediate Release
CENDANT RESPONDS TO AMERICAN BANKERS AND AIG
--------------------------------------------
STAMFORD, CT and PARSIPPANY, NJ, February 6, 1998 -- In response to the press
release issued today by American Bankers Insurance Group Inc. (NYSE: ABI),
Cendant Corporation (NYSE: CD) said, "We are gratified that notwithstanding
the contractual constraints placed upon the ABI Board, it clearly could not
continue to fully support AIG's $47 bid in the face of our superior $58
proposal.
"We stand ready to meet with the ABI Board and its advisors to provide
requested information about Cendant and our proposal. Unfortunately, the ABI
Board has entered into a contract with AIG that ABI has described as
precluding it from entering into discussions with any party other than AIG.
"Nevertheless, we can publicly address the specific issues raised by ABI and
point out that:
o Cendant is a financially strong builder of companies, with a market
capitalization exceeding $32 billion. We enjoy an investment grade rating of
A from three separate rating agencies, which compares with ABI's lower
ratings.
o Cendant's business plan for American Bankers, like all of our acquisitions,
is for accelerated growth as a member of the premier direct marketing
company in the world. This is our comparative advantage. Considerable
benefits would result from combining the direct marketing strengths of
Cendant and ABI by providing Cendant's formidable distribution channels to
ABI for the sale of its products, as well as utilizing ABI's existing
distribution channel for Cendant's broad array of products and services.
o Cendant stands able and ready to infuse ABI or its subsidiaries with
appropriate capital for growth."
With respect to the lawsuit filed by AIG today, Cendant said, "We will file a
registration statement with respect to the shares we would issue in
connection with our proposal in a timely fashion, when appropriate. This
issue, like the canards and misinformation contained in today's full page AIG
advertisement and the baseless litigation filed by AIG which we will
vigorously contest, are simply distractions from the major issue. WHAT IS
IMPORTANT IS THE VALUE DELIVERED TO ABI SHAREHOLDERS. WE CONTINUE TO
BELIEVE THAT SHAREHOLDERS SHOULD HAVE THE OPPORTUNITY TO RECEIVE THE
HIGHEST POSSIBLE VALUE FOR THEIR SHARES AS REPRESENTED BY THE CENDANT
OFFER."
<PAGE>
Cendant's proposal to acquire American Bankers is for $58 per share in cash
and stock, for an aggregate of approximately $2.7 billion on a fully diluted
basis, 23% more than the American International Group proposal.
Cendant (NYSE: CD) is the world's premier provider of consumer and business
services. With a market capitalization of approximately $32 billion, it ranks
among the 100 largest U.S. corporations. Cendant operates in three principal
segments: Membership, Travel and Real Estate Services. In Membership Services,
Cendant provides access to travel, shopping, auto, dining, and other services
through more than 73 million memberships worldwide. In Travel Services, Cendant
is the leading franchisor of hotels and rental car agencies worldwide, the
premier provider of vacation exchange services and the second largest fleet
management company. In Real Estate Services, Cendant is the world's premier
franchisor of residential real estate brokerage offices, a major provider of
mortgage services to consumers and a global leader in corporate employee
relocation. Headquartered in Stamford, CT and Parsippany, NJ, the company
has more than 35,000 employees, operates in over 100 countries and makes
approximately 100 million customer contacts annually:
<TABLE>
<CAPTION>
<S> <C> <C>
Investor Contact: Media Contact: or:
Laura P. Hamilton Elliot Bloom Roanne Kulakoff/Jim Fingeroth
Senior Vice President Vice President Kekst and Company
Investor Relations Public Relations
and Corporate Communications (973) 496-8414 (212) 521-4800
(203) 965-5114
</TABLE>
Cendant and certain other persons named below may be deemed to be
participants in the solicitation of proxies in opposition to the proposed
merger of American Bankers and a subsidiary of AIG which will be sent to
shareholders of American Bankers promptly after it is finalized in
accordance with the Federal securities laws. The participants in the
solicitation of proxies in opposition to the proposed AIG merger include the
directors of Cendant: Walter A. Forbes, Henry R. Silverman, James E. Buckman,
Bartlett Burnap, Leonard S. Coleman, T. Barnes Donnelly, Martin L. Edelman,
Frederick D. Green, Stephen A. Greyser, Dr. Carole G. Hankin, Stephen P.
Holmes, Robert D. Kunisch, Christopher K. McLeod, Michael P. Monaco, The Rt.
Hon. Brian Mulroney, P.C., LL. D., Robert E. Nederlander, Burton C. Perfit,
Anthony G. Petrello, Robert W. Pittman, E. John Rosenwald, Jr., Robert P.
Rittereiser, Stanley M. Rumbough, Jr., Leonard Schutzman, E. Kirk Shelton,
Robert F. Smith, John D. Snodgrass, Craig R. Stapleton and Robert T. Tucker;
and the following officers of Cendant: Samuel L. Katz, Cosmo Corigliano,
John Fullmer, Laura T. Hamilton, Elliot Bloom, Ronen Stauber, Eric J. Bock
and Cindy C. Hodnett. Certain directors of Cendant are also officers of
Cendant. Cendant may contact holders of shares of American Bankers preferred
stock and common stock by mail, telephone, facsimile, telegraph, the
Internet, newspapers or other publications of general distribution and
personal interviews.
As of the date of this communication, the directors and executive officers of
Cendant do not beneficially own any of American Bankers' equity securities.
Cendant is the beneficial holder of 371,200 shares of American Bankers common
stock and 99,900 shares of American Bankers preferred stock.
