Cendant Eyes Agency Acquisition
Following the close of its acquisition of Galileo International, Cendant Corp. last month replaced top-level management at the global distribution system and relocated Galileo's headquarters from Rosemont, Ill., to Parsippany, N.J. BTN executive editor Jay Campbell met with Samuel Katz, Cendant chief strategic officer and chairman and CEO of the new travel distribution division that includes Galileo, to discuss what could be Cendant's next move: buying a travel management company.
BTN: How have the events of Sept. 11 and the following weeks affected Cendant's acquisition strategy?
Samuel Katz: It has taken away some ability to move in terms of strategic things, because we've had to focus on adjusting our cost structure to deal with a different revenue environment. Barring a reaction to other terrorist incidents—like the reaction that occurred after Sept. 11, when travel stopped—we'll start seeing some opportunity in 2002 to go after more organic expansion of our travel distribution business, as well as potentially some deals. We're going to be much more cautious on acquisitions right now because of the environment. It's very hard to buy something when you don't know what the earnings are.
BTN: Cendant chairman, president and CEO Henry Silverman said the travel management industry—all those travel agencies out there that handle corporate travel—is fragmented and needs consolidation. Is it a worthwhile business in which to be investing?
Katz: All the leading companies will tell you that they expect and need consolidation. After the top handful of companies that have, say, half the market, it drops off very dramatically. So, you'll see some activity, and we're going to participate. There are some conflict issues if we do business with all those top agencies and then we own one of them. For example, when Merck puts out its business for bid, it would be tough to explain to the other guys bidding that we aren't competing with them, because it isn't just that we'd be the GDS for one of the three but we'd actually own one of the three. But we've dealt with some pretty thorny conflict issues in other areas of our business. That being said, if you look at the marketplace today, Sabre and American Express are very closely aligned in terms of going to market together with customers. Agencies that are customers of, or partners with, Sabre are not happy with that. They still do business with them, but those dynamics are changing because corporations increasingly are taking control of the GDS decision, in particular because of corporate booking tools.
BTN: Some people are perceiving the travel agency as old news, a dying business. If it's not a dying business, is it really a forward-looking business to get into, especially now?
Katz: The fact is, 80 percent of the business is done through travel agencies and you will not find successful companies using internal capabilities for travel management. It's just nuts. The best companies, in trying to control their costs, outsource the function and it's on a fee-for-service basis. Business travel management has a relative amount of complexity, and if you do it well, you can be successful and get a lot of value and appreciation from your customer.
Looking at the participants: American Express historically was more driven around its corporate card, and it's a small part of their business. In the case of Carlson Wagonlit Travel, a lot of management changes have created some issues. With a great company like Rosenbluth International, a private company and by nature much more conservative, it's difficult to have the financial flexibility that other people have. Navigant International has done a very nice job, but they have a lot of debt, so maybe they have limited or lesser options. With this environment, how much they can grow is at least put on hold. And WorldTravel BTI is interesting because it is very well-resourced, but also by a very conservative group of shareholders. I think they're happy with their organic growth, so it's not clear how enhancing their business with more acquisitions affects that whole relationship. For each one of their reasons, each of these companies have some sort of unusual characteristic, and so it's not like there are four public companies out there.
BTN: You went through some of the big agencies, but another strategy might be to focus on the agencies in the fifth- to 20th-largest range. Does an acquisition also depend on how well a company has been able to move toward a more slick, technology-oriented environment?
Katz: You hit the nail on the head in the sense that you started off with, "What about the next 15 to 20 companies?" That's part of the reason that there has been some consolidation and certainly organic growth at the top. Those companies with more scale have been able to invest in some client-facing technologies that focus on reporting and driving savings to the customers. That's where you have a real disadvantage among even firms that were nice-size companies with long-time relationships and so forth. As in other areas of business, it is the larger firms that have succeeded because they have been able to invest in technology to become more efficient.
The travel agencies that will stick around are the ones that have those resources, and it's important to consider that when you go into an environment like this, where transactions are going down so you have to skinny down. One of the first things that goes is your investment in new technology and capital expenditures, so that puts added pressure. Your question raises another catalyst to this whole issue of why it is likely that there will be some activity. It's because some people are not going to be able to make all of the investments they need to, and they'll have issues about their competitive position, and that will, perhaps, cause them to make some decisions.
BTN: In announcing the Galileo acquisition, your CEO put some emphasis on a model of loaning money to smaller travel agencies that would make acquisitions and convert the acquired to the Galileo GDS. Has that begun?
Katz: We have a number of discussions going on and we've made proposals to some people, typically subscribers of Galileo looking to make an acquisition. It's obviously much more attractive when the agency they're buying is not a subscriber to us. In a couple of cases, deals haven't materialized because the buyer is going through some challenges. I don't think there has been any real activity in the business in terms of deals over the past few weeks.
BTN: People are associating Cendant's approach with the moves by United Airlines back in the 1980s to line up with Hertz, Hilton and Westin into a conglomerate known as Allegis. How is what you're doing different?
Katz: I think Allegis was a supplier-focused strategy in trying to cross-market among the main products in the chain, air, car and hotel. The difference is that our travel distribution division is separate from our owned travel businesses, Avis and the hospitality businesses. We're a third-party business in every aspect. There's tremendous value in distribution. Suppliers are not necessarily paying a lot for their distribution, they're just, unfortunately, taking all their distribution savings and giving it to their unions. There's a sort of adversarial relationship that has developed and part of what we want to do is show that you shouldn't cut off your nose to spite your face.