Free Essay

Marriott

In: Business and Management

Submitted By artistepassionne
Words 1098
Pages 5
The purpose of this memo is present the analysis and answer the questions revolving around the Project Chariot, the Spin-off that allowed Marriott to separate its business activities in its world famous hotel management business and a separate real estate business in 1994. This project involves the splitting up the company into two separate entities, Marriott International Incorporated (MI) and Host Marriott Corporation (HM) in order to minimize the debt burden and improve the financial health of the company after severe effects from real estate market crash and the slowdown in the business in early nineties.
The description of Marriott Corporation, key issues faced by the corporation, details about the proposed Project Chariot and the alternatives and consequences of implementing Project Chariot is reported in the following sections.
1) The first analysis is the impact assessment for the parties and stakeholders of Marriott:
According to the reorganization plan MI would operate hotels and include Marriott’s service businesses. It would also own Marriott’s trademarks, trade names, reservation and franchise systems. HM would own Marriott’s hotel properties and undeveloped real estate. It would also operate food, beverage, and merchandise concession in airports and toll-road rest areas.
Impact Assessment for:
a) Shareholders: the project would give each shareholder one share of the new Marriott International Inc. (MI) for each share of Marriott, so since no cash would be exchanged/transferred. It would have the beneficial effect of diversifying the risks into two categories: 1) services and 2) real estate. They can look at a develeraged and well capitalized business, which could deliver enhanced returns on the one side and HM being well covered by the value of the real assets in case of default. The trade looks favourable on paper and so should increase the interests of shareholders.
b) Bondholders: Bondholders are worse off. Distressed real estate assets together with a decreased ability of income generation are now backing HM bonds. This decreases the company’s ability to repay the accumulated debt, which becomes fully dependent on the value of the real estate. Finally, the HM bondholders also lose the benefit of diversification of earnings generation from three different businesses.
The subordinated bondholders are also worse off because the company will take a line of credit from MI, which will be ranking pari passu with its senior obligation. This will make their debt repayment even riskier and therefore their bonds will decrease in value even further.
Finally, there is also a high risk for the current liabilities’ holders as the company might not be able to generate sufficient operating income for its repayment and thus will depend on the credit line from MI for its current liabilities refinancing.

c) Management: Management will be clearly benefiting from the spinoff transaction. They will be able to create a new company with much less debt, good earnings generation and focused to the hotel business which has been their main business over the years. At the same time, they are able to dispose all the accumulated debt from the past. Finally, with the new company they will have the ability to raise financing on better terms in order to finance future growth.
d) The value of the whole company: The value of the whole company: At first glance the value of the whole company will increase as MI is mainly unlevered while HM’s loans will be marked down significantly. However, the value of the whole company will depend on: (i) the ability of HM to generate future earnings, (ii) the value of HM assets relative to its debt (iii) the ability of MI to find and finance new projects on good terms and (iv) the ability of the management of both companies to implement the above.

2) In second instance assess whether the proposed restructuring is consistent with management’s responsibilities:
Under project chariot, MI and HMC would have different independent management teams. For MII, this means that the new spin-off would include little long term debt and thus better prospects for MI. given Bollenback experience in managing leveraged real assets, management responsibilities are in line with enhancing shareholders value. But some room for criticism still remains towards the treatment of bondholders, who may have been kept in the dark too long before the decision was officialised. In essence, Management isn’t responsible as they obey to the rule of doing their best to achieve balanced debt ratio and hold investment grades, and maximize value of the firm.

3) If project chariot were to be implemented what would be our position as board members?
Assuming that the spinoff is legal, the main considerations would be ethical and economical. From an economic standpoint the transaction makes sense for the shareholders as it makes them better off from the current situation, and simultaneously provides them with the ability to finance new projects on better terms, which will be managed from the same management team, as in the past, with a proven record. The market response is as follow:
Year Total Liabilities (L) Total Assets (A) Debt ratio = L / A
1987 $3 588 $4 579 78,36
1988 $4 560 $5 371 84,90
1989 $6 104 $6 732 90,67
1990 $6 519 $6 926 94,12
1991 $5 721 $6 400 89,39
1992 $5 625 $6 410 87,75

