HFS STANDS FOR GROWTH

By John Greenwald

You may never have heard of him, but if you've bought a home, rented a car or stayed in a hotel recently, you have probably encountered the handiwork of a high-powered, low-profile tycoon named Henry Silverman. Once a top Wall Street dealmaker, Silverman now runs a superfast-growing company called HFS that owns a collection of brands from Howard Johnson to Century 21 to Avis that have made it the world's largest and most aggressive franchiser. "You'd have a lot of difficulty finding another company this size that is growing this fast," says Smith Barney analyst Michael Rietbrock. How fast? In 1995 HFS had sales of $413 million. This year the company will clock in around $1.8 billion.

Silverman, who founded HFS as Hospitality Franchise Systems in 1990 and took it public in 1992, has his company in the thick of some of the hottest plays on Wall Street. If Hilton Hotels Corp. succeeds in its hostile $6.5 billion takeover bid for ITT Corp. and its chain of 424 Sheraton properties, as many analysts think likely, HFS will add the luxe Sheraton brand to its already bulging portfolio. That's because Hilton ceo Stephen Bollenbach wants to license HFS to franchise the Sheraton trademark worldwide. Says Bollenbach of Silverman: "He can do more for the Sheraton brand than anyone else can. He's the best."

Silverman, 56, has in fact been assembling a new kind of empire, one consisting of a loose confederation of brands in related services--rental cars and hotels, real estate and mortgages--that can reach consumers at home, at work or at play. In pursuit of that strategy, HFS last week agreed to pay $175 million for Value Rent-a-Car of Boca Raton, Florida, which has a string of 45 locations that cater to vacationers. Value will complement Avis' operations, which are largely oriented to business travel. And even as HFS drove off with its deal, Silverman was completing the $1.7 billion purchase of PHH, a mortgage, fleet-management and executive-relocation company.

For a consumer-services giant, HFS has surprisingly little contact with real, live consumers. Its main strategy is to be a franchiser: providing a brand name and other services in return for royalties that its brands generate. With a notable exception, HFS avoids the headaches associated with running service companies. This unusual game plan has worked wonders for Silverman, who has displayed a knack for spotting value in unpromising places while spending $5 billion to assemble his empire. Since acquiring two familiar hotel chains--Howard Johnson and Ramada--HFS now commands 23,000 outlets in 63 countries, and had revenues of nearly $800 million last year. "Many of our businesses no one wanted," Silverman says, "and we had to fix them."

Some repair job. Fans on Wall Street estimate that the company's net income, which more than doubled, to $169.6 million, last year, could reach $445 million in 1997. Silverman isn't always golden. HFS last year licensed its Century 21 trademark to Amre Inc., a cash-strapped home-remodeling company that Silverman thought would fit nicely with his real estate operations. But Amre went belly up at a cost to HFS of $14 million in write-offs.

Nowhere has Silverman displayed contrarian instincts more clearly than in the slo-mo rental-car business, from which U.S. automakers have been peeling away as fast as they can (see box). Yet Silverman gladly paid $800 million last year for No. 2 Avis, a global brand that he views as a natural fit with his hotel and resort time-sharing businesses. After overhauling Avis, Silverman plans to sell a stake in the company to the public.

HFS, based in Parsippany, New Jersey, also wants to regain the fast track on Wall Street that it occupied until late last year. HFS zoomed from $4 a share at the time it went public in 1992 to a high of $79.87 last October. No one was happier than Silverman, whose personal holdings topped $600 million in value. Since then the stock has faltered on fears that HFS has gotten too big and unwieldy; but the price has rebounded in recent weeks and closed last Friday at $69 a share. "HFS moves so quickly, and makes so many acquisitions, that it is difficult for the investment community to fully understand everything it is doing," says Camille Humphries, an analyst for the firm Alex Brown, who remains bullish nonetheless.

