Assignment - LCA - Marriott

Prashant Narula
EPGP – 11 - 078
Assignment Name: Marriott Corporation (A)
Mentored by Professor Abhilash S Nair
Study Questions for Marriott Corporation (A):
1. Why is Marriott management proposing project Chariot? What is it trying to accomplish?
Marriott Corporation was facing a serious concern, and that concern was challenging the
very existence of the company. The issue would be a concern with both current
shareholders and bondholders as the current company Marriott Corporation, is deep into
debt as it has created an inventory of hotels and rooms however it no longer has buyers
for the same and under tremendous pressure as it may need to sell its properties in
distress sale unless a plan is quickly chalked out. The shareholders are crying aloud as
the market capitalization has eroded by 2/3rd and that’s hit them real hard and the
bondholder 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, however there risk escalates if the real estate recovery does not happen as
well.
Under Project Chariot, Stephen Bollenbach, aims to restructure the existing company and
split it into 2 companies. Under the project, Marriott Corporation would be split into
Marriott International Incorporated and Host Marriott Corporation. The objective of the
exercise had commenced earlier in the reduction of the debt by selling their properties,
however the real estate crash dented the plan further, although the current situation in the
last quarter of 1992, things looked better than the low of 1990, the ability of the company
to raise funds in the capital market, was with limited options in the foreseeable future.
The situation was so grim, that if they continued in the current scenario they would need
to distress sale assets to free them mounted debt or else look at the proposed option
which probably would help the company, although in some perspective the concept of
growing smaller or breaking might seem counterintuitive for Marriott Corporation.
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 high debt for HMC. Thus the bond holders will find that their investment gets
tied to a risky real estate assets whose appreciation is uncertain owing to the real estate
crash. Project Chariot if implemented will most certainly give the existing shareholders
the upside thereby leaving the downside of the real estate business to the bondholders. It
almost seems a case of wealth transfer where the overall wealth is being transferred from
the bond holder to the equity holder. The shareholders will now have a majority stake as
they now have shares in both companies, a corporation now with a lower probability of
default. MII the new company created will be backed by performing assets and
shareholders’ equity will be able to issue new debt, there appreciating and increasing
value for both the company and also the shareholder’s.
3. Should Management be concerned by the loss of market value of the bonds if project
Chariot is implemented?
Marriott Corporation went public in 1953, and sold 1/3 of their shares and over the years
continued to sell its shares to fuel growth and development of the company. After J.W.
Marriott Sr. retired in 1964, the company initially too to bank loans and unsecured to
help continue their historical 20 % growth. In 1978, Marriott Corporation embarked upon
a Joint Venture, constructing a group of hotels and then selling them to Equitable Life
Assurance Society, a major insurance company. This was a new strategy and addition to
their original core business and this strategy was a powerful one as constructing hotels,
selling them to investors and retaining long term management contracts, was adding to
the growth of the company and it was in the range of 30 % growth now with over 70 %
of the hotel rooms were owned by investors. Marriott Corporation core was that they
were known for an enviable reputation of for quality and reliability in service, and with
this they possessed great hotel sizing abilities along with careful site selection
procedures.
Although there was a strong co-relation and first right of refusal provided to each of the
companies, HMC would hold retain Marriott Corporations long-term debt of nearly USD
2.6 Billion. Although the management was confident that it would have financial strength
to make all payments of interest and principal on long term obligations when due, the
separation of the two companies was going to have an impact on the debt holders. On a
possible immediate reaction if markets were not to correct themselves for the real estate
and the appreciation of asset will not happen, the rating agencies would lower their rating
and put their bonds on a level below investment grade & in high risk. This would force a
sale by some institutional holders since banks, pension funds and insurance companies
operated legal restrictions that limited the amount of investment on low grade
investments. Although HMC would be valued for the chance of appreciation in the
property holdings when the real estate market recovered, not on the basis of earnings,
thereby reducing the pressure to sell properties at depressed rates. So overall the threat
was not outweighing the pros to the process and Marriott Corporation was within its
rights to execute the Project.
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.
5. Would you recommend the implementation of project Chariot?
Under the current scenario, its advisable to go ahead with Project Chariot as that would
enable the company to free up the ability to raise further funds / debt. Also the current
situation of real estate slump is temporary and there would be an asset appreciation later
which will also enhance the valuation of the existing company (HMC). The new company
(MII) is going benefit with profitable bottom line and good top line and this will enable them
to raise funds for further expansion. For the employees owing to the creation of two
companies, opportunities of growth will open as in the past MC had already shed excess
manpower in an effort to operational efficiency.

Assignment - LCA - Marriott

Uploaded by

Copyright:

Available Formats

Assignment - LCA - Marriott

Uploaded by

Document Information

Original Description:

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

Assignment - LCA - Marriott

Uploaded by

Copyright:

Available Formats

Prashant Narula

Mentored by Professor Abhilash S Nair

Study Questions for Marriott Corporation (A):

1. Why is Marriott management proposing project Chariot? What is it trying to accomplish?

You might also like