In the meantime, from 1987 to 1990, the ratio operating income to interest expense dropped from 2.75 down to 2. Also, from 1990 to 1992, the stock price went from $10.5 up to $17. So while debt ratios was going down the share price was increasing, improving the value of the firm.
Ethically, the transaction seems to be more difficult to evaluate. Although it protects the shareholders’ interests and improves their financial position, it reduces the value of the bondholders’ claims. This action will have a negative impact on the companies’ reputation and might also decrease the group’s ability to raise financing in the future.
Taking into account the above, We would advise for the Project Chariot, as We would need to protect the shareholders’ interests and make sure that the company would be able to generate value in the future. In terms of the bondholders’ claims, which have been decreasing in value for the past 3 years, this solution would provide them with a good chance to recoup their financing at par as MI would provide a credit line for HM implicitly providing a ‘’backstop’’ for the repayment of its debt. In return for this credit line, the bondholders would have to accept a current decrease in the value of their holdings.

Similar Documents

Free Essay

Marriott

...Introduction The goal of this research paper is to recognize and apply the principles of the marketing planning process, develop contemporary marketing management issues by analysing if the marketing mix of the organisation in this case Marriott Corporation with their Birmingham represented hotel Forest of Arden, A Marriott hotel and Country Club, satisfies their target market’s needs. Threats and opportunities will be detailed from caring a PEST analysis and by recommending marketing mix changes in line with the target markets needs and wants. Target market and marketing mix Marriott’s target marketing strategies have been enhanced in its several categories of segmentation through the various brands. The different flagships of Marriott’s brands support the overall target segmentation by the hotel. The various facilities like Marriott’s Hotels and Resorts, Courtyard by Marriott, Renaissance Hotels, Fairfield Inn and several others form the core brands that serve customer needs in the various target market segments according to Marriott.com. Being part of the brand Marriott’s Hotels and Resorts the Forest of Arden focuses on business, leisure or group events. Location can be a way to target a certain market; this hotel is located just 4 miles from Birmingham Airport and International train station within easy access of the M6/M42 and M40 so a great part of their target market is represented by business customers Considering the close proximity to the NEC, UK's largest...

Words: 2596 - Pages: 11

Premium Essay

Marriott

...Case Questions Case #5 – Marriott Corporation: The Cost of Capital 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the weighted average cost of capital for Marriott Corporation? a. What risk free rate and risk premium did you use to calculate the cost of equity? b. How did you measure Marriott’s cost of debt? 4. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? 5. What is the cost of capital for the lodging and restaurant divisions of Marriott? a. What risk free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? b. How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? c. How did you measure the beta of each division? Case Hints and Suggestions The primary objective of this case is to show students how the CAPM is used to compute the cost of capital. Students learn to calculate beta based on comparable companies and to lever betas to adjust for capital structure. Students are asked to determine the appropriate risk-less rate and market risk premium. This case also encourages students to focus on the choice of time period to estimate expected returns and the difference......

Words: 3319 - Pages: 14

Premium Essay

Marriott

...Marriott International implemented its Group Pricing Optimizer (GPO), a group pricing sys- tem that helps its sales force price hotel rooms for group customers. The system uses price-elasticity models for each statistically derived market segment to recommend an optimal rate and negotiating range. To assist the sales manager during the negotiations, GPO also displays additional data, including avail- ability of sleeping-room inventory, potential displace- ment of more valuable business, probability of the customer accepting the rate, and evaluation of alter- nate dates. In its first two years of operation, GPO has met its objectives to drive profitable revenue and improve the sales process for both the customer and the sales manager. Marriott International Marriott International, Inc., a leading hospitality com- pany with more than 3,300 hotels in nearly 70 coun- tries and territories, operates and franchises hotels under the Marriott, JW Marriott, The Ritz-Carlton, Renaissance, Residence Inn, Courtyard, TownePlace Suites, Fairfield Inn, SpringHill Suites, and Bulgari brand names. It also develops and operates vacation ownership resorts, operates Marriott Executive Apart- ments, provides furnished corporate housing through its Marriott ExecuStay division, and operates confer- ence centers. Headquartered in Bethesda, Maryland, the company has more than 140,000 employees worldwide. Marriott’s heritage can be traced to a root beer stand that J. Willard and Alice S. Marriott......

