Marriott Corporation (A)

Introduction.
In 1927 J.W. Marriott Sr. founded the Marriott Corporation (MC) and during the 1980s experienced a huge growth.
Marriott's main strategy in those days was developing hotel properties around the world and selling these properties to
outside investors while retaining lucrative long-term management contracts. MC was a conservative company and it
stressed the themes of careful attention on the details, the organization and its employees. Quality was the one of the highest
priority set by the founder himself. In 1953 MC went public, selling one-third of its shares in its Initial Public Offering.
Although they continued to sell public stock, the Marriott family always kept a 25% ownership over the business. J.W.
Marriott Sr. resigned then in 1964, after having opened its first hotel in Washington eight years earlier. J.W. Marriott Jr., his
son, took over from then and immediately abandoned his father's conservative financial policies.
In the '70s MC began to use bank credit and unsecured debt instead of mortgages to the finance development. In addition,
MC had experienced two financial crises, which were due to dry up of limited partnerships in 1989, where MC experienced
a sharp drop in income and the 1990 real estate market crash. This resulted in MC's stock price to fall by more than two-
thirds, which means a drop of $2 billion in market capitalization. This was the first time investor-owned Marriott hotels
went bankrupt.

Issues.
This case deals with debt and its relevant actions to minimize debt and make the company financially healthy again, where
analysis must be done to determine the potential financing opportunity and restructuring the corporation.
Due to the aforementioned economic downturn in the early '90s and the Tax Reform Act of 1986, MC had limited ability to
raise funds. This resulted in large interest payments on property, which basically left Marriott Corporation with lots of debt.
This left the organization with nothing but a fast restructuring of its debt policy and with it a restructuring of the company
itself. Stephen Bullenbach, the new chief financial officer, planned on doing this change by inventing Project Chariot.
Under Project Chariot, MC would become two separate companies. One is called Marriott International, Inc (MII), which
would comprise MC's lodging, food, and facilities management businesses. The other one was to be named Host Marriott
Corporation (HMC), which would retain MC's real estate holdings and its concessions on toll roads and at the airports.
Under this project, MII and HMC would have different and independent management teams. For MII, this means that the
new spin off would include little long term debt and therefore more it would be more profitable, whereas for HMC this
separation would mean that they would retain the real estate holdings, including retaining the most of the long term debt
from MC. To every upside there is a downside and in this case the bondholders would not be satisfied with this move. This
split would lead that bond rating agencies would lower MC's long-term bonds to a level below investment grade, whereas
the stockholders will very likely benefit from this new project. By saying this, leveraged buyouts (LBOs) had provided
stockholders, in the past, with large profits from tender offers at premium prices, while creating losses for bondholders in
the reduced market value of their newly speculative investments. So called "event-risk" covenants would have blocked
Project Chariot or at least required any measures to protect bondholders from its potentially adverse effects, which they
often did so, but at the cost of lower interest.
Financial Theories
In order to choose the best solution to the case problem, I will take a look at the financial statements of the company, by
using several ratios in order to see its profitability and its financial health. The numbers given in the case for the years 1991
and 1992 will be used to analyze this case. Furthermore, the evaluation of the bond rating and a look at the stockholders'
outcome would be looked upon in this case.
Alternatives
Having stated this, the only two alternatives to this case would be:
1) Invest into the new Project Chariot and split Marriott Corporation into two entities of Marriott International and Host
Marriott Corporation
2) Remain at status quo, meaning to stay as it was and not change the structure of the company
Analysis of data using the criteria and analysis of alternatives:
In the analysis we will use following criterias:
1) Return on Shareholder's Equity
2) Debt
3) Cash Flow
4) Stockholders
5) Bondholders

