Will Cendant Sell?

Will who what?

I know, you never heard of Cendant.

But because of what happened on Wall Street on April 15th, you may not get to see WARCRAFT IV.

Have I got your attention?

There's a section in Dr. Seuss's HOP ON POP that goes: Dad Sad Bad Had. Dad is sad. Dad had a bad day. What a day dad had.

That's about how life is, at the moment, for Sierra On-Line, Davidson & Associates, and Blizzard. On April 15th, their dad had a bad day. A very bad day.

Their parent company is Cendant Corporation. Along with GT Interactive and Electronic Arts, it practically owns PC gaming.

And the thing is: Cendant doesn't care. It doesn't need to. Computer gaming is a pimple on its collective corporate butt.

Cendant was formed last year from the merger between HFS and CUC International. On April 15th, Cendant announced that it had discovered accounting irregularities in CUC's books that would require it to restate 1997 earnings, reducing Cendant's net income by something over $100 million -- out of total net income for the year of $872 million.

Wall Street went nuts. The firm's share price dropped from 35 5/8ths to 19 1/6th, losing nearly half its value. And Cendant remains in Wall Street's dog house; a major credit rating firm, Duff & Phelps, has placed its debt on credit watch, and a slew of commentators continue to decry what they view as slick, albeit legal, accounting tricks that, they claim, vastly overstate income.

This is a new experience, for Cendant and for its precursors as well. HFS saw its share price soar by 80% between 1992 and April 15th; CUC, by 37%. And Cendant was, up until the moment it announced the problem, hot hot hot. The company was growing by leaps and bounds, mainly by acquisition; the $13.5 billion merger between CUC and HFS was only the biggest deal it's made in the last couple of years.

The second biggest: shortly before the announcement that caused is shares to crash, Cendant had made an agreement to take over American Bankers Insurance Group for $3.1 billion.

That's a lot of money--and Cendant may have paid too much, too. They won American Bankers' agreement after a bidding war with AIG, which also wanted the insurer--and AIG is one of the biggest (and by all accounts, one of the best-managed) insurance companies worldwide.

But what does this mean for gaming?

A better question is: How does gaming fit into Cendant in the first place?

From where we sit, Cendant looks like one of the giants of computer entertainment. Along with EA and GT Interactive -- and maybe you throw in Activision and Interplay if you're generous -- they have a virtual stranglehold on publication and distribution and financing in the industry. If you're an independent game developer, you spend a lot of your time grovelling to those companies, trying to get them to fund your next game, trying to get them to push your product. "Cendant Software" isn't a monolithic operation, the way EA is; Davidson and Sierra and Blizzard operate pretty much independently. But put them together, and Cendant owns a big, big chunk of PC gaming.

But we get a skewed view of the world, because we're gamers. From Cendant's point of view, their consumer software operations are a sideshow.

Cendant owns Days Inn, Ramada, HoJos, and Travelodge. They own the Avis name and trademark, and 20% of the American operation which uses that trademark. They own Coldwell Banker and Century 21. They own the largest seller of timeshare condominiums in the world. They manage corporate vehicle fleets, provide relocation services, and make mortgages. They provide information technology and reservation services for the hotel industry and for casinos. And perhaps most importantly, from Wall Street's perspective, they own these membership clubs -- Shoppers Advantage and Travelers Advantage and a slew of others -- which consumers pay to join so they can get discounts on goods and services. And in many cases these are goods and services that Cendant itself supplies, because it owns so much of the travel and real estate services industries.

This is golden, Wall Street thinks, because Cendant's existing and ongoing relationship with so many consumers means they can leverage their other businesses by cross-selling new goods and services to their existing customer base.

That's why Cendant wanted an insurer; they think they can sell insurance up the wazoo to all the people who're members of their membership clubs, or patrons of their hotels, or use their real estate services. ("Now that you've bought a new house, Mr. Jones, have you thought about insuring it?")

And that's why Wall Street was in love with Cendant.

But how the hell does DIABLO and WARCRAFT fit in with Travelodge and Coldwell Banker?