Words: 593 - Pages: 3

Premium Essay

Marriott

...Marriott Corporation Marriott International is the current leader in the hotel/lodging industry. Founded in 1927, by J Willard Marriott, and his wife Alice, it had its beginning as the first A&W Root Beer franchise. By 1957, Marriott made a historic move into the hotel industry, opening their first hotel in Arlington, Virginia, under the management of their son, Bill Marriott. (Marriott International, 2015). Between 1957 and 1985, the Marriott Corporation had expanded into Mexico, began providing lodging for the cruise industry, and debuting the first Courtyard hotel. Between 1986 and 2011, they acquired several more hotels, including Fairfield Inn, Residence Inn, Renaissance, Executive Stay, and 49% of the Ritz-Carlton Hotel Company. By 2012, Marriott had added an additional five hotels after acquiring Gaylord Hotels Brand, bringing the current number of properties owned by the corporation to 4,300, in 81 countries (Marriott International, 2015). Most of its current properties are franchised, with the Marriott family owning about 30% of the corporation (Yahoo Business). Marriott International, Inc. is one of the leaders in lodging, and is currently headquartered in Bethesda, Maryland. They have made their mark worldwide, as operator, franchisor, and licensor of hotels and timeshare properties. Under its current model, the hotels are typically franchised, rather than owned. “At year-end reporting, in 2014, of the total number of hotels available......

Words: 1405 - Pages: 6

Premium Essay

Marriott

...CHICAGO Marriott Corp. Spinoff (A) by Professors Robert Gertner and Steven Kaplan On October 5, 1992, the Marriott Corporation announced plans to spin off its profitable hotel management business leaving its real estate assets as part of the successor corporation. At first glance the deal did not seem very different from many other corporate restructurings. However, because much of Marriott's existing debt was to become an obligation of the real estate assets only, the default risk on that debt would increase significantly as a result of the spinoff. The spinoff announcement was greeted with an unusually large amount of resistance and controversy that had wide-ranging implications for the business, fiduciary, and ethical obligations of management, directors, shareholders, debtholders, and financial advisers. The Marriott Corporation The Marriott Corporation was founded in 1927 by J. Willard Marriott as an A&W root beer franchise. The company soon expanded into the restaurant, airline catering, food service, and hotel businesses. J.W. "Bill" Marriott Jr., who became president of the company in 1964 at the age of32, was the chairman and CEO in 1992. Despite having gone public in 1953, Marriott and his family still owned 25.8% of the company's equity. Marriott's use of innovative financing techniques permitted its rapid growth in the 1970s. Marriott's strategy was to build hotels, and then sell them offto investors, maintaining control through long-term management......

Words: 2177 - Pages: 9

Free Essay

Marriott Hotel

...CL IENT STORY • M ARRIO T T Company: Marriott Panel name: My Marriott Voice Panel since: 2008 No. of Panelists: 17,000+ “ We want to have a pulse on what our mobile customers are looking for and the tools Vision Critical provided allowed us to have a quick implementation. With the survey we were able to speak to 700 mobile users in roughly 30 days and it allowed us to very quickly get insight into today’s mobile customers.” - Gina Villavicencio, Senior Manager, User Research, Marriott International – eCommerce Vision Critical Community Panels To find out why Vision Critical Community Panels is the most widely adopted platform of it’s kind, used by over 500 of the worlds top brands, visit us at www.visioncritical.com In 2005, Marriott International launched their first mobile site. The next step was to gain insights into how their mobile customers liked the site and what features they wanted to see next. With the help of Vision Critical, they launched a custom mobile research application that surveyed customers right on their phones. In only a month, they had the data to guide the strategic launch of their next wave of site features and content. Challenge: Engage mobile customers and find out how to serve them better in this new space. With eighty percent of the US population using mobile phones, mobile sites and content are becoming more and more important to businesses. Marriott International launched their mobile site in 2005......

