Marriott Corporation (A) Introduction
In 1927 J.W. Marriott Sr. founded the Marriott Corporation (MC) and during the 1980s experienced a huge growth. Marriott's main strategy in those days was developing hotel properties around the world and selling these properties to outside investors while retaining lucrative long-term management contracts. MC was a conservative company and it stressed the themes of careful attention on the details, the organization and its employees. Quality was the one of the highest priority set by the founder himself. In 1953 MC went public, selling one-third of its shares in its Initial Public Offering. Although they continued to sell public stock, the Marriott family always kept a 25% ownership over the business. J.W. Marriott Sr. resigned then in 1964, after having opened its first hotel in Washington eight years earlier. J.W. Marriott Jr., his son, took over from then and immediately abandoned his father's conservative financial policies. In the '70s MC began to use bank credit and unsecured debt instead of mortgages to the finance development. In addition, MC had experienced two financial crises, which were due to dry up of limited partnerships in 1989, where MC experienced a sharp drop in income and the 1990 real estate market crash. This resulted in MC's stock price to fall by more than two-thirds, which means a drop of $2 billion in market capitalization. This was the first time investor-owned Marriott hotels went bankrupt. Issues
This case deals with debt and its relevant actions to minimize debt and make the company financially healthy again, where analysis must be done to determine the potential financing opportunity and restructuring the corporation. Due to the aforementioned economic downturn in the early '90s and the Tax Reform Act of 1986, MC had limited ability to raise funds. This resulted in large interest payments on property, which basically left Marriott Corporation with lots of debt. This left the organization with nothing but a fast restructuring of its debt policy and with it a restructuring of the company itself. Stephen Bullenbach, the new chief financial officer, planned on doing this change by inventing Project Chariot. Under Project Chariot, MC would become two separate companies. One is called Marriott International, Inc (MII), which would comprise MC's lodging, food, and facilities management businesses. The other one was to be named Host Marriott Corporation (HMC), which would retain MC's real estate holdings and its concessions on toll roads and at the airports. Under this project, MII and HMC would have different and independent management teams. For MII, this means that the new spin off would include little long term debt and therefore more it would be more profitable, whereas for HMC this separation would mean that they would retain the real estate holdings, including retaining the most of the long term debt from MC. To every upside there is a downside and in this case the bondholders would not be satisfied with this move. This split would lead that bond rating agencies would lower MC's long-term bonds to a level below investment grade, whereas the stockholders will very likely benefit from this new project. By saying this, leveraged buyouts (LBOs) had provided stockholders, in the past, with large profits from tender offers at premium prices, while creating losses for bondholders in the reduced market value of their newly speculative investments. So called "event-risk" covenants would have blocked Project Chariot or at least required any measures to protect bondholders from its potentially adverse effects, which they often did so, but at the cost of lower interest. Financial Theories
In order to choose the best solution to the case problem, I will take a look at the financial statements of the company, by using several ratios in order to see its profitability and its financial health. The numbers given in the case for the years 1991and 1992 will be used to...
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