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MARRIOTT RESTRUCTURING A Written Analysis of a Case by Lloyd Ty Brief Synopsis of Data On October 5, 1992, Marriott Corporation announced their

plan to restructure the company by splitting itself in to two separate companies. The first of the two companies, Marriott International (MI), would manag e and franchise over 700 hotels and motels. In addition, it would manage food and facilities for se veral thousand businesses, schools, retirement homes and health-care providers. On the other hand, Host Marriott (HM), which was the second of the two companies, was to own most of the hard assets. It would own 139 hotels or motels, 14 retirement communities, and nearly 100 restaurants/shops at ai rports and along toll roads. The key element in the restructuring plan was that Host Marriott was to keep the debt associated with its assets, rounding to about $2.9 billion. Marriott International w ould then only have modest debt after restructuring. Their respective risks as investments were ref lected through their new security ratings, with HM being rated with a single B by Standard " Poor's, while MI received a rating of single A - both deviating from the pre-restructured company's rating of BBB. To help alleviate HM's position, MI was to provide a $630 million line of credit to HM, tho ugh the expiration date of the line was sooner than the maturities of many of the bond issues outsta nding. On the part of the shareholders of the former company, one share of stock in each of the new companies was to be given to them for each share of stock they previously held. This announcement c aused immediate and opposite price movements for Marriott Corporation's stocks and bonds. Stockhold ers were elated with the decision, while bondholders were angered, particularly investors who bought bonds just that April. Nonetheless, Marriott management tried to assure bondholders that interest and principal payments would be delivered on time. Main Problem How should management, its stock an d bondholders treat the situation? Analysis of Data Marriott Corporation's proposed restructuring i nvolves splitting the parent company into two separate entities based on two of its main activities - Marriott International would manage, while Host Marriott would own. Since most of Marriott Corpor ation's current debts were associated with its asset-purchasing activities, many of the former compa ny's debt was now found in Host Marriott's accounts, leaving Marriott International virtually debt-f ree in comparison. The restructuring was technically a spin-off which meant that stockholders of th e parent company would receive a share of stock in each of the new companies for each stock they pre viously held, thereby leaving stockholders with ownership in two firms instead of one while no cash was actually transferred. Furthermore, the Marriott family and all stockholders would still own th e same percentage in the new companies as what they owned in the parent company. Unlike other forms of corporate restructuring, Marriott Corporation's own version of a spin-off allowed it to transfer most of its debts into one company, while leaving another free for unhampered expansion. Marriott ac hieved much of its growth by building hotels and then selling them to limited partnerships as tax sh elters. Marriott made its profits from management fees and the sales of the hotels. However, when Congress eliminated these tax deductions, Marriott ended up with over 150 properties, built largely with borrowed funds, that it could not sell. The $250 million annual mortgage interest expense thre w Marriott into a severe cash crunch. Then, in 1992, Marriott divided his company in two, spinning off its profitable management business from its debt-laden real-estate holdings. The new firm, Marr iott International, was now free to accelerate its expansion. The creativity of the restructuring d ecision lies in the fact that Marriott Corporation was able to free itself from the limitations of b eing a company heavily laden with debt. Since the restructuring meant that only one company would n ow be held liable for most of the debt, it allowed the shareholders of Marriott Corporation to minim ize their losses in the event that it defaults. Rather than watching the entire parent company suff er, it would be for the well being of the shareholders that a portion of Marriott Corporation, in th e form of Marriott International, prospers. Furthermore, the companies would also receive the benef its of a conventional spin-off. Probably the most common reason for creating spin-offs is that they improve efficiency. Since the parent company is split into two separate companies with each having differing activities from one another, it allows for the management of each to concentrate on their main activity and deal with the problems solely associated with it. If each business must stand on its own feet, there is no risk that the funds will be siphoned off from one in order to support unp rofitable investments in the other. Moreover, if the two parts of the business are independent, it i s easy to see the value of each and to reward managers accordingly. The restructuring decision benef ited the shareholders more than Marriott's bondholders. With stocks in two companies rather than on e, Marriott's shareholders are able to diversify their portfolio without additional investment outla y. Whether or not Host Marriott defaults on its debt or not, shareholders are still secured with an alternative investment in Marriott International. The