Dow Jones Online News, Friday, July 31, 1998 at 01:09
By Joann S. Lublin and Emily Nelson,
Staff Reporters of The Wall Street Journal
In the wake of his worst business decision ever, Henry R. Silverman is focusing on how to pick up the pieces. During a lengthy interview yesterday, the 57-year-old chairman and chief executive of deeply troubled Cendant Corp. said, "It's going to take years to restore credibility. But one has no choice in these matters."
The once highflying deal maker, though looking gaunt and tired, isn't done dealing. Mr. Silverman said he considered unraveling the $14 billion merger of his HFS Inc. with CUC International Inc. that formed Cendant last December, but decided such an option appeared too cumbersome. Instead, he said he is considering selling software and publishing businesses that were part of CUC and possibly selling part of an interactive network in a public offering.Cendant, based in Parsippany, N.J., has said that over three years,CUC booked roughly $500 million in fake revenue and pretax income and fudged another $200 million through improper accounting maneuvers.Arthur Andersen LLP, hired by Cendant directors to conduct an independent audit, told the board this week that 61% of 1997 net income reported by CUC was nonexistent, informed individuals say.Cendant has received unsolicited proposals for three former CUC businesses, Mr. Silverman said. The proposed transactions could bring it proceeds of about $2 billion.
One proposal is for Cendant Software, which could be sold outright or sold to the public. The unit, which has suffered management turnover,includes Sierra On-Line Inc. and Davidson & Associates Inc. and has about $650 million in annual revenue. Hebdo Mag International, whose magazines carry only classified advertising, has received an offer from current management to buy the company.Also, to take advantage of the exuberant market for Internet stocks,Cendant is contemplating selling to the public or an investor group 20% to 40% of its interactive membership clubs, Mr. Silverman said.Mr. Silverman said he met with a number of major customers this week to assure them that "anybody who might have been involved with the fraud is now out of the company." The crisis at Cendant has taken a significant toll on Mr. Silverman. He has lost weight, his hair has thinned, and he said he sleeps just four to five hours a night. He said he turned to a psychiatrist to help him deal with his stress. He said the psychiatrist prescribed daily workouts after hearing the executive declare: "I'm consumed with blind rage." Seated at a round conference table in his dark-paneled Manhattan office, Mr. Silverman outlined ways that he hopes to restore confidence. He said he plans to add more outsiders to the board's executive committee.To reduce the huge turnover at CUC's core membership clubs -- about 10 million of the 17 million new members each year drop out a year later -- the company will try to target customers better, he said. Mr. Silverman also said Cendant directors "are going to reconstitute the audit committee" once it finishes investigating the accounting fraud in late August. Frederick Green, the panel chairman and a developer of two golf courses with Mr. Forbes, has agreed to step down at that time.Leonard Schutzman, a former PepsiCo Inc. treasurer who headed HFS' audit committee, is expected to succeed Mr. Green.
Mr. Silverman portrays himself as a victim of fraud, but he said in the interview that he told a special board meeting this week that he "regretted the merger, and I was willing to take accountability for it." Among other things, he offered to give up his salary, bonus, stock options -- even his job. The offer changed the course of the intense board meeting, said Robert Kunisch, a director who runs a Cendant subsidiary. "A lot of what we're doing is his vision. The last thing you want is to have him walk out," he said. Instead, Cendant directors accepted the resignation of Cendant Chairman Walter Forbes, who had founded and led CUC. Eight other board members tied to CUC, besides Mr. Green, agreed to quit, too.
Through a spokeswoman, Mr. Forbes declined to comment.Now, Mr. Silverman said, all the CUC accounting and budgeting is under centralized accounting management and is being automated. Though a computer-oriented concern, CUC often switched an acquired business's automated accounting system to its manual one, he said.
Through expansion of current businesses, Mr. Silverman said, the company can continue to grow 20% a year. He indicated that Cendant will report net income of 21 cents a share for the second quarter, in line with some analysts' estimates. It expects to report its earnings around Aug. 13.
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