1) Using the numbers of Marriott International and Host Marriott Corporation combined for the year 1992, the ratios for the
Return on Shareholder's Equity were 1.3% and 6.1% (in 1991 and 1992 respectively)
2) The key element in the restructuring plan was that HMC was to keep the debt associated with its assets, rounding to about
$2.9 billion. Marriott International would then only have modest debt after restructuring. To help alleviate HMC's position,
MI was to provide a $630 million line of credit to HMC, though the expiration date of the line was sooner than the
maturities of many of the bond issues outstanding. It is important to know that by transferring debt the company will
improve their efficiency. Since the end of the 1980's, MC's debt continuously had increased. Project Chariot could make
some opportunities for HMC and MII. For HMC, it would be under less pressure of selling off the hotels at lower price from
other investors. On the other hand, the MII does not take a lot of debts, and it would have the ability to raise additional
capital and finance growth.
3) Looking at the numbers in Exhibit 5 Cash Flow from operating activities just experienced a drop in 1990. In 1991 they
were back up to $552 (millions of dollars). Furthermore by issuing the convertible preferred stock of $195 in 1991 the
number of cash and equivalents, end of year went down, but would have been up at $229.
4) As mentioned before the stockholders would gain from the change, since no cash would actually be transferred. It will
also diversify the portfolio. Looking at the secured investment in the case Host Marriott Corporation will default on its debt.
5) The returns of the bondholders are now attached to a heavily indebted firm with massive leverage in comparison with its
parent company. The lower security rating to show for it (from a BBB - Adequate capacity to pay for Marriott Corporation,
to a single B - Greater vulnerability to default, but currently has capacity to pay for Host Marriott Corporation. Bondholders
were never informed of such corporate restructuring plans before they bought bonds from Marriott when it is arguable that
the corporation must have already been planning months before for such a major move. The central issue now is that
bondholders' wealth was expropriated in favor of stockholders and it is natural that the both parties act in the way they did.
Criterias
Criteria / AlternativeProject ChariotStatus Quo
Return on Shareholder's Equity10
Debt10
Cash Flow10
Stockholders Interest10
Bondholders Interest01

Total score for alternative

4
1

Explanation of the results

According to the above calculation it becomes obvious that by adopting "Project Chariot" has its advantages and
disadvantages. Looking just at the rising numbers in the Return of the Shareholder's Equity leaves us with a positive mind,
when thinking of Project Chariot. Beginning debts might be high in comparison with the profits, something that usually
happens when adopting a new system. However, in the long run the situation turns around and the company can start to gain
benefits. With making two companies out of one, the debt issue is also divided. While MI can start with basically no (or
lower) debt, HMC will take over the old debt from MC, which makes at least one of the two more profitable. Furthermore,
the cash flows mentioned will propel HMC so far that it will be more than adequate to cover the debt in the future.
Looking at the Stockholders, who will gain from this new project, through diversification of the portfolio, the only negative
thing that would leave us, would be the bondholders. In the conclusion part, I will go into more depth of how this negative
influence on the criteria could be turned into a positive one. The case further mentions the public, but in my eyes I did not
take them into heavy consideration, since bond- and stockholders are more important to the company itself.
Conclusions and Recommendations
After reviewing the results, I came to the conclusion that Project Chariot should become a "go"! Marriott Corporation has
been for years a very successful business and impressed not only its shareholders, but also the public interest with positive
business doing. Due to the fact that borrowing money, better said, debt went to high, changes were much needed, so that
this would be a great way to innovate the company. One must also not forget, to why these debts went up high. Systematic
risks, as economic breakdown in the real estate market as well as several different Tax Acts, threw MC back for a bit, but
not as much so that they will have to stop continuing business. Diversifying its product line, if one can say so, meaning by
implementing MI and HMC, will make the MC just more competitive in their field and just by following the motto "attack
is the best defense" it will help them get up the economic ladder faster.
To the bondholders, I would recommend in their best interest to simply hold on to their bonds and wait how the company
will do within the next few years. The credit line can help in paying off the annual interest expenses until the management
of Host Marriott Corp. can adjust to its current situation. The credit line provided by Marriott International could be a
powerful tool in helping HMC get back on its feet. Since MI is now rated Single A (Investment Grade) in the bond ratings
from Standard and Poor's, it can easily borrow money at a cheaper rate. Finally, not to forget to mention the stockholders,
who will mostly benefit from the new project, especially then when all sides of the corporation are satisfied.