Editor’s note: An affiliate of private equity firm Apollo Management L.P. has entered into an agreement to acquire real estate brokerage giant Realogy — formerly the real estate arm of Cendant Corp. — in a deal valued at about $9 billion. This article, published earlier this year, describes the Cendant/Realogy adventure in real estate.

Just over 10 years after Cendant’s predecessor began a buying spree that included real estate brands Century 21, ERA, PHH and Coldwell Banker, the company’s impact on the industry is undeniable. With about 25 percent of all Realtors in the nation affiliated with the corporation, the story of the largest real estate brokerage and franchise company in the nation is still unfolding.

This story is packed with elements of mystery and intrigue, twists and turns, massive-scale acquisitions and consolidations, deception and scandal, courtroom drama, financial fallout and recovery, a restructuring of management, a rapid rise to power and prominence, and a carefully calculated breakup and re-branding. The cast is thick with power brokers and industry luminaries.

Cendant Corp. grew its real estate operations with hurricane force, building upon the buying spree of predecessor HFS, a hotel franchisor.

Tracing back 11 years, Cendant’s real estate roots were planted with the acquisition of Century 21 by predecessor HFS in 1995. From 1995-97 HFS acquired Century 21, ERA, PHH and Coldwell Banker, and Cendant was formed through a merger of HFS Inc. and CUC International Inc., a direct marketing and member services company, in December 1997.

Since inception, the company has been a cash cow for real estate company owners seeking an exit strategy, and has driven an unprecedented surge in industry consolidation.

Not even a decade old, the company has amassed a collection of reputable brands, with such company-owned and franchise affiliates as Century 21, Coldwell Banker, ERA and Sotheby’s, and about 313,500 sales associates are affiliated with Cendant’s major company-owned and franchise real estate brands. There are about 15,000 residential and commercial real estate offices affiliated with Cendant’s Real Estate Franchise Group.

NRT Inc., a Cendant subsidiary that oversees company-owned real estate offices, acquired 31 companies last year and has acquired about 320 companies since its creation. NRT has about 1,000 offices and 64,000 sales associates and operates in about 35 major metropolitan markets across the country.

Revenue for Cendant’s real estate services division in fourth-quarter 2005 reached $1.62 billion, which represents about 38 percent of the company’s total revenue for that quarter. In addition to its real estate business, the company also has operations in the hospitality services, timeshare resorts, vehicle rental and travel distribution services industries.

Focus on business and consolidation

Larry Knapp, president of Saratoga, Calif.-based Alain Pinel Realtors and a former NRT executive, said Cendant has brought a more intense business focus to the real estate brokerage industry. “The creation of what is today known as Cendant has forced the rest of the industry to operate at a higher level, which it has done. I think that the real estate industry before this (Cendant) consolidation play came along was run less like a business and more by the seat of somebody’s pants.”

Knapp, who began his real estate career in 1969 as a real estate agent in Sacramento, Calif., served as president for Coldwell Banker Northern California from 1985-97 and later served as senior vice president for NRT Inc.’s Western Region. NRT was initially established in 1996 as a real estate trust and grew through acquisitions to become a dominant real estate brokerage company. NRT Inc. began as a joint venture with Apollo Management, an investment group, and in 2002 Cendant bought out Apollo for about $230 million worth of stock and the assumption of about $300 million in net debt.

Cendant predecessor HFS was known for its franchising success, so real estate franchise operations were a good fit, but company-owned real estate operations posed a new challenge, Knapp said. It would have been easy for Cendant to simply be the “gorilla franchising business” based on the brands it had acquired from predecessor HFS, Knapp noted, but the company was not content with a singular role as real estate franchisor.

“The impact of Cendant and HFS on the industry was more from the consolidation play on the company-owned side than it was on the franchise side. That’s where they left their core business of franchising. There was a learning curve,” he said. “The company-owned operations created a dilemma for them. They were in competition with their franchisees. Early on (Cendant was) very aggressive in selling franchises. They started selling franchises in the middle of company-owned operations. There was an adjustment period where the franchise side of the business and the company-owned side of the business had to kind of agree on the rules and regulations of expansion. The message got over to the franchise side: sell outside the perimeters of company-owned (offices),” Knapp said.