If you look at Cendant's annual report, its 1997 net income of $5.3 billion breaks down like this: $2 billion for its membership clubs. $1.5 billion for travel services (including all those hotels -- which Cendant doesn't own, it franchises them, making money off the trademark without the headache of actually providing extra pillows and washing all those sheets). Another billion for real estate services.

The rest -- revenues of $862 million -- is "other." Cendant doesn't even break out its consumer software companies. "Other" includes Sierra and Davidson and the rest -- and it also includes Cendant's 20% stake in Avis, the Wizard System (IT and reservations for the hotel industry), and computer services for casinos. You can't, by looking at Cendant's financials even figure out what proportion of its revenues come from consumer software, but it can't be more than 10%.

And revenues are not profits, either. The "other" category -- which, remember, includes a bunch of unrelated things in addition to consumer software -- appears to be the least successful part of Cendant.

In other words, if you look at Cendant's financials, the answer to the question is clear: DIABLO and WARCRAFT don't fit into Cendant.

They aren't services that can be flogged to the members of Shoppers Advantage. They aren't products you can sell to people who stay at Days Inn. They're not something you can pitch to people buying IT services for the lodging industry. And they aren't going to help Century 21 franchisees move more two-bedroom ranch-style houses with off-the-street parking.

If you look at all the businesses Cendant is in, and look at Cendant's own stated objectives -- to cross-sell products and services using its consumer base, to hold brand-names and franchise out operations -- the software companies stand out like a sore thumb.

They're practically screaming, "Sell me."

And Cendant may have to.

Even after its stock plunged through the floor, Cendant re-affirmed that it plans to go through with the buy-out of American Bankers. That's going to cost them $3.1 billion dollars. And they're also, supposedly, buying a big British parking-lot operator, National Parking Corp., for another $1.3 billion. That's a lot of money, even for a company that (post-crash) is still worth more than $18 billion, at market values.

Cendant has grown largely by paying for acquisitions with its own stock. Now that its stock has almost halved in value, those uncompleted take-overs have to look at lot more expensive.

Cendant is not in financial trouble; they have good lines of credit, their operations throw off a lot of cash. Indeed, those who rate the stock a "buy" point to Cendant's relatively high cash flow to justify the share price. But their net income last year was only $55 million; they can't finance these takeovers with retained earnings.

Wouldn't it make sense to sell the consumer software firms?

Sell Sierra and Davidson and Blizzard and Griffin and Knowledge Adventure and you still won't have nearly enough to pay for American Bankers, but it will help. And Wall Street will like it, too; it would show that Cendant's management is concentrating on the company's core businesses, that they're getting rid of the nonessentials.

I will bet you dollars to donuts that suits from Cendant are talking to suits from EA and GT Interactive and Sony and God knows what else even as we speak.

Will Cendant sell?

There's no way to know for sure. Maybe no one will pay what Cendant thinks Sierra and Davidson are worth. Maybe someone at Cendant loves computer games beyond reason. Maybe I'm just a blind fool who can't see the obvious synergies between franchising, membership services, and real-time strategy games.

But a sale is the way to bet.

If Cendant does sell, what will it mean for gaming?

That depends largely on who buys.

If Cendant sells out to EA, say, that means one less place for independent developers to go. It means further consolidation on the publishing end--to the detriment of developers, and maybe to the detriment of retailers, too (although retailers are the ones with the real whip hand at present).

If Cendant sells to EA or GT Interactive, some of us will be praying that g.o.d. works -- and even that Microsoft remains committed to gaming.

But it's not impossible that Cendant would sell to a company that isn't currently a big player in computer gaming, but wants to be. Sony, or Time-Warner, or who knows, Bertelsmann.

And that might be a good thing for the industry. It would keep the number of big players constant--and it might place Cendant's assets in the hands of someone who understands entertainment better.

But what about WARCRAFT IV?

Okay, I'll admit it; claiming that the WARCRAFT brand-name was endangered by the fall in Cendant's price was a bit of a shuck, a way to grab you. Probably -- but only probably -- Cendant, or its successor corporation, will have enough sense to see that the brand is an asset, that flogging more WARCRAFT is an easy way to make some bucks.

But you never know. When the markets play the tune, it's hard to know who's going to pay the piper.

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