In the Avis deal, HFS backed into a public relations nightmare almost immediately, after civil rights lawyers last year filed a discrimination suit that accused an Avis licensee of refusing to rent to black customers in North and South Carolina. Avis moved to drop the licensee, began a review of its antidiscrimination policies and hired a new chief counsel to assure compliance with the law.

Yet accusations of discrimination continued. In a statement filed last week, a former Avis worker said the company had a policy of refusing to give corporate accounts to yeshivas (Jewish schools). Avis called any suggestion that it had discriminated against Jews "ridiculous and completely false." The company said it had alerted agents to incidents in which callers falsely claimed to be employed by yeshivas in order to get corporate discounts. Avis says the cars were then frequently driven by underage drivers and used as everything from taxis to trash haulers--and even on one occasion a hearse--and often returned banged up. Such controversies have dented Avis' "we try harder" image, but analysts are still upbeat about the company's longer-term prospects.

Although Silverman was educated as a lawyer, he gravitated to the more treacherous world of dealmaking, cutting his teeth with Wall Street's Blackstone Group in the merger mania of the 1980s. There he was involved in dozens of corporate deals. But don't look for his name in the headlines: he shies away from New York City's mogul madness. As one of his staff says, "He is not part of the scene. You will never see him on Page Six [the New York Post gossip page]. He is focused on business."

That business is complex, which stems from HFS's quasi-consumer strategy. Despite owning the Days Inn and Howard Johnson nameplates, for example, "we are not in the hotel business," says Silverman. "Nor are we in the real estate business.'' The main clients of HFS are the thousands of franchisees who fork over royalties and fees in return for the right to use HFS brand names and receive support services ranging from national advertising campaigns to discounts on Coca-Cola, computers and televisions. The franchisees can even get help setting up employee-retirement plans.

"What we try to do," Silverman says, "is assemble different brands that have huge internal synergies." Take yet another HFS business: time-share vacation properties. More than two million families are members of Resort Condominiums International, the world's largest time-share exchange network, which Silverman picked up for $825 million last year. "When members go to a time-share resort," he says, "they typically rent a hotel room on either side of the week [they have purchased], and obviously we have a hotel network to rent that room to them. Typically that owner will fly to his or her destination and rent a car, so that is where Avis comes in."

HFS also wants to consolidate purchases related to home owning that HFS franchisers could handle through affiliated HFS real estate units. For example, PHH could not only find and sell a home to a relocating corporate executive but could also write the mortgage. Silverman sees no reason why anything from title insurance to burglar alarms to satellite dishes or storage space can't be provided through HFS affiliated vendors.

But such cross marketing has raised the hackles of some franchisees. A few renegades at Century 21 banded together a year ago to protest irritants ranging from growing demands on their time to rising fees. Silverman concedes that "real estate agents really want to sell the house, not something else." But he thinks the agents should make a greater effort to look at life from their clients' point of view. The mortgage business, he says, offers rich opportunities for synergy. "What the consumer is saying is, 'I want to be able to buy a house like a car.'" That means obtaining financing at "the point of sale--which is our broker's office."

HFS is intent on expanding its real estate business, which accounts for 20% of all U.S. home sales. "The independent agent is pretty much going to disappear," Silverman warns, "because the consumer is being driven to branded products." He sees that happening overseas as well. In its first venture outside North America, for example, Coldwell Banker agreed last month to start franchising offices in Thailand, Singapore and Malaysia.

For the time being, HFS plans to build up its existing franchises rather than buy new ones. "I can't think of anything else on the service side that is really high on the radar screen," Silverman says. In any case, he notes, what drives him today is no longer the money ("It's not an economic issue") so much as the "fear of failure and the ego gratification of success. It's a way of expressing creative energy." Even if few people outside the business world have ever heard of your company.

--Reported by Valerie Marchant/New York and Parsippany

With reporting by VALERIE MARCHANT/NEW YORK AND PARSIPPANY