rise in the price of Marriott Corporation's stocks after the announcement simply reflected how other investors also saw the restructuring decisi on as an opportunity to take advantage off. The bondholders, on the other hand, are less fortunate. With most of the debt being linked with Host Marriott, the returns of these bondholders are now at tached to a heavily indebted firm with massive leverage in comparison with its parent company. The debt, now greater in proportion in the smaller, spin-off firm, is riskier than previous, and has att ained a lower security rating to show for it (from a BBB - Adequate capacity to pay for Marriott Cor poration, to a single B - Greater vulnerability to default, but currently has capacity to pay for Ho st Marriott). When Marriott's bondholders paid for the safer BBB bonds, they expected BBB level ris k and not single B bonds, which are associated with a higher risk. With the bond prices plummeting after the announcement, bondholders, especially those who just bought Marriott bonds months before, could have bought the same bonds at a lower price if they had just waited for a few months for the a nnouncement. More so, 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 plan ning months before for such a major move. The central issue, whether or not it was purposeful or si mply an effect of the restructuring, is that bondholders wealth was expropriated in favor of stockho

lders, and thus it is natural that the bondholders and stockholders act the way did. Recommendation Despite the event risk posed by Marriott's restructuring decisions, we think that it is in bondholde rs' best interest to simply hold on to their bonds. Although Host Marriott would indeed have a grea ter difficulty in servicing all debts, especially since it now holds less assets and controls less r evenue as before, it can still rely on the $630M credit line provided to them by Marriott Internatio nal. The credit line, although expiring at a date sooner than the maturities of many of the bond is sues outstanding, can help in paying of the annual interest expenses until the management of Host Ma rriott can adjust to its current situation. Simply selling off one's bonds could bring about undesi rable losses on speculations not yet clearly ascertained. Furthermore, the price of the bonds three months after the announcement has been experiencing a steady increase to its previous amounts. Alt hough we are quite doubtful that the market values of these bonds would return to its original rates , trends show that the drastic plunge experienced during the week after the announcement could be si mply a shock set by market panic. When worse comes to worst, and Host Marriott does indeed default on its bond payments, then bondholders, having priority claim over Host Marriott's various hard asse ts, is still assured of getting back its investment. Probably the worst off are those bondholders w ho have bought Marriott's bonds in the interest of quickly selling it off again for a capital gain. For these individuals, they could simply cut their losses at the point when the bond prices stabili ze or simply hold on to the bonds and claim the interest returns from it. Marriott management should put the fears of bondholders to rest by making sure that they do indeed manage to pay off the inter est payments, and later on, the maturity amounts. Marriott International, in particular, should pla y an active part in helping Host Marriott service its debts and liabilities. Although the main purp ose of a spin-off is to warrant different divisions in a solitary firm independent management contro l over itself, Host Marriott is still for the most part the responsibility of Marriott International , the debt-free older brother. Whatever happens to Host Marriott nonetheless affects the very same shareholders of Marriott International. In that sense, it is also a loss on the part of the owners of Marriott International if Host Marriott goes under. More so, it can also be reasonably ascertain ed that if Host Marriott falls, Marriott International's managing business would also be affected by the loss of Host Marriott's hard assets (hotels, motels, etc.). The credit line provided by Marrio tt International could be a powerful tool in helping Host Marriott get back on its feet. Since Marr iott International is now rated single A under Standard and Poor's, it can easily borrow money at a cheaper rate. In turn, if it is legally possible, Marriott International can extend a greater credi t line with a later expiration date to Host Marriott, who himself will have a more difficult time in borrowing at a low interest rate. This "passing" of loan credibility can act as a giant loophole w hich could surge both Marriotts back into prosperity. In wrapping up, stockholders have control (th rough the managers) of decisions that affect the profitability and risk of the firm and it is in the ir own best interests that they also reassure existing bondholders of their creditworthiness despite the lowered security rating. In the end, when all sides of the company are satisfied, it is the st ockholders themselves who will feel the most benefit. marriott restructuring written analysis cas e lloyd brief synopsis data october marriott corporation announced their plan restructure company sp litting itself into separate companies first companies marriott international would manage franchise over hotels motels addition would manage food facilities several thousand businesses schools retire ment homes health care providers other hand host which second companies most hard