In early 2006, Henry Silverman, chairman and CEO of Cendant Corporation, announced that the company’s board of directors had approved the de-merger of Cendant into four operating companies—Avis Budget (a vehicle rental company composed of Avis, Budget, and Budget Truck), Wyndham Worldwide (a lodging company composed of such hotels and resort chains as Wyndham Resorts, Ramada Inn, Howard Johnson, and others), Realogy (a real estate franchise company composed of Century 21, Coldwell Banker, and Sotheby’s, among others), and Travel Distribution (a travel company composed of Orbitz.com, CheapTickets.com, and RatesToGo.com, among others). Under the split-up plan, Wyndham Worldwide and Realogy would be de-merged by a public offering of shares, whereas Avis Budget and Travel Distribution would be spun off to existing Cendant shareholders.

The reason for the de-merger, according to Silverman, was that Cendant’s earnings were not being properly reflected in its share price. “We were among the 100 most profitable companies in America in 2004, yet we were somewhere in the 300s in terms of market value.” Discuss the reasons why Cendant’s share price in 2004 may not have reflected its earnings in 2004. If the de-merger is successful, what should happen to the share price of the four operating companies? Why?