Henry Silverman: The Real Artist Of The Deal?
When Henry R. Silverman gazes north from the cozy 41st-floor office he shares with two assistants on New York's Fifth Avenue, he looks down on the famed Plaza Hotel and much of sleek Trump Tower. The view couldn't be more fitting. Silverman, chief executive of HFS Inc., has no use for trophy properties, though he controls the biggest hotel network in the world. And there are few dealmakers he differs from more than his flashy longtime acquaintance, Donald Trump. Says the reserved former tax attorney: "I don't believe in self-promotion."
Nonetheless, the hotel, real estate, and rental-car empire Silverman is building seems bound to make him a far more important dealmaker than Trump. Already, he owns the rights to such powerhouse brands as Howard Johnson, Days Inn, and Ramada in hotels; Century 21, ERA, and Coldwell Banker in real estate; and Avis in rental cars. With his $1.7 billion purchase of PHH Corp., announced on Nov. 11, he'll add a topflight corporate relocation, mortgage, and car-fleet management company. The deal will bring to about $5.1 billion the value of acquisitions he has made since mid-1990.
If all the pieces of this disparate empire work together as he expects, Silverman, 56, will be a billionaire in just a few years. The value of his stake--12.2 million shares and options--has rocketed to more than $615 million since he took HFS public in 1992. The stock has soared from a split-adjusted 4 3/8 to a high of 79 5/8 on Oct. 14 and now trades at about 64. "He's come out on top of all of us," says Leon D. Black, managing partner of the investment firm Apollo Advisors LP and a longtime friend and associate.
But Silverman's hold on his fortune is hardly rock-solid. After its dizzying climb, the stock has become stunningly volatile. When Silverman disclosed on Sept. 3 that he might sell as much as 5% of his holdings each year for estate-planning purposes, the stock fell 6.1% on fears he was reducing his role. (In fact, his compensation plan lets him earn more stock than he would cash out.) And since the PHH purchase, his biggest single deal, was announced, the stock has fallen nearly 13%, closing Nov. 19 at 63 5/8.
UPS AND DOWNS. Riding such a roller coaster is nothing new for the driven Silverman. A dealmaker since 1966, when he went into investment banking at White, Weld & Co., a firm absorbed by Merrill Lynch & Co., Silverman has had a front-row seat for some of Wall Street's more spectacular ups and downs. After a stretch in the 1970s with his own mergers firm, he spent the 1980s mastering leveraged buyouts at the feet of Reliance Group Holdings Inc. Chairman and CEO Saul Steinberg. Silverman says the legendary financier taught him how to manage in a "no excuses" environment.
Indeed, Silverman makes no excuses for his own failures. While at Reliance, for instance, he studied demographic trends, then created a broadcasting venture for the Spanish-speaking American market, Telemundo Group Inc. The network built enviable ratings, but advertisers turned up their noses. "It was racial prejudice," grouses Silverman. He wound up getting out of Telemundo, now a profitable public company.
Silverman's dealmaking education at Reliance--and later at Blackstone Group--set him on the path to HFS. He and colleagues at Reliance snapped up the Days Inn motel chain for $590 million in 1984 and sold it five years later at a $125 million profit. In 1992, after the chain slipped into bankruptcy, he and Blackstone bought the franchise system, without the real estate, for $259 million. Days Inn fit nicely with Ramada and Howard Johnson, chains he had acquired for $170 million in 1990, when he launched what he saw as a franchisedhotel empire, originally called Hospitality Franchise Systems Inc. He first tended to the company while at Blackstone, which he left in late 1991.
Silverman's approach: pick up tarnished brand-name chains, improve them, then collect franchise fees and modest royalties on revenues. He used borrowed money, which he repaid out of cash flow and the proceeds of four public offerings--two for equity and two in convertible debt. With the lodging industry gaining momentum, healthy earnings growth, and a receptive market for offerings, finding capital was no problem. One selling point: Silverman left the facilities and most operating risk in the hands of franchisee-operators, a technique he still uses, though he has moved beyond hospitality.