assets would hotel s motels retirement communities nearly restaurants shops airports along toll roads element restructu ring plan that host keep debt associated with assets rounding about billion international then only have modest debt after restructuring their respective risks investments were reflected through their security ratings with being rated with single standard poor while received rating single both devia ting from restructured company rating help alleviate position provide million line credit though exp iration date line sooner than maturities many bond issues outstanding part shareholders former compa ny share stock each given them each share stock they previously held this announcement caused immedi ate opposite price movements corporation stocks bonds stockholders were elated decision while bondho lders were angered particularly investors bought bonds just that april nonetheless management tried assure bondholders that interest principal payments delivered time main problem should management st ock bondholders treat situation analysis data corporation proposed involves splitting parent into se parate entities based main activities international manage while host since most current debts assoc iated asset purchasing activities many former debt found accounts leaving virtually free comparison technically spin which meant stockholders parent receive share each they previously held thereby lea ving stockholders ownership firms instead cash actually transferred furthermore family still same pe rcentage what they owned parent unlike other forms corporate version spin allowed transfer most debt s into leaving another free unhampered expansion achieved much growth building hotels then selling t hem limited partnerships shelters made profits from management fees sales however when congress elim inated these deductions ended over properties built largely borrowed funds could sell million annual mortgage interest expense threw severe cash crunch then divided spinning profitable business from l aden real estate holdings firm free accelerate expansion creativity decision lies fact able itself l imitations being heavily laden since meant only held liable allowed shareholders minimize losses eve nt defaults rather than watching entire suffer well being shareholders portion form prospers further more also receive benefits conventional spin probably common reason creating offs improve efficiency since split separate having differing activities another allows concentrate main activity deal prob lems solely associated business must stand feet there risk funds will siphoned order support unprofi table investments other moreover parts business independent easy value reward managers accordingly d ecision benefited more than stocks rather able diversify portfolio without additional investment out lay whether defaults still secured alternative investment rise price stocks after announcement simpl

y reflected investors also opportunity take advantage hand less fortunate linked returns these attac hed heavily indebted firm massive leverage comparison greater proportion smaller firm riskier previo us attained lower security rating show adequate capacity single greater vulnerability default curren tly capacity when paid safer bonds expected level risk which higher risk bond prices plummeting afte r announcement especially those just bought months before could have bought same lower price just wa ited months more never informed such corporate plans before when arguable must have already been pla nning months before such major move central issue whether purposeful simply effect wealth expropriat ed favor thus natural recommendation despite event posed decisions think best interest simply hold a lthough indeed greater difficulty servicing debts especially holds less assets controls less revenue still rely credit line provided them credit although expiring date sooner maturities many bond issu es outstanding help paying annual expenses until adjust current situation selling could bring about undesirable losses speculations clearly ascertained furthermore three been experiencing steady incre ase previous amounts although quite doubtful market values these return original rates trends show d rastic plunge experienced during week shock market panic worse comes worst does indeed default payme nts having priority claim over various hard assured getting back investment probably worst those qui ckly selling again capital gain individuals losses point prices stabilize hold claim returns should fears rest making sure indeed payments later maturity amounts particular should play active part hel ping service liabilities purpose warrant different divisions solitary independent control itself par t responsibility older brother whatever happens nonetheless affects very same sense also loss owners goes under more reasonably ascertained falls managing affected loss hard motels provided powerful t ool helping back feet rated under standard poor easily borrow money cheaper rate turn legally possib le extend later expiration date himself will difficult time borrowing rate this passing loan credibi lity giant loophole surge both marriotts back prosperity wrapping control through managers decisions affect profitability best interests reassure existing creditworthiness despite lowered security sid es satisfied themselves will feel benefitEssay, essays, termpaper, term paper, termpapers, term pape rs, book reports, study, college, thesis, dessertation, test answers, free research, book research, study help, download essay, download term papers