Marriott Corporation Case Analysis:

(Submitted By Group H)
Introduction
After severe effects from real estate market crash and slowdown in the
business Marriott is considering Project Chariot which involves splitting up
the company into two separate entities, Marriott International Incorporated
(MII) and Host Marriott Corporation (HMC). This will minimize debt and
improve the financial health of the company.
Firm and situation
Marriott Corporation (MC) was founded by J. W. Marriott Sr. in 1927 and
companys path towards huge growth and success was shaped. Their main
strategy in those days was to sell the developed hotel properties around the
world and to outside investors while retaining long-term management
contracts. Marriott was a conservative company. The highest priority set by
the founder was Quality. The company went public in 1953 by selling onethird of its shares in its Initial Public Offering. The ownership of 25% over the
business was always kept by the Marriott family. J. W. Marriott Jr. took over
the company from J. W. Marriott Sr. when he resigned in 1964 and
immediately took a diversion from his fathers conservative financial policies.
In the 1970s, instead of mortgages the company began to use bank credit
and unsecured debt to finance development. At that time this was
considered beneficial due to substantially higher cash flows than the interest
charges. MC experienced two financial crises in the later years. This was due
to the 1990 real estate market crash and the 1989 limited partnerships in
which MC experienced a sharp drop in income. The stock prices fell by more
than two-thirds, which means a drop of $2 billion in market capitalization.
This was the first time that investor-owned Marriott hotels went bankrupt.
Key issues

In order to boost and produce back the money stability and additionally
improve the condition of MC, the then corporate executive planned
restructuring the corporate under a project named Project Chariot. This case
deals with the analysis of the financial condition of MC and putting in
relevant background data, money knowledge and alternative concerns
needed to investigate the execs and cons of implementing Project Chariot at
mc.
Due to the economic downswing within the early '90s and the Tax Reform Act
of 1986, mc had restricted ability to raise funds. This resulted in giant
interest payments on property that primarily left Marriott Corporation with
countless debt. This left the organization with nothing however a quick
restructuring of its debt policy and with it a restructuring of the company
itself. Stephen Bollenbach, the new chief financial officer, planned on doing
this modification by inventing Project Chariot. Under Project Chariot, MC
would become 2 separate firms. One is termed Marriott International, Inc.
(MII), which might comprise MC's lodging, food, and facilities management
businesses. The other one was to be named Host Marriott Corporation (HMC),
which might retain MC's assets holdings and its concessions on toll roads and
at the airports.
Important constraints or opportunities faced by the company
Under Project Chariot, MII and HMC would have completely different and
independent management groups. For MII, this implies that the new turn out
would come with very little long run debt and so a lot of it might be a lot of
profitable, whereas for HMC this separation would mean that they'd retain
the $64000 estate holdings, as well as retentive the foremost of the long run
debt from Mc. to each face there's a draw back and during this case the
bondholders wouldn't be happy with this move. This split would lead that
evaluation agencies would lower MC's semi-permanent bonds to a level
below investment grade, whereas the stockholders can terribly doubtless get
pleasure from this new project. By saying this, leveraged buyouts (LBOs) had

provided stockholders, within the past, with massive profits from tender
offers at premium costs, whereas making losses for bondholders within the
reduced market price of their freshly speculative investments. Thus referred
to as "event-risk" covenants would have blocked Project Chariot or a
minimum of needed any measures to safeguard bondholders from its
doubtless adverse effects that they usually did thus, however at the price of
lower interest.
Alternatives available to management
The management may either favor to go along with Project Chariot and split
the corporate into 2 separate entities or they may keep at intervals constant
structure and take a look at to boost the economic condition of the
corporate. So as to settle on the most effective answer to the present
downside the money statements and information of the corporate is studied.

Based upon MC's historical money info for 1991, the worth of the
corporate is calculable at $3,658,000. Constant calculations may be in
dire straits the 2 corporations shaped from the Project Chariot spin-off:
HMC and MII based mostly upon a professional pro forma basis, equity
and debt figures for the 2 new entities. HMC's worth is calculable at
$2,600,000,000 and MII's worth is calculable to be $1,200,000,000.

The key part within the restructuring arrange was that HMC was to stay
the debt related to its assets, rounding error to regarding $2.9 billion.
Marriott International would then solely have modest debt once
restructuring. to assist alleviate HMC's position, MII was to produce a
$630 million line of credit to HMC, although the expiration date of the
road was before the maturities of the many of the bond problems
outstanding. Its vital to grasp that by transferring debt the corporate
can improve their potency. Since the top of the 1980's, MC's debt
unendingly

had

exaggerated.

