Harvard Business School
Rev. September 15, 1986
The idea of repurchasing shares was no stranger to Bill Marriott by January 1980. Almost five million shares of common stock had been repurchased on the open market by Marriott Corporation during 1979 at a total cost of $74 million and an average price of $15.16 in the belief that they were undervalued—a belief that still was not fully reflected in the market price. At $19 5/8, the stock was selling at only six times cash flow per share; and its price/earnings ratio of nine was a far cry from historical multiples as high as fifty times as recently as 1973. Its low price seemed to offer once again an obvious opportunity to benefit shareholders. However, the proposal to repurchase 10 million of the 32 million still outstanding shares aroused some uneasiness. If successful, it had the potential of enhancing Marriott's EPS and of increasing family and management control from 20% to 29% of outstanding shares. However, it represented a move that was almost entirely financial—one that would run the debt well above the levels advocated before the Board of Directors only two years earlier. The repurchase would also necessitate renegotiation of restrictive covenants in existing loan agreements. Lastly, the huge size of the proposed program would require a tender price of $23 1/2, a hefty premium of $4 over the current market price. All of this seemed somewhat out of character for a corporation known for caution and stability.
Marriott Corporation was founded as a nine-seat A&W Root Beer Stand in Washington, D.C., in 1927 by J. Willard Marriott. Mr. Marriott had a gift for anticipating, or helping to create, trends in public eating habits. Shortly after the first stand opened, a second was built, and soon a chain of Hot Shoppes was underway. In 1934, industrial cafeterias were opened at a General Motors plant in Georgia and at the Ford Motor Company plant in Virginia. In 1937, the airline industry was revolutionized when Mr. Marriott established an airline catering service, providing box lunches from a Hot Shoppe next to the old Hoover Airport, on the site of what is now the Pentagon. Seven years later, Mr. Marriott led the company into the hotel field, opening the Marriott Twin Bridges just over the Potomac River from Washington. It became known as a motor-hotel and helped to revolutionize the lodging industry, for it offered a drive-in registration desk, a restaurant on the premises, and a convention center. By 1964, there were 77 restaurants, 4 hotels, and 9,600 employees generating total sales of $85 million.
This case was prepared for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1981 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1
Bill Marriott assumed the presidency from his father in 1964 and initiated further diversification into theme parks, cruise ships and international host services. In 1967 the company acquired the Big Boy Restaurants franchise based in the Los Angeles area. A year later, Marriott opened its first Roy Rogers Roast Beef Sandwich outlet, which would grow into the Roy Rogers Family Restaurant chain. Since 1964, growth was little short of phenomenal. From sales of $85 million 16 years earlier, sales in 1979 exceeded $1.5 billion. Operations expanded to 476 company-operated restaurants, 55 hotels and resorts, a cruise ship line, two theme parks, and 66,000...
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