Marriott Case Study

Introduction

This review tries to identify the reasons that led to a spin-off restructuring case of Marriott Corporation in 1992. It further investigates the potential challenges and ex-post performance of such corporate restructuring with regards to shareholders and bondholders. Marriott’s business model came to an end in the first years of the 1990s with the crash in real estate prices. This left the company with many assets on the balance sheet that it couldn’t sell anymore and a lot of debt that was barely covered. Its inability to serve the interest and debt repayments without selling its real estates at distressed levels forced the company to restructure itself. The proposed restructuring separated the management part of the business

The market of Hotel real estate buyers dried up. Nevertheless, Marriott continued to expand. As a result of this imbalance, the company experienced a sharp income drop in 1989 which resulted in the first restructuring, the divestiture of non-core assets and a capital expenditure freeze. A year later, in 1990, the real estate market collapsed and Marriott Corporation lost 2/3 in market capitalisation. Owing to the bankruptcy of the investor-owned Marriott Hotels, Marriott Corporation had huge interest payments for properties it couldn’t sell anymore and a shrinking earnings and cash flow base to make up for these interest charges. Occupancy rates and lodging prices fell across the board and many competitors went into bankruptcy. Marriott Corporation put greater focus on management opportunities as it was a more capital light business model.

This restructuring case is consistent with the findings of Brar, Giamouridis, and Liodakis (2009) that industry conditions play an important role in detecting takeover targets (spin-offs characteristics are similar in a sense), owing to the fact that a change in the economic structure or regulatory changes in an industry require a certain form of

The service company traded under the new name of Marriott International Inc. (MII) and the property company under Host Marriott Corporation (HMC). Marriott’s chief financial officer proposed the Project Chariot to give the new company (MII) the ability to raise capital and to be able to pursue and take advantage of market opportunities (i.e. consolidate the industry) that might arise in these tough market conditions. Moreover, the old company (HMC) had the possibility to wait until real estate prices recovered in order to pay down the debt rather than being forced to sell at depressed