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.
Investors lack confidence in the premise of the new business entity, analysts said.
The new company will rely on CUC's marketing expertise and HFS' customer base to create a colossal cross-marketing machine, capable of pinpointing consumers when they are ready to buy, and selling them what they need, representatives from both institutions said.
"We have a consumer who sleeps in our room or rents our car-and all we're selling to them is that particular service," said Mr. Silverman during the conference call. "We want to be able to sell more things to the same person."
The combined entity will have over 160 million customers. Detractors say that such an extensive affinity marketing plan has yet to be done successfully.
"The promise and the theories and the technology are all there" to cross-sell diverse products, said Frank Caruana, director of marketing systems, Danielian Consulting Group, Scottsdale, Ariz. "But to execute it in an effective manner has been quite daunting."
Financial institutions ranging from Merrill Lynch to Chase to American Express have had only modest success at cross-selling their products to consumers, Mr. Caruana noted. And, he said, they have brand-name recognition, customer histories, and a distribution system that beat out the new combined HFS/CUC.
Significantly, the terms of the agreement include a provision allowing either entity to make an acquisition of up to $2 billion without the other's approval before the deal closes. That prompted speculation that deals were in the pipeline for both companies.
CUC chairman Walter Forbes will serve as chairman of the new entity, and Mr. Silverman will serve as president and chief executive until Jan. 1, 2000, when they will swap titles.