Silverman, after all, is a dealmaker, not a hotelier. And some of his diversifications have backfired. In 1992, he moved into gambling, backing casino projects in several states. The venture lost money--in part, Silverman says, because politicians didn't deliver on promises to legalize gaming. He folded, at a loss he figures at about $25 million. He now avoids regulated industries.
WORKHORSE. The Brooklyn-born Silverman comes by his financial savvy naturally. His father was chief executive of James Talcott Inc., a commercial-finance firm. After earning a degree in American civilization at Williams College, Silverman studied law at the University of Pennsylvania. After a short stint in the Navy reserves--which he bluntly says he joined to avoid going to Vietnam--he practiced tax law before jumping to Wall Street.
Married for the second time, Silverman has three daughters, two grown and one a teenager. While HFS has 900 employees in Parsippany, N.J., he lives on Manhattan's Upper East Side and works from the office in midtown. He also has a weekend home in tony Westchester County, N.Y., near where he grew up. There he indulges his love of tennis.
On the job, Silverman has minimized setbacks by doing his homework. "I've been on Wall Street for 22 years and rarely have met somebody with that combination of brains, hard work, and ambition," says Peter C. Krause, a onetime managing director of Morgan Stanley & Co.
At the same time, some deals suggest an impulsive streak. Take Silverman's purchase of Resort Condominiums International, an Indianapolis time-share exchange company. Negotiating a volume-purchasing contract over lunch with RCI owner Christel DeHaan, Silverman, who is crazy about demographics, got caught up in DeHaan's discussion of how trends will affect the time-share industry. Before lunch ended, "I convinced myself, and had her half-convinced, that we should buy the company," says Silverman. He adds: "This is not a good negotiating tactic--drooling and groveling--but I do both of those."
For the most part, the stock market has liked Silverman's dealmaking, though the rationale for some purchases seems elusive. There's little apparent synergy, for example, between HFS's hotels and the real estate companies it has bought since mid-1995. But Silverman says he's building a company responsive to baby-boomer preoccupations: selling houses, renting cars, taking vacations. Moreover, he says, HFS's strength is managing franchisees in fast-growing service businesses--a view investors seem to accept, since they drove the stock up steadily till last summer.
GOOD EYE. Lately, however, the market has been showing some skepticism. At least initially, investors didn't like Silverman's $800 million cash-and-stock purchase of Avis Inc., announced in July. And some gulped when he agreed, in early October, to pay $625 million in cash and stock--plus as much as $200 million more depending on performance--for RCI. Investors are choking anew in the wake of the Nov. 11 announcement that he is buying PHH for $1.7 billion in stock. In fact, PHH seems a nice fit: Its vehicle fleet-management operations dovetail with Avis, while its executive relocation and mortgage businesses suit the real estate agencies.
Most of HFS's deals have involved a mix of cash, usually borrowed, and stock. With its four offerings, Silverman has been able to hold down leverage. HFS's debt includes just $150 million in notes and $390 million in convertible debt. So long as the properties keep generating returns and the stock keeps rising, he'll have no trouble doing more deals.
Silverman and some observers say HFS's earning power should calm investors. Montgomery Securities analyst Michael G. Mueller, for instance, expects HFS to finish 1996 with net income of about $167 million on about $740 million in revenues, then next year, after closing on PHH, to earn about $450 million on revenues topping $1.5 billion. Silverman, says Mueller, "has figured out how franchising brand names is good business."
But predicting sales or profits accurately may be impossible. Silverman says he'd like to buy another rental-car company, and analysts are betting he's looking at the likes of Dollar or Thrifty, both owned by Chrysler. Any such additions will throw projections out of whack. But so long as HFS's pieces keep working, together or apart, and the markets keep making its stock a marketable currency, Silverman will be buying and selling. So far, his eye for a good deal has proven his greatest asset.