Most Expect Cendant to Ride Financial Storm
Employees of the former CUC International, which merged with HFS Corp. in December to form Cendant, Parsippany, NJ, are said to have recorded membership revenues while delaying expenses, resulting in an overstatement of 1997 earnings by as much as $115 million.
On April 16, Cendant shares plunged $16.56, or about $15 billion, to $19.06 after the irregularities were announced, but recent actions to restore credibility in the $11 billion company have propped up the share price. Cendant closed April 22 at $22.25, down $1.56.
Last week, the company completed a management shakeup of its former membership division, now called the Alliance Marketing Division, by naming Michael Wargotz to the newly created position of chief financial officer. Wargotz joins three other executives recently named to run the new division. In addition, Cosmo Corigliano, CUC's former CFO, was terminated April 17, earlier than his effective resignation date. The company also is conducting an internal audit and expects to release preliminary findings in May.
Meanwhile, Cendant has received confirmation from its banks of a $3.5 billion line of credit, and the company issued assurances that the acquisitions of National Parking Corp. Ltd., London, and American Bankers Insurance (ABI), Miami, will continue.
"Cendant remains a financially strong and liquid company and remains committed to completing all of its pending transactions,'' president and CEO Henry Silverman said in a prepared statement.
Industry watchers confirmed Silverman's assessment.
"They are doing so many things right that they can recover if they can prove that revenues are accelerating,'' said merger and acquisition consultant David Greenspan of Clemente, Greenspan & Co., Glen Rock, NJ. "Most merged companies look to cut costs. Cendant's priority has been to drive cross-selling profits.''
Because the accounting irregularities only occurred in Cendant's membership division, which accounted for 28 percent of 1997 earnings, Merrill Lynch vice president Mark Miller is bullish on the company as a whole.
"The profit of travel, real estate and other services is not at issue here. Actually, the fundamental growth of these businesses appears quite strong,'' Miller wrote in a rating report. "We believe the company has considerable value in its brands, strong free cash flow and obvious breakup value, if that is necessary.''
Breakup of the merger is a possibility, albeit a slight one, according to Ed Shea, an expert on securities law with the law firm of Windels, Marx, Davies and Ives, New York. Typical merger agreements contain a lengthy list of conditions and warranties that if violated could void the merger. Minor breaches may carry a small liability, however, as Shea said, "if there were material breaches, a buyer could go back and seek a reversal. It's fairly rare because it may be impossible to unscramble the egg.''
Shareholders could ask for reversal, but that also is unlikely. A series of class-action lawsuits has been filed in U.S. District Court in New Jersey and Connecticut on behalf of shareholders who purchased the stock of Cendant, CUC or exchanged HFS for Cendant stock between May 28, 1997, and April 15, 1998. These suits charge that Cendant and CUC issued false and misleading financial statements that overstated earnings and seek only cash damages.
Jeffrey Block of Berman, DeValerio & Pease, Boston, one of several law firms representing the class, said the plaintiff is suing for the difference between the stock price at time of merger and what it is today. Block said there is no way these suits would undo the merger.
Legal action also could be taken against Silverman and Cendant chairman Walter Forbes if investigations should show that their sales of stock before the report of irregularities were driven by insider information or violated other regulations. Silverman is reported to have sold 1.7 million shares at more than $36 per share in February and Forbes 300,000 at more than $37 per share in March, according to the Washington Service, which monitors filings with the Securities and Exchange Commission.