Putting it all together.

Author:DeZube, Dona
Position:Cendant's acquisition of mortgage business - Cover Report: Retail/Wholesale - Cover Story

A company called HFS combined with another called CUC to form what may be the ultimate merger in the real estate and mortgage world. The new company represents a power play in the pursuit of one-stop shopping and the marketing of bundled products. The question is: Will it work?

After gobbling up huge market shares in the real estate, relocation and hotel industries, there is a company poised to take over a considerable share of the mortgage business, too. Its tactics include building a $5.5 million data warehouse designed to track the buying behavior of the 100 million consumers the company touched last year and using one of the world's largest telemarketing and direct-sales organizations to sell title, home warranty services and mortgages. Some Wall Street analysts - quite bullish on the firm's strategy - believe the company will first change, then dominate the real estate and mortgage markets.

The company, Cendant, was formed when shareholders of HFS Inc., Parsippany, New Jersey, and CUC, Inc., Stamford, Connecticut, voted to merge. When the deal closes late this year or early next year, a financial services giant will be born. Cendant's ties to mortgage banking come through its subsidiary PHH Mortgage, which it picked up when it bought PHH Mortgage's parent PHH, Inc., Hunt Valley, Maryland, in April 1997. In real estate, Cendant controls 21 percent of the residential market through its Century 21, Coldwell Banker and ERA franchises. It also controls a portion of NRT, Inc., the largest owner of residential real estate offices in the United States.

And yes, Cendant also owns a relocation services company, HFS Mobility Services, Inc., that helped more than 100,000 corporate transferees sell their homes and buy new ones last year.

Ranked 13th-largest lender and 20th-largest servicer by Bethesda, Maryland-based Inside Mortgage Finance, PHH, if it can find a way to convert even 5 percent of the real estate deals handled by the Cendant real estate franchises, could swell its mortgage volume by $4.5 billion.

Some Wall Street analysts think PHH Mortgage will do just that. "PHH Mortgage will benefit handsomely from expanded cross-selling and preferred-alliance agreements," according to Robertson, Stevens & Co. analysts Keith E. Benjamin, CFA, and Andrew W. Jeffrey, CFA. "We believe the synergies associated with [Cendant's] real estate operations have the potential to propel the company to a new level in terms of creating additional brand equity and awareness," the New York-based analysts add.

For 1998, Robertson projects PHH loan originations will rise about 50 percent to more than $15 billion, its loan servicing portfolio will grow by 25 percent to approximately $31.9 billion and its total revenues will reach $228.8 million, up 39.1 percent.

What is Cendant?

When shareholders of CUC International Inc., Stamford, Connecticut, and HFS Incorporated, Parsippany, New Jersey, voted to merge, they created Cendant, one of the largest consumer and business services providers worldwide. CUC, best known for its Entertainment coupon books and its Net-Market online superstore, direct-markets club memberships to 68 million consumers. Other cards in the Cendant deck (from HFS holdings) include the Avis car rental company; a slew of discount hotels, including Days Inn, Super 8 and Howard Johnson; and an international time-share operation.

When combined into Cendant, HFS and CUC had revenues of approximately $4.3 billion, net income of nearly $600 million, about $700 million in free cash flow based on pro forma performance in 1996, and market capitalization of about $22 billion, according to a company press release.

In addition to very deep pockets, the two firms share a similar business model and philosophy about not owning fixed assets or significant inventory. HFS makes its money by collecting franchise fees, along with preferred vendor fees. A pizza delivery company, for example, might pay for the right to display a menu in every Super 8 motel room. Oakwood Corporate Housing pays HFS a fee to mention the temporary housing provider every time it pitches its relocation services to a corporation. In 1996, revenues from HFS' 70 alliance partners reached $46 million, according to Wall Street analysts Furman Selz, LLC. CUC, meanwhile, makes its money from selling memberships in about two dozen discount programs such as Travelers Advantage, Shoppers Advantage, the Entertainment coupon books and its Internet superstore, NetMarket.

The idea behind the merger was to combine CUC's marketing expertise with HFS's products and cross-sell everything from real estate, mortgages and home security systems to pizzas and rental cars [ILLUSTRATION FOR FIGURES 1 and 2 OMITTED]. Or, as HFS Vice Chair Steve Holmes explained in an interview with the company's internal newsletter: "CUC is the premier delivery vehicle - the premier telemarketer, the premier marketer of products and services to consumers. It's a perfect marriage. We've got access - they know how to deliver the products."

It's a story Wall Street seems ready to buy. Robertson's Benjamin says Cendant has the capacity to dominate the entire homebuying process. "We envision a corporate employee being transferred across the country, securing a preapproved mortgage through PHH, being shown a variety of homes by a Century 21 real estate agent while having the whole process managed by [HFS Mobility Services]. We also imagine this individual renting an Avis car and potentially residing in a Days Inn while in the homebuying process," Benjamin says.

And remember, every step along the way, Cendant will be collecting information about the buying habits of that corporate employee for its $5.5 million data warehouse.

Ironically, in these days when everyone is talking about technology driving the mortgage business going forward, this much ballyhooed real estate-mortgage venture does not center that much on technology to make it work.

"They [Cendant] have a lot of capital behind it; it has a lot of good, smart people. But it's clearly not a technology play, and they think it is, which is where I disagree," says William Dallas, owner and CEO of First Franklin, San Jose. Real estate, he argues, is a technology-poor industry filled with part-timers. "Why would they [Realtors] ever want to use technology?" asks Dallas.

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