Project

Chariot

may

build

some

opportunities for HMC and MII. For HMC, it might be underneath less
pressure of commerce off the hotels at cheaper price from alternative

investors. On the opposite hand, the MII doesn't take plenty of debts,
and it might have the flexibility to lift extra capital and finance growth.

Looking at the numbers in Exhibit five income from in operation

activities simply old a call in 1990. In 1991 they were duplicate to $552
(millions of dollars). Moreover by supply the convertible preference
shares of $195 in 1991 the amount of money and equivalents, finish of
year went down, however would are up at $229.

As

mentioned

modification,

before

since

no

the

stockholders

money

would

would

truly

be

gain

from

the

transferred.

Itll

additionally diversify the portfolio. Watching the secured investment

within the case Host Marriott Corporation can neglect its debt.

The returns of the bondholders are currently connected to a heavily

indebted firm with large leverage compared with its parent company.
The lower security rating to indicate for it (from a BBB - Adequate
capability to obtain Marriott Corporation, to one B - larger vulnerability
to default, however presently has capability to obtain Host Marriott
Corporation. Bondholders were ne'er familiar of such company
restructuring plans before they bought bonds from Marriott once it's
debatable that the corporation should have already been coming up
with months before for such a significant move. The central issue now's
that bondholders' wealth was taken in favor of stockholders and it's
natural that the each parties act within the manner they did.

Recommendation and Conclusion

According to the higher than calculation it becomes obvious that by adopting
"Project Chariot" have its benefits and downsides. The worth of the corporate
is far higher with the restructuring. Starting debts may well be high as
compared with the profits, one thing that typically happens once adopting a
brand new system. However, within the end of the day things turns around
and also the company will begin to achieve advantages. With creating 2

corporations out of 1, the debt issue is additionally divided. Whereas MI will

begin with primarily no (or lower) debt, HMC can take over the previous debt
from rate, that makes a minimum of one in all the 2 a lot of profitable.
Moreover, the money flows mentioned can propel HMC to this point that it'll
be over capable cowl the debt within the future. Staring at the Stockholders,
United Nations agency can gain from this new project, through diversification
of the portfolio, the sole negative factor that will leave United States of
America, would be the bondholders.
The greatest risk related to Project Chariot seems to be the very fact that
HMC would assume nearly the complete existing debt burden related to the
present organization, while MII, with the best income potential would emerge
primarily debt free. Whereas this strategy might predict well for MII, HMC
emerges from Project Chariot as a debt clogged entity with associate
anticipated web loss of $66 million annually. The first sources of the present
long-run debt of the Marriot Corporation are issued within the variety of
secured and bond certificate notes. Project Chariot will very little to deal with
the

impact

of

the

structure

restructuring

on

bondholders.

Whereas

management looks assured that the rising HMC firm can sustain enough
monetary strength to create all payments to bondholders, the negative web
revenues are seemingly to lead to a reappraisal by the valuation agencies. It
seems seemingly that the ratings for existing bonds are down to below
investment grade as a result of the exaggerated investment risk which is
able to need some institutional creditors to sell their holdings.
In conclusion Project Chariot ought to be enforced at Marriott Corporation
once careful thought of Bond Risk. The management will think about
distributing the debt in MII and HMC a little a lot of fairly thus because the
overall debt burden don't have an effect on the valuation after. Rate has
been for years an awfully self-made business and affected not solely its
shareholders, however conjointly the general public interest with positive
business doing. Changes are undoubtedly required within the company as a
result of its high debt as a result of systematic risks, as economic breakdown

within the assets market in addition as many totally different Tax Acts that
threw rate back for slightly, however not the maximum amount so they're
going to need to stop continued business. Diversifying its merchandise, if
one will say thus, which means by implementing MI and HMC, can build the
rate simply a lot of competitive in their field and it'll facilitate them get on
my feet the economic ladder quicker.
Quantitative Data
1. The following table provides a break-down of some critical information
comparing the value of the existing firm MC and the two firms
proposed, HMC and MII, proposed by Project Chariot:
MC
Number of Employees 202,000
Equity

HMC

MII

23,000

182,000

$679,000,000

$600,000,000

$800,000,000
Debt

$2,979,000,000

Value

$2,000,000,000

$3,658,000,000

$400,000,000

$2,600,000,000

$1,200,000,000
Group H Members:
Aanchal Sharma, Aditya Thakare, Chahat Shah, Deepanshu Ujjain,
Jasdeep Singh, Peeush Goel, Saurav Narjinary and Umesh Kumar