Words: 619 - Pages: 3

Premium Essay

Marriott Case

...Marriott Case i. What is the cost of capital for Marriott Corporation as a whole?   | βE | D/D+E | E/D+E | βA | Marriot Whole | 0.97 | 41% | 59% | 0.57 | Target | 1.43 | 60% | 40% | 0.57 | rA=8.95+0.57*7.43=13.20% ii. What types of investments would you value using Marriott’s WACC? Since most projects have their own idiosyncratic risks and various leverage levels, their discount rates are mostly different than the WACC of the company as a whole. Only for projects that have the same risk and the same leverage as the firm overall can we apply the Marriott’s WACC. iii. If Marriott used a single corporation hurdle rate for evaluating investment opportunities in each of its lines of businesses, what would happen to the company over time? By using the same hurdle rate, the company may implement investments that they should not, or they may not implement ones that they should because of using the improper rate to calculate NPVs of the project. When the single corporation hurdle rate (13.2%) is applied to each of its lines of businesses, some projects that are supposed to have negative NPV will be invested while other projects that are supposed to have positive NPV will be neglected. For example, the lodging sector has a discount rate of 11.97%, and by applying the corporation hurdle rate of 13.2%, the company will mistakenly pass some lodging projects that can generate positive NPV. iv. What is the cost of capital for Marriott’s three divisions? ■Lodging......

Words: 478 - Pages: 2

Premium Essay

J.W Marriott

...Executive J. W. Marriott, Sr. | About MarriottA reflection on the life, legacy and contributions to the hospitality industry of J.W. Marriott, Sr. Group A Partners Robert Manuel and Kody Wood | Hospitality Industry Executive J. W. Marriott, Sr. | About MarriottA reflection on the life, legacy and contributions to the hospitality industry of J.W. Marriott, Sr. Group A Partners Robert Manuel and Kody Wood | John Willard Marriott September 17, 1900 – August 13, 1985 Born on September 17, 1900 in Marriott Settlement, Utah, as the eldest son of a poor farmer, J.W. Marriott was said to have learned to ride a horse before he could walk. Early in his upbringing, Marriott was held to a very strict and high standard of conduct from his father. His father also gave him responsibility at an early age making him a sheepherder on the farm to help his family. At the age of 19, he preached the gospel as a Mormon missionary around the New England area. Once Marriott completed his mission, he traveled through Washington D.C. on his way back to Utah and thought how great of an opportunity it would be to sell A&W root beer there during the hot summer days. Unfortunately, at this time he had to put this idea on hold, as the country was under the Great Depression and all the money the family had was needed to pay off loans to the banks. Marriott experienced poverty throughout his childhood and vowed to go back to school and create a better living. Although, Marriott......

Words: 1512 - Pages: 7

Free Essay

Marriott Hotels

...------------------------------------------------- Abstract: The case examines Marriott International's (Marriott) various innovative HR practices, which earned it the reputation of being 'the best place to work' in the hospitality industry. It describes Marriott's 'Spirit to Serve' culture and the company's HR philosophy which guided its various HR initiatives. The case gives an overview of the best practices employed by the company in the recruitment, selection, training and development of employees. It also details the employee retention strategies and grievance redressal system at Marriott. Finally, the case reviews the benefits reaped by the company because of its employee friendly HR practices. | | ------------------------------------------------- Issues: » Understand the role of an organizational philosophy and culture in the development of human resource policies in a multinational organization » Get insights into the HR best practices of a large global service organization » Understand the role of employee development programs for retaining employees and improving organizational productivity » Appreciate the benefits that accrue to an organization through the use of employee-friendly policies ------------------------------------------------- The Spirit to Serve Once, when a customer checked in at an Anaheim Marriott hotel, she was in a very disturbed state of mind. It was on her way to the hotel that she learnt of her sister's death. The worst......

