Marriott Case
QUESTION 1
Are the four components of Marriott´s financial strategy consistent with its growth objective?
With regards to the overall strategy of primarily being a premier growth company, we analyze the 4 components as follows:
1. Manage rather than own hotel assets
• Marriott developed the projects, established long term management contracts consisting of 3% of revenues and 20% of the profits. The assets were then sold to partners. Not owning hotels provided Marriot with greater liquidity and allowed them to decrease the depreciation expenses while the incentive based management contracts allowed them to take advantage of the profitability of the project. Overall this led to surpluses in cash which could be used for outright growth. Hence this component is in line with the strategy.
2. Invest in projects that increase shareholder value
• From the perspective of a premier growth company, this strategy might not be in line with objective. A premier growth company would concentrate on any and all NPV + projects, regardless of the impact on share holder value.
3. Optimize the use of debt in the capital structure
• Marriott used target interest coverage ratios instead of D\E ratio signaling that their main priority was the ability to service its debt. With this cap on interest financing, Marriot effectively put a upper limit on their sustainable growth rate (g*=Profit Margin*Asset Turnover*Leverage*Retention Ratio). This behavior is not typical of a premier growth company. A growth company would tend to increase their g* substantially by piling on more debt.
4. Repurchase undervalued shares
• There are 3 ways to increase shareholder’s wealth: Increase in market value of shares, dividends and last but not the least repurchasing stocks and reducing outstanding equity. Again, this behavior is not typical of a premier growth company. A growth company would rather invest the available cash in projects that would drive the top line.
How Does Marriott use
Are the four components of Marriott´s financial strategy consistent with its growth objective?
With regards to the overall strategy of primarily being a premier growth company, we analyze the 4 components as follows:
1. Manage rather than own hotel assets
• Marriott developed the projects, established long term management contracts consisting of 3% of revenues and 20% of the profits. The assets were then sold to partners. Not owning hotels provided Marriot with greater liquidity and allowed them to decrease the depreciation expenses while the incentive based management contracts allowed them to take advantage of the profitability of the project. Overall this led to surpluses in cash which could be used for outright growth. Hence this component is in line with the strategy.
2. Invest in projects that increase shareholder value
• From the perspective of a premier growth company, this strategy might not be in line with objective. A premier growth company would concentrate on any and all NPV + projects, regardless of the impact on share holder value.
3. Optimize the use of debt in the capital structure
• Marriott used target interest coverage ratios instead of D\E ratio signaling that their main priority was the ability to service its debt. With this cap on interest financing, Marriot effectively put a upper limit on their sustainable growth rate (g*=Profit Margin*Asset Turnover*Leverage*Retention Ratio). This behavior is not typical of a premier growth company. A growth company would tend to increase their g* substantially by piling on more debt.
4. Repurchase undervalued shares
• There are 3 ways to increase shareholder’s wealth: Increase in market value of shares, dividends and last but not the least repurchasing stocks and reducing outstanding equity. Again, this behavior is not typical of a premier growth company. A growth company would rather invest the available cash in projects that would drive the top line.
How Does Marriott use