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The Honolulu Advertiser
Posted on: Thursday, February 7, 2002

Cendant seen in same light as Enron

By Robert Burgess
Bloomberg News

NEW YORK — Cendant Corp. Chairman Henry Silverman may have been dealt a setback by the Enron Corp. bankruptcy as he tries to move beyond a 1998 accounting scandal that cost Cendant $3.1 billion in shareholder lawsuit settlements.

Shares of the company, which franchises enterprises from Ramada hotels to Coldwell Banker residential brokerages and owns the Avis rental car business, have fallen 22 percent this year. Investors are fleeing companies with far-flung operations and off-balance-sheet partnerships after Enron's collapse and the stock decline of conglomerate Tyco International Ltd.

The drop in confidence comes as Silverman tries to integrate more than $5 billion in acquisitions made last year — including the purchase of Honolulu-based Cheap Tickets Inc. — while facing the first drop in global travel since 1982.

"They've been tainted with the same brush" as Enron and Tyco, said Eric McKissack, portfolio manager of the Ariel Appreciation Fund, to Bloomberg TV this week.

The New York based company said yesterday that fourth-quarter earnings per share on an adjusted basis rose a cent, to 23 cents, from a year earlier.

Those results are not in accordance with generally accepted accounting principles and don't reflect Cendant's stake in Homestore.com Inc. or one-time items such as charges or costs related to shareholder litigation.

Including $520 million of charges, mainly to cut jobs and write down the value of assets, the company had a loss of $307 million, or 31 cents a share.

Revenue more than doubled to $2.58 billion on acquisitions of such businesses as travel reservation company Galileo International Inc. and car rental firm Avis Group Holdings.

Cendant shares are down 21 percent for the year. They rose 22 cents yesterday to $15.57. The fourth-quarter report was released after the close of trading.

Cendant paid $3.1 billion — the biggest securities fraud settlement ever — to resolve suits filed after it disclosed in 1998 that it had overstated revenue. The disclosure caused the company's stock to fall 46 percent, or $14 billion, in one day in April 1998.

Cendant was formed through the merger of Silverman's HFS Inc. and CUC International Inc., where the fraud took place.

To calm shareholders last week, Cendant put detailed information on its Web site about its accounting practices and off-balance-sheet ventures.

"Their accounting is aggressive, but it's well within the law," said Brian Katz, a portfolio manager at Colony Group Inc., which owns 462,000 shares. "They've been doing a pretty good job of anticipating what investors are looking for in their accounting."

Silverman, 61, declined to comment, a spokesman said. Last week he said in a statement that the company used off-balance-sheet partnerships to help increase earnings with "minimal asset risk."

In addition to franchising hotels, Cendant franchises Century 21, ERA and Coldwell Banker residential brokerages and has a mortgage banking operation that is one of the 10 largest in the nation, is in the timeshare business and operates parking garages, among other ventures.

In 2000 Silverman said the company had put the scandal behind it and he was "ready to go back on the offensive."

Last year he expanded the company's travel-related businesses by acquiring Galileo for $2.34 billion, the part of Avis it didn't already own, discount airline ticket seller Cheap Tickets and timeshare resort operator Fairfield Communities.

As Cendant was digesting those acquisitions, the economy went into a recession and the terrorists attack on Sept. 11 led to a drop in international travel.

With the help of 6,000 job cuts in the fourth quarter, which reduced its work force 10 percent, Cendant may exceed its goal of $200 million in savings after Sept. 11, said Scott Barry, an analyst at Credit Suisse First Boston.

Travel has rebounded, with some airlines adding capacity and car rental rates rising.

Still, Cendant's accounting may outweigh any improvements in travel as the company reports results, analysts said.

Cendant has stakes in seven ventures it does not consolidate on its financial statements: NRT Inc., Trip Network, FFD development Co., Trilegiant Corp., Tax Services of America, Homestore.com Inc. and Entertainment Publications.

Cendant does not have a majority of board seats or voting control over their boards. Total debt associated with them is $3.66 billion, none of which Cendant carries, said analyst Jay Leupp at Robertson Stephens Inc.