Words: 913 - Pages: 4

Premium Essay

Marriott Corp

...Marriott Corporation, an American firm, has 3 major lines of business: lodging, contract service and restaurants. Its growth objective is to remain a premier growth company. The four components of its financial strategy are consistent with this growth objective for the reasons: Manage rather than own hotel assets: Marriott sold its hotel assets to limited partners to reduce assets and thus, it can increase ROA and thereby increase potential profitability. Invest in projects that increase shareholders’ value: the discounted cash flow techniques to evaluate potential investments allow the company to invest only in profitable projects. Therefore, it can maximize the use of its cash flow to gain profits. Optimize the use of debt in the capital structure: because firms with lower percentage of debt have higher value, Marriott uses this strategy to increase its value and thereby increase it profitability. Repurchase undervalued shares: By buying back its undervalued shares, Marriott can increase PE ration when needed and can make its investors’ holdings more valuable because share prices will increase (increase in ROE). It also can appease investors and avoid pressure to increase dividend, thereby it can use its retained earnings to invest more in profitable projects. This strategy means that Marriott are confident in its future performance. Marriott use the Weighted-Average-Cost-of Capital (WACC) method to measure the opportunity cost for investments. WACC =......

Words: 802 - Pages: 4

Premium Essay

Marriott Solution

...lodging and restaurant divisions of Marriott? Answer: The cost of capital for lodging is 9.2% and the cost of capital for restaurants is 13.1% Calculation: WACC = (1-t) * rd * (D/V) + re* (E/V) Where: D= market value of DEBT E = market value of EQUITY rd = pretax cost of debt re = aftertax cost of equity V = D+E t = tax rate To calculate the formula above, we need to determine each component Tax rate (t) 56% --> calculated before LODGING Step 1: Calculate unlevered beta using similar companies Weigh Unlever . Avg. ed Beta (βu) Sales Sales 0.70 0.77 23% 0.43 1.66 50% 0.40 0.17 5% 0.67 0.75 22% 3.35 Beta (β) Debt (D/V) E/V Hotel D/E Tax HILTON HOTELS CORPORATION 0.76 14% 86% 0.16 44% HOLIDAY CORPORATION 1.35 79% 21% 3.76 44% LA QUINTA MOTOR INNS 0.89 69% 31% 2.23 44% RAMADA INNS, INC. 1.36 65% 35% 1.86 44% Total Sales Calculate unlevered beta for the Marriott Lodging using Weighed Average of Sales βu = 23%*0.70+ 50%*0.43+5%*0.40+22%*0.67 βu lodging = 0.54 Note: βu = βe / (1+ (1-t) * D/E) Step 2: Re-lever the beta ( βl ) for lodging βl = βu * (1+ (1-t) * D/E) Use 74% debt target ratio --> Calculation βl = βu * (1+ (1-t) * D/E) βl = 0.54 * (1 + (1-0.44)*(.74/.26)) βl = 1.41 Calculation re = rf + β * (rm - rf) re = 8.95% + 1.41*7.43% re =19.4% Step 3: Calculate cost of equity (re) re = rf + β * (rm - rf) Where rf = risk free β = beta levered risk premium = rm - rf rm = market risk --> rf used is 8.95% since Marriotts uses the long-term debt for......

Words: 1056 - Pages: 5

Free Essay

Marriott History

...J.Willard Marriott, who had moved away with his business partner Hugh Colton and his wife Alice from Utah to Washington, D.C., started the brand new startup company in 1927, when he operated a curbside food stands selling A&W Root Beer in the Columbia Heights neighborhood of Washington at 14th Street and Park Road NW. He would later rename the food stand The Hot Shoppe, adding Mexican food items to the menu.[2][3] Marriott's business expanded to Baltimore, Maryland, in 1934, shortly after which the company started its food services division. During Second World War, the business expanded to include the management of food services in defense plants and government buildings, such as the U.S. Treasury. Then in the 1950s, Hot Shoppes, Inc. started providing food services to public schools and to Children's Hospital in 1955, a contract which they held for 35 years. Marriott's restaurant chain grew, and the company went public in 1953. In 1957, he expanded his business to hotels, opening the first Marriott hotel—actually a motel, the Twin Bridges Motor Hotel—in Arlington County, Virginia. The company became Marriott, Inc., in 1967. Two large chains were added to the group, the Big Boy family restaurants in 1967 and Roy Rogers Family Restaurants in 1968. Over the years, Marriott's company interests expanded. Continuing with food services, Marriott eventually invented airline in-flight food service. This segment of their enterprise continues to be a large part of their business,......

