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Introduction

The purpose of this report is to present the analysis and suitable


recommendations towards the decision of whether Project Chariot should be
implemented at Marriott Corporation (MC) or not. This project involves
splitting up the company into two separate entities, Marriott International
Incorporated (MII) and Host Marriott Corporation (HMC) in order to minimize
debt and improve the financial health of the company after severe effects
from real estate market crash and slowdown in the business. The description
of Marriott Corporation, key issues faced by the corporation, details about
the proposed Project Chariot and the alternatives and consequences of
implementing Project Chariot is reported in the following sections. Finally,
with the support of financial data supplied in the case, suitable
recommendations are mentioned in the last sections of the report.

Description of firm and situation


J. W. Marriott Sr. founded the Marriott Corporation (MC) in 1927 and
shaped the company’s path towards huge growth and success. Marriott’s
main strategy in those days was to develop hotel properties around the
world and sell these properties to outside investors while retaining long-term
management contracts. MC was a conservative company and it stressed the
themes of careful attention to details, the organization and its employees.
Quality was one of the highest priorities 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
25% ownership over the business. J. W. Marriott Sr. resigned in 1964, and his
son J. W. Marriott Jr. took over from then and immediately took a diversion
from his father’s conservative financial policies. In the 1970s MC began to
use bank credit and unsecured debt instead of mortgages to the finance
development which was considered beneficial at that time due to substantial
higher cash flows than the interest charges. Later, MC experienced two
financial crises, which were due to 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 prices to fall 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 that the decision maker must address


In order to improve and bring back the financial stability and also
improve the financial condition of MC, the then CFO proposed restructuring
the company under a project named Project Chariot. This case deals with the
analysis of the financial condition of MC and setting up relevant background
information, financial data and other considerations required to analyze the
pros and cons of implementing Project Chariot at MC.
Due to the 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
Bollenbach, 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.

Discuss any important constraints or opportunities that the


company faces
Under Project Chariot, 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.
Discuss the alternatives available to management
The management could either choose to go with Project Chariot and split
the company into two separate entities or they could stay within the same
structure and try to improve the financial condition of the company. In order
to choose the best solution to this problem the financial statements and data
of the company is studied.
 Based upon MC's historical financial information for 1991, the value of
the company is estimated at $3,658,000. The same calculations can be
done for the two companies formed from the Project Chariot spin-off:
HMC and MII based upon a projected pro forma basis, equity and debt
figures for the two new entities. HMC's value is estimated at
$2,600,000,000 and MII's value is estimated to be $1,200,000,000.
 The key element in the restructuring plan was that HMC was to keep
the debt associated with its assets, rounding to about $2.9 billion.
Marriott International would then only have modest debt after
restructuring. To help alleviate HMC's position, MII was to provide a
$630 million line of credit to HMC, though the expiration date of the
line was sooner than the maturities of many of the bond issues
outstanding. It is important to know that by transferring debt the
company will improve their efficiency. Since the end of the 1980's,
MC's debt continuously had increased. Project Chariot could make
some opportunities for HMC and MII. For HMC, it would be under less
pressure of selling off the hotels at lower price from other investors. On
the other hand, the MII does not take a lot of debts, and it would have
the ability to raise additional capital and finance growth.
 Looking at the numbers in Exhibit 5 Cash Flow from operating activities
just experienced a drop in 1990. In 1991 they were back up to $552
(millions of dollars). Furthermore by issuing the convertible preferred
stock of $195 in 1991 the number of cash and equivalents, end of year
went down, but would have been up at $229.
 As mentioned before the stockholders would gain from the change,
since no cash would actually be transferred. It will also diversify the
portfolio. Looking at the secured investment in the case Host Marriott
Corporation will default on its debt.
 The returns of the bondholders are now attached to a heavily indebted
firm with massive leverage in comparison with its parent company. The
lower security rating to show for it (from a BBB - Adequate capacity to
pay for Marriott Corporation, to a single B - Greater vulnerability to
default, but currently has capacity to pay for Host Marriott Corporation.
Bondholders were never informed of such corporate restructuring
plans before they bought bonds from Marriott when it is arguable that
the corporation must have already been planning months before for
such a major move. The central issue now is that bondholders' wealth
was expropriated in favor of stockholders and it is natural that the both
parties act in the way they did.

Recommendation and Conclusion


According to the above calculation it becomes obvious that by
adopting "Project Chariot" have its advantages and disadvantages. The value
of the company is much higher with the restructuring. Beginning debts might
be high in comparison with the profits, something that usually happens when
adopting a new system. However, in the long run the situation turns around
and the company can start to gain benefits. With making two companies out
of one, the debt issue is also divided. While MI can start with basically no (or
lower) debt, HMC will take over the old debt from MC, which makes at least
one of the two more profitable. Furthermore, the cash flows mentioned will
propel HMC so far that it will be more than adequate to cover the debt in the
future. Looking at the Stockholders, who will gain from this new project,
through diversification of the portfolio, the only negative thing that would
leave us, would be the bondholders.
The greatest risk associated with Project Chariot appears to be the fact
that HMC would assume almost the entire existing debt burden associated
with the existing organization, while MII, with the greatest cash flow potential
would emerge essentially debt free. While this strategy may bode well for
MII, HMC emerges from Project Chariot as a debt encumbered entity with an
anticipated net loss of $66 million annually. The primary sources of the
existing long-term debt of the Marriot Corporation have been issued in the
form of secured and unsecured bond notes. Project Chariot does little to
address the impact of the organizational restructuring on bondholders. While
management seems confident that the emerging HMC firm will sustain
enough financial strength to make all payments to bondholders, the negative
net revenues are likely to result in a reassessment by the bond rating
agencies. It appears likely that the ratings for existing bonds will be lowered
to below investment grade due to the increased investment risk which will
require some institutional creditors to sell their holdings.
In conclusion Project Chariot should be implemented at Marriott
Corporation after careful consideration of Bond Risk. The management can
consider distributing the debt in MII and HMC a little more fairly so as the
overall debt burden do not affect the bond rating subsequently. MC has been
for years a very successful business and impressed not only its shareholders,
but also the public interest with positive business doing. Changes are
definitely needed in the company due to its high debt due to systematic
risks, as economic breakdown in the real estate market as well as several
different Tax Acts that threw MC back for a bit, but not as much so that they
will have to stop continuing business. Diversifying its product line, if one can
say so, meaning by implementing MI and HMC, will make the MC just more
competitive in their field and it will help them get up the economic ladder
faster.

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 HMC MII

Number of Employees 202,000 23,000 182,000


Equity $679,000,000 $600,000,000
$800,000,000
Debt $2,979,000,000 $2,000,000,000 $400,000,000
Value $3,658,000,000 $2,600,000,000
$1,200,000,000