Now that the big fire appears to be out at Cendant, observers are beginning to assess the extent of the damage inflicted on the corporation and its subsidiaries. The consensus is that the bottom line will likely pull through, but that the company's credibility may remain in critical condition for some time. "It would be an understatement to say Cendant has not been affected," says Christopher Feiss, senior market analyst with BT Alex Brown. But, he adds, the damage is not permanent.

The company began its fall from grace in April following the reports of major accounting fraud at CUC International, which was merged with HFS to form Cendant last December. Two weeks ago, Cendant chairman Walter Forbes and eight Cendant directors tied to CUC resigned, paving the way for what the company hopes will be a full comeback.

Yet according to Richard Smith, chairman and CEO of Cendant Real Estate, any comeback won't happen overnight. The first hurdle will be receiving the full audit of Cendant's financial statement, due out in mid-August, which could reveal the extent of the fraud at CUC. "Then the appropriate regulatory agencies and others are going to have to do their work, and that's probably going to take some time," says Smith.

Meanwhile, it is indeed Cendant's credibility that has taken the biggest hit. Those most deeply affected are real estate brokerage franchisees who "see the company's name in the paper every day and see the black marks," says Feiss. Rating services and institutional lenders are also on alert, and have been looking more closely at all their dealings with the company, he says.

Smith adds that the company remains confident that it will eventually be "reasonably distanced" from the debacle, and says he's focusing on running the company and not necessarily on mitigating damage. "We'll let the government agencies do their job and we will go back to do our job of running the company without all these distractions," he says.

Feiss sees the problem, and solution, in largely financial terms. "With regards to the parent corporation, the first major step occurs on or around August 13," when Cendant is scheduled to deliver its second-quarter earnings. "At that point institutional lenders can come back and have a real sense of the numbers. Then it comes back to qualitative and quantitative measures of the company."

That's heartening, since "financially the company is in good shape," adds Feiss. "They have sufficient cash flow and borrowing capabilities to fund its current mix of businesses."

By most calculations the numbers do look solid, particularly on the real estate side, which is "the strongest Cendant has by a large margin," says Feiss. "The industry's growth is in a mode of outperformance" (between 8% and 10%), but Cendant has the highest growth rate in the industry - in the 20% to 30% range. They are taking a lot of market share." Operating income for the real estate division increased 115% year over year in the quarter ending in March, while net revenues were up 47%.

Feiss attributes much of the company's success to its ability to blend its Century 21, Coldwell Banker and ERA subsidiaries. "Conceptually, it's working, the idea that the brands can be combined in the back office but kept separate for the consumer," says Feiss, noting that the idea of cross-selling mortgages also appears to be "demonstrable."

Of course, much of this success is also attributable to the economy. If that stumbles, says Feiss, Cendant's margin and growth rate will suffer.

If there's any immediate good news for the franchisees who do their business under Cendant, it's that they're paid in cash, not Cendant's withered stock, which dropped more than 50% off its 52-week high after news of the fraud hit the Street. There's also the helpful fact that many home sellers and buyers don't know, or care, that their brokers are related to Cendant, says Smith. So commissions from home sales have not stopped pouring in.

Published: August 7, 1998

Use of this article without permission is a violation of federal copyright laws.