Conglomerate Reverses Field; Plans Breakup (NYTimes, 10/24/05)
October 24, 2005
Conglomerate Reverses Field; Plans Breakup
By ANDREW ROSS SORKIN
Cendant, the $18 billion conglomerate that was built through the acquisitions of dozens of the nation's most prominent businesses like Century 21, Avis, Days Inn and Orbitz, is planning a radical breakup into four different companies.
The move, which Henry R. Silverman, Cendant's chairman, said the company planned to announce today, is perhaps the most vivid acknowledgment that the latest era of conglomerates built through mergers and acquisitions may be over.
Under the plan approved by Cendant's board yesterday, the company will be divided into four parts - one each for Cendant's real estate, travel distribution, hospitality and vehicle rental businesses. Each unit will be spun off into a separate publicly traded company. Current Cendant shareholders will receive shares in each and will continue to receive dividends. For customers and employees, the change should mean little, at least in the near term.
Cendant's decision to pursue a breakup comes about six months after Viacom announced plans to separate CBS and its cable television companies into two, reversing an all-under-the-same-roof strategy that created one of the world's most powerful media conglomerates. Similarly, Time Warner, which merged with America Online in 2000, is now entertaining offers for its AOL unit, potentially reversing what has been decried as perhaps the worst merger in modern history. The breakup of big conglomerates like Cendant is being driven in large part by investors' newfound desire for companies to be more focused and narrow - what bankers and analysts like to call "pure plays" - as opposed to large empires with disparate businesses. The stock prices of many big companies, like General Electric and Citigroup, have suffered in recent years, and some analysts attribute their sluggishness to what is often called a "conglomerate discount."
And of course, it is a long-held tradition on Wall Street to build up big companies (garnering fees along the way) and then disassembling them (garnering even more fees).
For Cendant, which also owns the Budget rental car system, Ramada and Super 8 hotels and the Coldwell Banker real estate business, among others, the breakup is a complete about-face aimed at reviving its lagging stock price, which has remained stagnant ever since the company merged with CUC International in 1997. It was later discovered that CUC had been involved in what was then considered the largest accounting fraud in history. Cendant's stock price has hovered from $20 to $25 over the last two years and closed Friday at $20.90 a share.
The decision to split up the company was made by Cendant's management team, which is led by Mr. Silverman, who built the business through an acquisition spree beginning in 1990. In an interview yesterday at Cendant's office with sweeping views of Central Park, Mr. Silverman said the decision to undo what he had so painstakingly put together was difficult, but said that he believed it was the right thing to do for shareholders.
Mr. Silverman, the company's largest shareholder, called his conglomerate strategy a "financial success, but a stock market failure," noting that the company is financially strong, but that investors have not rewarded the company's stock price.
"You can have a great business strategy, but if it's not moving the stock price, it's not working," he said. "This is a classic case of the sum of the parts is worth more than the whole."
Mr. Silverman said he planned to run one of the companies, in effect demoting himself. He has chosen the travel distribution company, which he has been building up in recent years with the acquisitions of Orbitz, Cheaptickets.com and Galileo International, an electronic network for travel agents.
More remarkably, Mr. Silverman, who has long been criticized for his compensation packages, said he planned to work for free. Mr. Silverman, who is estimated to have made $36.6 million in salary and bonus and reaped $223 million from exercising options between 1998 and 2002, said he would not accept a salary so that investors could not accuse him of trying to use the breakup to enrich himself.
"I want to take the issue off the table," he said. "I'm going to work for nothing." Of course, as a large shareholder, if his breakup plan helps lifts the company's share price, he would be handsomely rewarded.
While it is unclear how the stock market will react to the breakup, some analysts have been calling on the company to break itself up. Just about a month ago, Michael Rietbrock, an analyst at Citigroup, wrote in a note to investors that "we're not sure there's any way around splitting the company."
Still, not all breakups or spin-offs have worked. Viacom's stock price, for example, has not moved much higher since it announced its plan to split in two, leading some investors to question whether such moves really "unlock shareholder value." Even Mr. Rietbrock mentioned in his note about Cendant that, "we're typically cynical of financial engineering that only rearranges the pieces of the puzzle."
However, Mr. Rietbrock and Cendant may have reason to believe that its split will increase the company's share price. Over the past year, Cendant has spun off three different units; in both cases, investors benefited. Other historical examples, like the breakup of Dun & Bradstreet, resulted in huge gains.
Of course, there is a strong possibility that the units might quickly be gobbled up by suitors after they are spun off. Cendant's rental car businesses are seen as an especially attractive target for private equity firms; Hertz was just acquired by a consortium of buyout firms for $15 billion. It is unlikely any of the units will be purchased before they are spun off into separate companies because there would be significant tax consequence for any buyer.Cendant is being advised by Evercore Partners and JPMorgan in this transaction, and its outside legal counsel is Skadden, Arps, Slate, Meagher & Flom.
The four new companies will be led by teams drawn from Cendant's current senior leadership. Richard A. Smith will be chief executive of Real Estate Services, with Mr. Silverman serving as non-executive chairman. At Travel Network, Mr. Silverman will serve as chairman and chief executive. Hospitality will be headed by Stephen P. Holmes as chairman and chief executive. Ronald L. Nelson will lead Vehicle Rental Services as its chairman and chief executive.
Mr. Silverman was asked whether he would pursue the same conglomerate strategy if he could do it all over again. "Who knows?" he said. "It's woulda, coulda, shoulda."
