Little guy grows fast HFS recently a tyke compared with PHH, which it is buying

Analyzing a marriage

February 16, 1997|By Sean Somerville | Sean Somerville,SUN STAFF

Five years ago, HFS Inc. was tiny compared with PHH Corp. by almost every measure.

Just 2 years old, the Parsippany, N.J.-based franchiser of Main Street lodges such as Howard Johnson and Ramada had $18.2 million in net income.

That was about one-third the net income of then 46-year-old PHH -- the Baltimore-founded company with car fleet management, corporate relocation and mortgage banking businesses.

By last year, after a string of acquisitions, HFS was reporting $170 million in net income, more than double PHH's.

Next month, Hunt Valley-based PHH will vanish into the maw of HFS, a company that has parlayed its acquisitions into explosive profit growth.

Henry R. Silverman, HFS chairman and chief executive, said the company makes only purchases that will boost earnings immediately. "We've had a record of accelerated growth," Silverman said.

"I would say the track record speaks for itself."

Shareholders of both companies will vote on HFS' $1.7 billion purchase of PHH in late March. The stock-swap merger will eventually eliminate PHH's headquarters. Senior officials will either depart or take jobs with the combined company.

The two companies are looking at whether PHH's computer data center overlaps with HFS' operations. Together, the company's headquarters and the data center employ about 200 people.

Unit to stay in Hunt Valley

PHH's vehicle fleet management division, which employs about 900 people, will remain in Hunt Valley. Employee of PHH's U.S. relocation business, who are scattered across North America, will be integrated with counterparts at HFS.

The two companies said other information was unavailable because details are still being worked out. Silverman estimated that the merger would cut PHH's work force of 5,100 by about 2 percent. "Most of it is going to happen through attrition," he said.

Robert D. Kunisch, PHH's chairman and CEO, will take a seat on HFS' board and manage former PHH properties. The PHH name will remain. "Of the companies that were looking at PHH, this one has the least impact because our businesses are so compatible," he said.

Digesting new companies is nothing new for HFS. The company, originally Hospitality Franchise Systems Inc., was founded in 1990 with the $195 million purchase of the Howard Johnson and the domestic Ramada franchise systems.

The company was then part of the privately held Blackstone Group, which included Silverman. Hospitality Franchise Systems went public in 1992, and the next year Blackstone sold its stake to Silverman.

In HFS' franchising system, the company charges a fee to franchisees and gets a percentage of sales revenue in return for national marketing, support and reservation systems.

As the new boss, Silverman started buying new properties: Super 8 Motels and Park Inn International in 1993, Villager Lodge in 1994 and Knights Inn in 1995.

The company, which changed its name to HFS in 1995, also expanded its focus. HFS acquired Century 21, then the world's largest residential real estate franchise system.

In the last 18 months, HFS has spent about $2.7 billion on a buying spree. Last year, HFS bought the Travelodge hotel franchise; Resort Condominiums International, or RCI, the world's largest provider of timeshare-exchange programs; and Avis Inc., the world's second biggest car rental company.

Other new acquisitions: Coldwell Banker Corp. and Electronic Realty Associates, two of the world's top five residential real estate brokerage companies.

As the nation's largest hotel and real estate office franchiser, HFS gets a tiny piece of millions of transactions. It has 5,300 hotels. That's more than 485,000 rooms -- about 14 percent of the U.S. lodging market. The company franchises 12,100 real estate brokerages with more than 160,000 brokers.

The formula

Michael P. Monaco, HFS chief financial officer, said HFS tries to find companies that will result in lower costs, higher revenues and markets for other services. "The question is how can we make one plus one equal three or more," he said.

Silverman had never heard of PHH until 1995, when the company contacted him about buying a small relocation business that came with HFS' Century 21 acquisition.

The companies had little in common but their three-letter monikers.

HFS markets brand franchises directly to consumers. PHH does business with individuals through the federal government, large groups and big companies such as IBM and Microsoft.

Founded by three Baltimoreans in 1946, PHH's Hunt Valley office still has a family feel. HFS is so Wall Street-friendly that Silverman's office is not at the company's Parsippany headquarters, but on the 41st floor of a Fifth Avenue office building in Manhattan.

Wall Street never took to PHH, often pricing its stock at only nine times its projected earnings per share. The Street loves HFS. Its stock has traded at more than 30 times earnings per share.

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