Marriott Case Study Solution - Antesh Kumar - EPGP-13A-021

Leadership & Corporate Accountability
Quarter- V
Topic:
Marriott Corporation (A) Case Analysis
Prepared By-
Antesh Kumar
EPGP-13A-021
1. Why is Marriott management proposing project Chariot? What is it trying to accomplish?
After the estate market crash in the 1990, Marriott Corporation (MC) had a huge inventory of
properties for which there were no buyers. There is huge debt which MC is unable to repay
because there has been a mismatch in the demand and supply of hotel rooms. The demand is
less and supply is more. This has resulted in low occupancy rates and huge discounts that have
severely impacted the cash flows from operations. Market capitalization has eroded by 2/3 rd and
bondholders are also weary of their investment at the current juncture as selling properties on
distress or continued position in the bankruptcy status would erode their investment
completely. Due to the huge debt, it is difficult for MC to further borrow money from the
market. There is a pressure from investors to reduce the debt burden.
Project Chariot was conceived by Stephen Bollenbach aimed to restructure the existing company
and split it into 2 companies. Marriott Corporation was proposed to be split into Marriott
International Incorporated (MII) and Host Marriott Corporation (HMC). This exercise had
commenced earlier. MC used to build properties and sell to the investors and owned only the
operations part of it to reduce the debt. However, after the real estate crash MC management
faced difficulty in finding investors who were willing to buy properties. Although things looked
better in last quarter of 1992 than that in 1990, the ability of the company to raise funds in the
capital markets was still limited in the foreseeable future. If the situation worsened they would
need to go for distress sale of assets to reduce the debt of MC or else look at the proposed
option which probably would help the company. MII would be mostly debt-free and this concept
would be inline with investors thoughts of making profits through operations management in
the hotel industry while leaving out the asset part of it. Assets would be handled by HMC which
would attract a group of investors more interested in making long term gains through asset price
appreciation.
2. What is the likely impact of project Chariot on the wealth position of the shareholders?
The key process of split in the company as per Project Chariot was creating MII with low debt
and HMC with high debt. The theory was that value could be generated by investing in
development and management of hotels and not from owning real estate. The management of
MC felt that the stock was undervalued because the investors found it difficult to differentiate
between ownership of assets and management of hotels. Project Chariot would offer
opportunity to investors to participate in “pure plays”- either invest in management of hotels or
invest in real estate for longer-term appreciation.
3. Should Management be concerned by the loss of market value of the bonds if project Chariot is
implemented?
Project Chariot was designed as MC’s responsibility towards its shareholders. It was aimed at
increasing investor trust in the company. MC’s bonds had already received poor ratings. Some of
the criteria for bond ratings are debt ratio, times-interest-earned ratio, stability and maturity. All
of these are affected when the company’s financial performance is not good. MC’s bonds have
been rated as BBB by S&P and BAA3 by Moody’s leading to bonds with rates as high as 9.3%.
Risk of lawsuits related to bonds needs to be mitigated. Although LBO lawsuits are rarely
successful, there are examples where the company’s have to pay to bond holders. The position
of courts is changing, leading to corporations having more responsibility over their bonds. If this
project leads to bankruptcy, they could be sued over their actions. Their actions might be proved
fraud in court of law. Also, financial institutions will sell off their part as they can hold only
certain portion of non-investment grade bonds in their portfolio. Since the rates of the bonds are
so high and risks are also high, there is an implicit expectation from bondholders they will only
receive part of their money back. Therefore, the management should not be very concerned.
4. Is project Chariot a matter of survival for Marriot in the fall of 1992? The Excel work book allows
you to estimate whether Marriot will be able to service its debt, given your assumptions about
future profitability, revenue growth, and property sales. Please see case Exhibit 6 for summary
statistics on Marriott’s past performance.
From the data in Exhibit 6, the following observations could be made:

a) EBIT as % of sales have gone up by 0.1% from 1991 to 1992 even during the heavy slash in
real estate prices. This was expected to increase further by 0.5% by 1993 and another half
decimal point after another two years.
b) Long term debt as % capital is 59% in 1991 which is lower than the past three years since
1988.
c) Cash flow from operating activities has increased from 1992 to 1995.
Considering these 3 points, it can be inferred that Project Chariot is not a matter of survival. The
situation is slowly improving and the position of MC would further strengthen when real estate
prices once again gain momentum. Also, considering the risks posed by bondholders and
possible lawsuits, the management planned project Chariot in way that the project could be
abandoned with minimal cost impact to MC.
If project Chariot was abandoned, the D/E ratio would have doubled for bond holders.
5. Would you recommend the implementation of project Chariot?
Under the current scenario, it is advisable to implement Project Chariot. This would enable the
company to raise capital for further growth of hotel development and operations management
business. The current slowdown in real estate market is temporary and there would be an asset
appreciation later which will also enhance the valuation of the existing company (HMC). Due to
the formation of 2 entities, there will be a rise in number of management positions in the
Marriott group as a whole which will benefit the employees. Overall, if the project is
implemented, it will be good for all stakeholders- investors, company’s management, employees
etc.

Marriott Case Study Solution - Antesh Kumar - EPGP-13A-021

Uploaded by

Copyright:

Available Formats

Marriott Case Study Solution - Antesh Kumar - EPGP-13A-021

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Marriott Case Study Solution - Antesh Kumar - EPGP-13A-021

Uploaded by

Copyright:

Available Formats

What is Project Chariot trying to accomplish for Marriott Corporation?

What impact would Project Chariot likely have on shareholders' wealth?

Leadership & Corporate Accountability

From the data in Exhibit 6, the following observations could be made:

5. Would you recommend the implementation of project Chariot?

You might also like