Cendant Chairman and CEO Henry Silverman had told real estate managers that he believed the real estate industry was ripe for consolidation on a large scale. That movement had already begun prior to the arrival of HFS and Cendant to the real estate scene – companies like Coldwell Banker and Merrill Lynch had been active in consolidation efforts in years prior.

Cendant had an acquisition strategy that focused on gaining market share within a particular market area, he said. “Most of the consolidation they did was in the markets where they already had a presence … merging them into existing operations, closing unneeded offices, reducing redundant costs and in some cases eliminating duplicate advertising costs. While some of these acquisitions put them into new markets, most of them were consolidations right in markets where there already were (existing company-owned offices),” he said.

The company-owned operations became a good channel to purchase the operations of Cendant franchise businesses that were for sale, Knapp said.

Though Cendant has established a reputation as a major consolidator, Knapp said the company did not make a name for itself in the early years as a trailblazer in technology or business innovation, for example.

It was a challenge, he said, to combine all of the legacy technology systems for all of the companies that it had acquired. “It would’ve taken a rocket scientists to get it all together. I think it took them a long time back in New Jersey to realize how important the technology play was going to be and do it on a large scale. They worked hard to present a good technology system like all the rest of us.” It was also a tall order for NRT to streamline the bits and pieces of many real estate-related services, such as mortgage and settlement services, from its various acquisitions and turn that into a functional business, he said.

Cendant has at times been a trendsetter in the adoption of new technologies, and took a big technological step in November 2004 when it announced the launch of LeadRouter, a lead management system that quickly feeds leads to real estate agents via telephone or e-mail from a variety of sources.

The company last year launched a tool called SearchRouter, which allows consumers to navigate from the main Web sites of its national brands to a large inventory of property listings in a local market area.

Also, NRT Inc. this year extended a marketing agreement for enhanced property advertisements at the popular home-search site Realtor.com. NRT first announced a marketing agreement with Realtor.com’s parent company, Homestore, in Feb. 22 for the enhanced display of all NRT-affiliated listings at the Web site. The company’s actions speak volumes about an increasing shift in real estate advertising to online venues.

Cendant spun off its real estate segment this year as a separate company called Realogy. The new company had its stock listed on the New York Stock Exchange under the symbol “H.” Cendant also split off or sold other operating segments.

Bob Moles, chairman of Cupertino, Calif.-based Intero Real Estate and former president and CEO for Cendant’s Real Estate Franchise Group, was president of Contempo Realty when that company was bought by NRT in 1997.

When HFS acquired Century 21 and ERA, the industry was still trying to figure out whether the company would become a major figure in the industry, Moles said. The acquisition of Coldwell Banker and then PHH, which included mortgage services and relocation services, made it clear that Cendant was sincere.

“The acquisition of Century 21 sent a signal, and ERA sent a signal. People (said), ‘Wow, what is this?’ The acquisition of Coldwell Banker was big. After Coldwell Banker and after PHH, people thought this was a very serious company,” he said.

After Cendant formed, the company set its sights on acquiring regional independent brokerage companies, and it was not uncommon for the company to rattle off several new acquisition deals in a single week.

Among the major deals: Jon Douglas Co. in Southern California; Arvida Realty Services in Florida; Burnet Financial Group in Minnesota and Chicago; The DeWolfe Cos. in New England; and Fred Sands Realtors in Southern California. All of these companies had an annual sales volume in the billions. Other major acquisitions included Hunneman Real Estate Corp. in Boston; Gundaker Realtors in St. Louis; Cornish & Carey Residential Real Estate in Northern California; Coldwell Banker Stevens in Washington, D.C., and Baltimore; O’Conor, Piper & Flynn in the Northeast; Contempo Realty in Northern California; Northside Realty in Atlanta; and The Corcoran Group in New York.

