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Marriott Corporation (Project

Case Analysis


IE business School
Section 4
September 2014
Question 1. Why is Marriott management proposing Project Chariot?
What is trying to accomplish?

One of the main reasons for Project Chariot proposal is the collapse of prices
in real estate market. A decrease of market prices leaded to loss and
bankruptcy for a plenty of competitors. Additionally, we should outline that
right now it is very difficult to sell the property, because of collapsing market.
The company will try to sell the property when the market become more
The main aim of the project is to split company into to new companies. One
of them will be profitable, because it will represent basically all the sectors of
the hotel except real estate and land and will be named Marriott
International (MI). However, second company will include the real estates of
the old company and because of the major contribution of debt is related to
real estate and lands it will pay huge amount of interests. Hence, this
company will be less profitable and will be named Host Marriott (HM). So,
why is CFO of the company proposing this project? It is worth mentioning
that because of real estate market prices decrement the stockholders of the
company had a noticeable amount of losses and as a result absence of
paybacks. This project will result in tax-free dividends to shareholders and
distribution of dividends by mid-1993.
Question 2. If the proposed Project Chariot is implemented, how do
you think this will affect the interests of:

Management (=the Marriott brothers)
The value of the whole company

Please, provide numerical estimations for every sub-question.

The Project Chariot will affect the following players:
a. Shareholders:
Shareholder now have majority stake in a corporation with a lower
probability of default while all the risk is transferred to debt holders. So all
the risky investments are highly leveraged with bond holders exposed to the
risk. On the other hand MI backed mainly by shareholders equity of 0.8
million and performing assets of 2.6 billion and thus having less long-term
debt (0.4 million), would be able to issue new debt increasing value for both
shareholders and the corporation. Thus the shareholders would gain at the
expense of bond holders and the equity value of the company would
increase. As a proof, the case presents the debt-to-equity percentage to be
33% for MI.
b. Bondholders:
The new project will lead to huge loss for bondholders. The major reason for
that is almost the whole debt would be assigned to HM. Further, we should
outline that real estate market and hotel market issues make problems for
HM to be able to cover its debt. Hence, there is a high probability of default.
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Since the debt is not backed up by the valuable assets and equity in this
company the value of the bond would decrease substantial and bondholders
will lose majority of its investment. As a proof for this, we should outline that
1990-1991 the MC long-term debt is ranked as Baa3 and BBB by Moodys
and S&P respectively (Exhibit 1 & 2). This means that these are the lowestrated bonds that many investors are allowed by law to invest. According to
the case company owes to approximately 3 billion in debt, which has a high
probability of going default, because of the reasons mentioned above. In
addition to this, we would like to underline debt-to-equity percentage of HM,
which is 76%.
c. Management:
The main gain of management is the split of profitable and unprofitable
assets. This strategy will help the company to concentrate on core
businesses of the hotel, which are service, food, etc. Thus, trying to improve
the efficiency of the hotel. The improvement of the hotel value will lead to
increase in employees and especially senior positions. As a result, the losses
of HM wont offset the gains of MI.
d. The Value of the whole company
According to the idea of Project Chariot, the value of the whole company is
not changed. The main idea of the project is the distribution of dividends.
The MI and HM combined will have the same close to zero net income and
inability to pay its debt in the future. The main problem of this project is that
shareholders distribute their risks to bondholders. The company as a whole
will have the same gain and losses, but the difference now is who is going to
pay those losses and get the gains.
Question 3. Is the proposed
managements responsibilities?




Right now the main responsibilities of MI management are to develop

business and make it more profitable. On the other hand, HM management
need to try to sell the hotels and make all payments of the debts.
Accordingly, the main idea of restructuring is to differentiate the business
into two parts in order not to offset profitable asset with unprofitable one.
Additionally, we should outline that MI has approximately 6 times more
estimated employees and 7 times more estimated operating cash flow than
HM. And the tasks of both management responsibilities are clear. Therefore,
the management responsibilities are aligned with proposed restructuring.
Question 4. If you were a board member of Marriott, would you
advise for or against Project Chariot (you may take both legal,
ethical, and economic arguments into account)?
Before answering this question, we should take into account all the
advantages and disadvantages of the project. As we already understood the
project itself has a huge advantages for shareholders and management. On
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the other hand, bondholders are the ones who may be the biggest risk
takers. The project doesnt include any line regarding Event-risk covenants to
protect bondholders from leveraged buy-outs (LBOs). This problem may bring
big issues between bondholders and the company management, since none
of the 400million dollars long-term bonds in 1992 had these convents. As a
result company might face a couple lawsuits, which will probably decrease its
popularity and stock prices and bring additional problems. Therefore, when
making decision the company should provide bondholders some kind of
insurance in case of default. This we deem, is the biggest issue of this
project. The benefits are that it can help manage the companies more
appropriately, because it has a division of a service and a property. Hence, as
a board member I will try to solve all the legal issues and only after their
solution advise for Project Chariot.

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Exhibit 1: Marriot Long-term Debt

Exhibit 2: Ten-Year Financial Summary

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