MOTLEY FOOL's take on all of this:
Nothing is more indicative of how important marketing has become to business than today's merger between CUC
INTERNATIONAL (NYSE:CU) and HFS INC. (NYSE:HFS) . Membership fee-based CUC International will swap
2.4031 of its own shares for each share of franchise-owning HFS in a deal that combines 68 million members with
household names in lodging establishments, car rental agencies, and real estate brokerages. Although both companies
sang the praises of the merger in a conference call held with analysts this morning, investors were apparently not quite
as sanguine on the merger. Shares of CUC International slipped $1 3/4 to $23 1/4, dragging shares of HFS down $4 1/4
to $54 3/4 because of the stock-for-stock nature of the deal.
HFS has become one of the best-known marketing savvy companies in the investment arena, with shares having risen
an extraordinary amount in the past two years, from a split-adjusted $13 to as high as $79 7/8 in the fall of 1996. The
company has gobbled to grow, making acquisition after acquisition of franchises in the hotel, car rental, mortgage broker
and relocation arena. The company owns the rights to hotel chains like Days Inn, Ramada, Knights Inn, Villager Lodge,
Wingate Inn, Howard Johnson and Super 8, as well as Coldwell Banker, ERA, Century 21, Resort Condomiums, Avis
and PHH Corp. The company has sold investors the notion that it represents the perfect business -- a franchisor
avoids capital expenditures, collecting a fixed percentage of all franchisee revenues in return for running national
marketing campaigns.
Chief Executive Harry Silverman stresses that he runs a new-age franchise operation where HFS cross-markets
customers from one franchise property to another. Relocating cross-country? Perhaps PHH can move you after your
Century 21 broker finds you a house that you looked at while staying at a Super 8 Motel and renting an Avis
automobile. Although this cross-marketing does not really create new revenue, it does potentially combine revenue
that was split among many different parties and keep it all in the pockets of HFS franchisees -- and therefore HFS.
Despite the fact that the actual growth of this concept is difficult to monitor because of the frequent acquisitions, the
company has convinced investors to pay more than 30 times earnings and three times sales for businesses that
traditionally have traded for less than half those multiples on the pure possibility of synergies.
Now investors have the tantalizing carrot of the biggest synergy of all dangled before them -- the 68 million members
of various CUC International membership clubs. Stamford, Connecticut-based CUC International provides an array of
membership-based discount clubs for shopping, travel, dining and health products. The company is best known among
consumers for the ubiquitous Entertainment coupon book, a package of restaurant and travel savings designed for more
than 30 regions across the U.S. Getting these 68 million members to drive Avis, stay at Ramada, buy houses through
ERA, relocate with PHH, and get a time-share with Resorts Condomiums is an attractive option to these executives.
Although a little difficult to conceptualize now, management promises that in time it will see the benefits.
Unfortunately for CUC shareholders, it is a promise they have heard before when billions of dollars worth of stock were
issued on fuzzy concepts that were hard to explain. Investors are most familiar with the CUC because of its confusing
purchase of Sierra Online and Davidson & Associates in February of 1996. CUC was clocked for $3 7/8 to fall to $20 5/8
after the acquisitions were announced, as CUC was widely viewed as overpaying for the properties, offering $2.2 billion
in stock. CUC promised that these properties were vital for its new online, Internet-oriented strategy and that patient
investors would eventually see how the businesses all fit together.
More than a year later the much touted interactive games that were to spice up CUC's aggressive web presence at
www.netmarket.com have yet to materialize. In fact, CUC bought these properties right after Softkey International
(now known as THE LEARNING COMPANY (NYSE:TLC) ) had finished an ugly takeover battle with
BRODERBUND (Nasdaq:BROD) for the Learning Company, an event that pushed up the valuations of many software
companies. When CUC purchased both of those properties, cash-rich Broderbund traded at $49 compared to $25 1/2
today, while leveraged Softkey traded at $24 compared to $7 today. These purchases were partially responsible for
CUC's extraordinarily disappointing 1997 results, although the earnings reported today of $0.17 per share versus $0.13
per share last year on a 21% revenue rise were a return to the company's salad days of growth.
Whether this marriage will bring synergistic profit growth or demonstrate forever that marketing cannot be mistaken for
product will be proven over the next few years. Why HFS is accepting $55 in tattered CUC stock for its shares when
CUC is $6 from its 52-week low should spark some skepticism among its new owners and some feeling of vindication
for those who have been skeptic al of the ultimate value of the company's franchises. By paying more than 8 times sales
for the company, CUC is putting quite a bit of stock in HFS's impressive 27% operating margins over the last five years
and the potential future benefits inherent in the synergies. To some, it seems like Sierra and Davidson all over again. |