Words: 500 - Pages: 2

Premium Essay

Marriott Study Case

...How Marriott Never Forgets a Guest When retiree Ben B. Ussery Jr. goes on vacation, he typically spends hours beforehand nailing down golf dates, scouting shops for his wife, and making restaurant reservations. But last year, when the Usserys and another Richmond (Va.) couple chose to spend a week at Marriott's Desert Springs resort in Palm Desert, Calif., he let the hotel do the legwork. Weeks in advance, Marriott planning coordinator Jennifer Rodas called Ussery to ask what he wanted to do. When all was set, she faxed him an itinerary. She had even ordered flowers for his wife. ''Marriott made it a real smooth experience,'' says Ussery. ''I'm ready to go back.'' What makes such velvet-glove treatment possible is Marriott International Inc.'s (MAR) use of customer management software from Siebel Systems Inc. (SEBL) The hotel chain, based in Bethesda, Md., is counting on such technology to gain an edge with guests, event planners, and hotel owners. The software lets Marriott pull together information about its customers from different departments, so that its reps can anticipate and respond more quickly to their needs. It starts with reservations. Says Chairman J.W. Marriott Jr.: ''It's a big competitive advantage to be able to greet a customer with: 'Mr. Jones, welcome back to Marriott. We know you like a king-size bed. We know you need a rental car.''' Marriott, America's No. 1 hotel chain, is the industry leader in using technology to pamper customers. The......

Words: 556 - Pages: 3

Premium Essay

Marriott Hotel International

...Executive Summary Marriott International envisions itself to be the world’s lodging leader. Its mission is to provide the best possible lodging services experience to customers who vary in backgrounds, language, tradition, religion and cultures all around the world. Marriot is committed to environmental preservation through using environment-friendly technology and engages in social responsibility and community engagement. We value our shareholder’s so we will only take steps that will ensure our growth. Most importantly, through our “spirit to serve”, we emphasize the importance of Marriott’s people and recognize the value they bring to the organization’s growth and success. It aims to increase revenues by 9% every year, to increase profits by 5% annually, to gain brand loyalty from their international customers, and lastly, to increase their market share in the lodging industry by 3% within 3 years. Marriott International is ranked as number one in market capitalization and revenues in the lodging industry. In fact, it has been ranked by Fortune as among the “100 Best Companies to Work For.” It has a total of six business segments in its portfolio, namely: the North American Full-Service Lodging Segment, North American Limited Service Lodging Segment, International Lodging Segment, Luxury Segment, Timeshare Segment, and the Synthetic Fuel Segment. It has a deep history, which started way back to 1927 when J. Willard Marriott and his bride opened a 9-seat root beer......

Words: 1605 - Pages: 7

Free Essay

Marriott International Management

...Introduction Marriott International, Inc. is a global leading hospitality company with more than 4,000 properties, and more than 690,000 rooms in 77 countries. Marriott operates franchises, and licenses hotels and timeshare properties worldwide. It also licenses the operation, development, marketing, sale, and management of vacation ownership and related products. Marriott was founded in 1927 by J. Willard Marriot and Alice Marriott in 1927 and is headquartered in Bethesda, Maryland, USA. JW Marriott Hotels & Resorts is Marriott International’s luxury brand that consists of 60 exceptional properties in gateway cities and distinctive resort locations around the world. JW Marriott Hotels & Resorts are expanding into gateway cities and established resort destinations as well as emerging luxury markets throughout the world. JW Marriott Hotels & Resorts compete with other fine luxury hotel brands such as Fairmont, Park Hyatt, Shangri-La and Conrad and high-end independent properties. Marriott International reported revenues of nearly $13 billion in fiscal year 2013. It has been committed to guest satisfaction, and operates and franchises hotels under 18 brands for more than 80 years. There are three roles within the Marriott “family” culture which are associates (employees), customers and its communities. “Take care of your employees and they’ll take care of the guests” was the philosophy of Marriott’s founder. “Spirit to serve the customers” is the core value of...

Words: 2997 - Pages: 12