Conglomerate Reverses Field; Plans Breakup
By ANDREW ROSS SORKIN
Cendant, the $18 billion conglomerate that was built through the acquisitions of dozens of the nation's most prominent businesses like Century 21, Avis, Days Inn and Orbitz, is planning a radical breakup into four different companies.
The move, which Henry R. Silverman, Cendant's chairman, said the company planned to announce today, is perhaps the most vivid acknowledgment that the latest era of conglomerates built through mergers and acquisitions may be over.
Under the plan approved by Cendant's board yesterday, the company will be divided into four parts - one each for Cendant's real estate, travel distribution, hospitality and vehicle rental businesses. Each unit will be spun off into a separate publicly traded company. Current Cendant shareholders will receive shares in each and will continue to receive dividends. For customers and employees, the change should mean little, at least in the near term.
Cendant's decision to pursue a breakup comes about six months after Viacom announced plans to separate CBS and its cable television companies into two, reversing an all-under-the-same-roof strategy that created one of the world's most powerful media conglomerates. Similarly, Time Warner, which merged with America Online in 2000, is now entertaining offers for its AOL unit, potentially reversing what has been decried as perhaps the worst merger in modern history. The breakup of big conglomerates like Cendant is being driven in large part by investors' newfound desire for companies to be more focused and narrow - what bankers and analysts like to call "pure plays" - as opposed to large empires with disparate businesses. The stock prices of many big companies, like General Electric and Citigroup, have suffered in recent years, and some analysts attribute their sluggishness to what is often called a "conglomerate discount."
And of course, it is a long-held tradition on Wall Street to build up big companies (garnering fees along the way) and then disassembling them (garnering even more fees).
For Cendant, which also owns the Budget rental car system, Ramada and Super 8 hotels and the Coldwell Banker real estate business, among others, the breakup is a complete about-face aimed at reviving its lagging stock price, which has remained stagnant ever since the company merged with CUC International in 1997. It was later discovered that CUC had been involved in what was then considered the largest accounting fraud in history. Cendant's stock price has hovered from $20 to $25 over the last two years and closed Friday at $20.90 a share.
The decision to split up the company was made by Cendant's management team, which is led by Mr. Silverman, who built the business through an acquisition spree beginning in 1990. In an interview yesterday at Cendant's office with sweeping views of Central Park, Mr. Silverman said the decision to undo what he had so painstakingly put together was difficult, but said that he believed it was the right thing to do for shareholders.
Mr. Silverman, the company's largest shareholder, called his conglomerate strategy a "financial success, but a stock market failure," noting that the company is financially strong, but that investors have not rewarded the company's stock price.
"You can have a great business strategy, but if it's not moving the stock price, it's not working," he said. "This is a classic case of the sum of the parts is worth more than the whole."
Mr. Silverman said he planned to run one of the companies, in effect demoting himself. He has chosen the travel distribution company, which he has been building up in recent years with the acquisitions of Orbitz, Cheaptickets.com and Galileo International, an electronic network for travel agents.
More remarkably, Mr. Silverman, who has long been criticized for his compensation packages, said he planned to work for free. Mr. Silverman, who is estimated to have made $36.6 million in salary and bonus and reaped $223 million from exercising options between 1998 and 2002, said he would not accept a salary so that investors could not accuse him of trying to use the breakup to enrich himself.
"I want to take the issue off the table," he said. "I'm going to work for nothing." Of course, as a large shareholder, if his breakup plan helps lifts the company's share price, he would be handsomely rewarded.
While it is unclear how the stock market will react to the breakup, some analysts have been calling on the company to break itself up. Just about a month ago, Michael Rietbrock, an analyst at Citigroup, wrote in a note to investors that "we're not sure there's any way around splitting the company."
Still, not all breakups or spin-offs have worked. Viacom's stock price, for example, has not moved much higher since it announced its plan to split in two, leading some investors to question whether such moves really "unlock shareholder value." Even Mr. Rietbrock mentioned in his note about Cendant that, "we're typically cynical of financial engineering that only rearranges the pieces of the puzzle."
However, Mr. Rietbrock and Cendant may have reason to believe that its split will increase the company's share price. Over the past year, Cendant has spun off three different units; in both cases, investors benefited. Other historical examples, like the breakup of Dun & Bradstreet, resulted in huge gains.
Of course, there is a strong possibility that the units might quickly be gobbled up by suitors after they are spun off. Cendant's rental car businesses are seen as an especially attractive target for private equity firms; Hertz was just acquired by a consortium of buyout firms for $15 billion. It is unlikely any of the units will be purchased before they are spun off into separate companies because there would be significant tax consequence for any buyer.Cendant is being advised by Evercore Partners and JPMorgan in this transaction, and its outside legal counsel is Skadden, Arps, Slate, Meagher & Flom.
The four new companies will be led by teams drawn from Cendant's current senior leadership. Richard A. Smith will be chief executive of Real Estate Services, with Mr. Silverman serving as non-executive chairman. At Travel Network, Mr. Silverman will serve as chairman and chief executive. Hospitality will be headed by Stephen P. Holmes as chairman and chief executive. Ronald L. Nelson will lead Vehicle Rental Services as its chairman and chief executive.
Mr. Silverman was asked whether he would pursue the same conglomerate strategy if he could do it all over again. "Who knows?" he said. "It's woulda, coulda, shoulda."
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