Cendant definitely escalated industry consolidations, said Moles, who was named president and CEO of Century 21 Real Estate Corp. in 1997 and later oversaw franchise operations for all of Cendant’s real estate brands until he returned to California in 2004 to join Intero.

“I wouldn’t have traded the experience,” he said of his time at Cendant. “Those first three or four years were pretty exciting years and it was really unique to be a part of that. This is a very entrepreneurial business. There were times when people were having to move very fast.” When he arrived at the company there were about 1,700 employees and when he left there were about 92,000, he said.

Cendant brought lots of capital into play in the real estate industry, which had never been done before in such a big way. And the timing was right for HFS and Cendant to make a move, he said. “Clearly in the seven years I was out there we really had the wind at our backs in terms of property appreciation and (sales).”

Knapp agreed, “The timing of the creation of NRT was pretty perfect. From 1997 until now has been probably the best nine years in the history of real estate. The market is not likely to continue to grow.”

Cendant officials are well aware of changing sales market conditions this year. In February, the company announced it would consolidate local offices to quickly cut about $50 million in costs.

The real estate market turned rapidly in December 2005 in some markets, and the company saw a cancellation rate on sales transactions spike about 30 percent that month, perhaps because speculators were fleeing. Also, the volume of real estate transactions at NRT companies dropped about 19 percent in New England, California and Florida in fourth-quarter 2005, the company reported, while transaction volume in other market areas increased about 4 percent during the quarter.

Small and mid-sized companies face an increasingly competitive real estate environment, Moles said, and there are challenges for large national companies, too. Massive size can be a ”two-edge sword,” he said. “Sometimes when you’re real big the ability to move quickly … is hampered. I think (size) can be both a blessing and a curse.” But Cendant has effectively used its size as an asset in consolidating the industry.

Also, it can be difficult to manage real estate operations within a publicly traded company, Moles said, as “you’ve got to manage to shareholder expectations – sometimes it’s difficult to take a long-term perspective.”

With the real estate segment as a separate company, the national scope of Cendant’s real estate operations and its franchise royalties should provide some balance to market fluctuations in specific geographic areas, Moles said. “Its revenue streams are diversified across major metro areas.”

Early days

Before today’s successes, the corporate marriage of HFS and CUC proved disastrous in its early stages. Cendant in 1998 restated its earnings for 1995-97, revealing that “a ‘widespread and systemic’ fraud had occurred at CUC and the merged company that included improperly recognizing fictitious revenues, falsely coding services sold to customers and fraudulently manipulating merger reserves,” according to court documents. A report adopted by Cendant’s Board of Directors found that CUC’s operating income was inflated by about $500 million during a period from May 1995 to August 1998, the court documents reveal.

In financial filings to the U.S. Securities and Exchange Commission in 1998, Cendant reported that earnings had been overstated by about $300 million, or 24 percent, during that three-year period, and earnings per share were overstated by about 130 percent.

Cendant officials did not offer any comment for this article due to “vacation schedules,” Kevin Doell, a spokesperson for Cendant’s Real Estate Services Division, said.

Cendant’s stock price plummeted with the news of the accounting fraud. In one day following the company’s initial disclosure in April 1998 about the problems, Cendant’s stock dropped 47 percent per share and its market capitalization sunk $14.2 billion. With later announcements in July and August the company’s market capitalization dropped further — for a total of $20.5 billion, or 67 percent, court documents state.

Several company officials made millions by selling shares of stock before the radical drop in stock price. Chairman and CEO Silverman in February 1998 sold 1.7 million shares of Cendant common stock — his entire holding in the company — and received $61.4 million, according to court documents.

Heads rolled. Walter A. Forbes, the former CUC chairman, CEO and president who served as chairman of Cendant’s board of directors following the merger, was forced to resign in July 1998. Forbes sold about $38.5 million worth of CUC and Cendant common stock, court documents state. E. Kirk Shelton, vice chairman for Cendant and former CUC president, was terminated in August 1998. Shelton earned about $23 million in Cendant and CUC stock proceeds. A group of other former CUC officials also resigned as the scandal unfolded.

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