Shawn: Cendant's problem is not merely that CUC was cooking the
books for 3 years -- rather, it is the fact that CUC's books
needed to be cooked. The book cookers have been removed
-- but the need has not. CUC had no competitive advantage in
offering discount cards, and imitators soon caused marketing
costs to rise, and fees to fall, to the point that profit
disappeared. New accountants will not change that.
October 14, 1998
A Humbled Cendant Calls Off $3.1
Billion American Bankers Deal
By JOSEPH B. TREASTER
Seven months and a lot of accounting problems after
Cendant Corp. beat out the big insurer, American
International Group, in a bruising battle to buy
American Bankers Insurance Group, Cendant announced
Tuesday that the $3.1 billion deal was off.
For its trouble, American Bankers, which specializes in
life insurance on credit card balances, will get $400
million as a breakup fee, the companies said.
Henry Silverman, chief executive of Cendant, a
franchising and discount shopping company, said the
deal "no longer made strategic or financial sense."
The breakup was clearly the result of terrible times
for Cendant, which disclosed in April, a month after
its successful bid for American Bankers, that its
earnings reports had been greatly inflated by improper
accounting procedures. Just last week Cendant called
off its $219 million purchase of Providian Auto and
Home Insurance Co., a unit of Aegon NV.
By the close of the market Tuesday, shares of Cendant,
which owns brands like Century 21 real estate and Avis
car rentals, were trading at $9.4375, down from a high
of about $42 when it was in the midst of its battle for
American Bankers. Moreover, Moody's Investors Service
had only the day before lowered Cendant's financial
ratings a notch so that borrowing would become more
expensive for Cendant.
"What we're looking at here is a company with a broken
story, pressure on its financial ratings and an
uncertain future," said Kenneth Zuckerberg, an analyst
at Keefe, Bruyette & Woods.
After American International Group had signed an
agreement to pay $47 a share for American Bankers,
Silverman came in with a hostile bid of $58. Maurice
Greenberg, chief executive of American International
Group, matched the $58 bid. But he gave way when
Silverman raised his offer to $67 a share; 51 percent
in cash, the balance in stock.
To go through with the deal at Tuesday's prices,
Silverman would have had to give American Bankers three
times more Cendant shares than originally anticipated
or a lot more cash. He would have been constrained from
giving more shares, analysts said, because the effect
would have been to further dilute Cendant's sagging
earnings per share.
"Cendant could afford to do the deal when it had a
high-octane stock," Zuckerberg said. "Now they would
have to use more cash and with the cost of funds going
up, that would have been very expensive for them."
The accounting problems were discovered in what had
been parts of a company known as CUC International,
with which Silverman merged his former company, HFS
Inc., to form Cendant last December. CUC, which
specialized in discount shopping clubs, sold its
products through lists of credit card holders just as
American Bankers does. So Silverman saw a good
strategic fit.
But as more details of the accounting problems became
public, Walter Forbes, chairman of Cendant, and eight
other executives who had essentially created CUC,
resigned from Cendant, changing what Silverman referred
to Tuesday as the "strategic premise" for the American
Bankers acquisition.
Some analysts said they thought that American
International might make a renewed bid for American
Bankers. But a spokesman for American International
would not comment. Barbara Blanco, an investor
relations representative for American Bankers, said
senior executives were traveling and not available to
discuss the breakup or the company's future. Its
shares, which had risen to $66.16, closed Tuesday at
$36.
On Sept. 30, Cendant reported that after a
reexamination of its books, the company lost $217.2
million in 1997 instead of the $55.5 million in profits
it reported before the accounting problems surfaced.
After the close of the market Tuesday, Cendant and
American Bankers issued a two-paragraph announcement
that the deal was off. Then Cendant issued a second,
lengthy statement saying it planned to buy back $1
billion of its own stock, a step often taken to bolster
share prices and investor confidence.
Silverman has rapidly expanded his business empire
through a series of acquisitions. But, at least for the
moment, his days as a flamboyant buyer seem over.
"We have articulated to the equity and credit markets
that we are no longer going to be a seller of shares
and a buyer of companies," he said, "but a seller of
companies and a buyer of our own shares."
Copyright 1998 The New York Times Company |
