Marriott dueled with a U.S. hotel company, probably Hyatt, and a foreign one, for Starwood. In the end, Starwood liked Marriott's financial proposal, management and bigness.
The Starwood sales process, which kicked off April 29 at the urging of some of the hotel chain’s shareholders, involved 30 U.S. or foreign hotels or investment groups that reached out or were contacted, while Marriott International ultimately took home the grand prize in November for $12.2 billion.
Of those 30 parties, the scorecard reads like this: 10 expressed interest in a combination with Starwood while seven, including Marriott, signed confidentiality agreements, according to a Marriott-Starwood filing with the U.S. Securities and Exchange Commission.
As the Marriott-Starwood agreement neared its completion, a U.S.-based lodging company (possibly Hyatt and referred to as Company E) came the closest to stealing Marriott’s prize and actually outbid Marriott. And a foreign lodging company (potentially InterContinental Hotels Group and referred to as Company D) was in the running until about 10 days before the Marriott-Starwood deal announcement November 16. Bloomberg reported in early November that InterContinental Hotels Group was exploring a sale or merger.
Along the way, in August, Starwood considered acquiring a foreign lodging company (Company K) that had put itself up for sale but the company informed Starwood that the price range that Starwood was considering was considerably below the foreign lodging company’s expectations.
The Path to the Deal
One of the more interesting aspects of the path to the deal is that from April through October — about six months — Marriott considered getting involved but didn’t bite. The first Starwood meeting with Marriott occurred on April 23, but Marriott didn’t further engage in the process at that time.
On June 9, according to the filing, a representative of Starwood’s financial advisor, Lazard, discussed the possibilities of a deal with Marriott CEO Arne Sorenson. “Mr. Sorenson expressed that Marriott was unsure as to whether it would be interested in a transaction with Starwood at that time,” the filing states.
Marriott reviewed a potential acquisition with Starwood in late July and early August but told Starwood in mid-August that it wasn’t interested and withdrew from the process. Marriott’s main reasoning was the relative stock prices of the two chains. On August 12, Marriott’s stock closed at $70.93 per share while Starwood’s was $75.91.
Oh, Those Industry Conferences
Marriott went silent for nearly another two months until October 7 when then-interim Starwood CEO Adam Aron spoke to Sorenson at a hotel industry conference — probably the Lodging Conference in Phoenix — and urged Marriott to take another look at a combination.
Marriott reengaged with Starwood on October 22 but by this juncture Starwood was in advanced talks with Company D, the foreign lodging company. Sorenson called Starwood board chairman Bruce Duncan the next day, proposing an all-stock deal in which Starwood shareholders would receive one share of Marriott for each share of Starwood they owned.
“Mr. Duncan emphasized the importance of both price and speed to signing in pursuing a potential transaction with Marriott,” the filing says.
Starwood’s Stock Went Boom
A Wall Street Journal story on October 27 reporting that one of several Chinese firms was likely close to a deal with Starwood caused the chain’s stock to rise 9.1 percent, its largest percentage increase since 2009. On October 28, Starwood’s stock closed at $79.50 compared with Marriott’s $76.89.
After proposals and counter-proposals back and forth over the next two weeks, on November 14 Marriott offered the deal that the two parties accepted: Starwood shareholders would get 0.920 shares of Marriott stock for each Starwood share they owned, plus $2 per share. There was also a $400 million termination fee if either board changed their favorable recommendation of the deal.
A week earlier, Company D, the foreign hotel company that perhaps was InterContinental Hotels Group, had been eliminated because its own country’s regulations would have required it to publicly disclose the talks, and Starwood was concerned that such an announcement would scare off Company E, a U.S. hotel company that might have been Hyatt, as well as Marriott. [The public disclosure requirement argues against the possibility that the foreign lodging company was one of the Wall Street Journal’s purported three Chinese suitors.]
On the same day that Marriott submitted its ultimately winning bid, Company E came in with a revised proposal: 1.120 shares of stock of the combined company for each Starwood share along with $17.74 in cash per share of Starwood stock that was to be paid through a special dividend.
Based on the Marriott-Starwood SEC filing and our reporting, Gary Leff of View From the Wing crunched the numbers behind the Hyatt and Marriott bids for Starwood and concluded that the financial value of Hyatt’s bid was 7.6 percent higher than Marriott’s.
Bigger Is Better
Starwood opted for what it calls Marriott’s “superior” bid because, according to the SEC filing, it “represented a transaction that offered superior long-term value than the proposal submitted by Company E, due to, among other things, the superior strategic benefits of a combination with Marriott because of the strong management team and lower risk of execution, greater scale of the resulting combined company, potential synergies that were more likely to be realized, more diversified chain scale mix and a more ‘asset-light’ business model, as well as Company E’s complex proposed voting structure [one vote per share of the new stock that would climb to 10 votes per share if held for four years] that could impair the trading value of the combined company’s stock …”
With 1.1`million rooms in more than 5,500 hotels, scattered across more than 100 countries and more than 30 brands between the two major hotel chains, the Starwood board obviously liked the scale of the combination.
Why the Marriott Change of Heart?
Marriott CEO Arne Sorenson, in a conference call on November 16, the day the deal was announced, discussed what he likes about the size of the new Marriott-Starwood, and why Marriott went from not interested to pursuer.
“I think when you look at the unaffected prices of the stock there was probably about a 15 percent swing in our equity values from the time we originally passed on it and the time when we really jumped in and re-energized the process. So that economic piece was one of the things that changed.
Expedia, Google, Airbnb, and Alibaba
“But I think the second thing that changed, over the course of those seven months we’ve become I think more impressed by what we can accomplish by being bigger.” Sorensen said on the call. “And whether you look at what some of the OTAs have done by consolidating in their space, entering into tangential spaces for them, whether you look at the Alibabas and Googles of the world and what they are trying to do in the travel space, whether you look at the home-sharing sites and the way they are trying to get in, watching all of that we became more convinced that strategically we could drive better value and compete better by being bigger. And that really starts with things like the loyalty programs, things like the technology spending that we’ve got to do.
“And by being bigger we have more resources to do that cost effectively and to prioritize in a way that will really help us compete. So you put those two things together and the final strokes of this deal came together very, very quickly.”
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