Magazine article American Banker

HFS Plan to Merge with Direct Marketer Gets Cool Reception

Magazine article American Banker

HFS Plan to Merge with Direct Marketer Gets Cool Reception

Article excerpt

In a move that raised eyebrows in the financial sector, franchise king HFS Inc. and direct marketing leader CUC International Inc. announced Wednesday that they plan to merge in a stock swap valued at $11 billion.

In the deal, HFS, whose legion of franchise brands includes Avis, Century 21, Ramada Inn, and Coldwell Banker, will get 2.4031 shares of CUC stock for each of its own shares. CUC uses direct marketing to sell products ranging from discount airline tickets to appliances to financial products.

The new company, as yet unnamed, will attempt to capitalize on direct marketing and an extensive data base to sell diverse products to the same customer-a strategy that banks have tried for years, with limited success.

The merger agreement, unveiled after the market's closing bell on Tuesday, sent both stocks into a tailspin Wednesday amid heavy selling by disappointed investors.

By midmorning, HFS' stock was down $3.375 from Tuesday's close of $59, and CUC International's had fallen $1.375 from $25.

By 2 p.m on Wednesday, 3.56 million shares of HFS stock had traded, versus an average daily volume of just over one million shares. In even more spirited action, 9.63 million shares of CUC had changed hands, versus a typical daily average of 1.61 million.

HFS investors were disappointed with the terms of the merger, said Tom Graves, an analyst with the S&P Equity Group. "Based on the closing price yesterday, shareholders only got a small premium," he said.

But, the deal is not dilutive of earnings per share, insisted HFS chairman Henry Silverman, addressing the issue in a conference call. "The fundamental earning power of the company is being enhanced by this," he said.

The company is not being managed around its stock price, he said.

For their part, CUC shareholders just "don't know what they're getting yet," said Jim Corridore, also with S&P. …

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