Marriott case study

1. The economic slowdown in the late 1980s and the 1990 real estate market crash left MC owning
many newly developed properties for which there were no buyers, together with a massive burden
of debt. For the foreseeable future, MCs ability to raise funds in the capital markets would be
severely limited. For the purpose of improving MCs financial condition the chief financial officer
proposed a radical restructuring of the company under Project Chariot. Project Chariot means the
bulk of MCs service businesses would be split off from its property holdings and debt. It will create
two separate entities: Marriott International Incorporated (MII) and Host Marriott Corporation
(HMC). MII would comprise MC's lodging, food, and facilities management businesses, as well as the
management of its life-care facilities. HMC would retain MC's real estate holdings and its concessions
on tollroads and in airports. Dividing MC into two companies will add value for the company as a
whole and will take away the pressure previously created by investors off selling hotels at distress
prices.
2. a. Project Chariot contains giving stockholders of MC a share of stock in the new company to
match each share they held of MC. The EPS will rise from $0.75 to $1.40. The proposed Project
Chariot will if implemented benefit the shareholders in a positive manner, namely a rise in the stock
price due to a higher EPS.
b. While project Chariot would very likely benefit stockholders in MC, the situation is quite different
for bondholders. The separation of the two companies would affect the security of MCs debt
holders. The debt will be divided in $0.4 billion for MII and $2.6 billion for HMC. If you take this into
consideration HMC becomes less preferable for bondholders, because of the underlying
nonperforming assets. This will result in a likely downgrade in the rating of these bonds under
investment grade. For the valuation we use earnings before interest expense and income taxes
divided by interest expense: (259+123)/(25 + 210) = 1.63 for MC.
When compared to the time interest earned (1991) we see no change in bond-rating (still B) and
yield (10.81). So this will not affect the interests of the bondholders.
c. Management (the Marriott brothers) would also benefit from the expected increase in the value of
the stock after implementing project Chariot, because they have 25.75% of the total shares in the
company. With two separate companies there would now be twice as many top-level positions, and
with MII poised for rapid growth, ambitious managers would be more likely to stay.
d. The value of the existing firm MC: $679 million +$2,979 million = $3,658 million
The value of the firm HMC : $600 million + $2,000 million = $2,600 million
The value of the firm MII: $800 million + $400 million = $1,200 million
The value of HMC and MII= $2,600 million + $1,200 million = $3,800 million
HMC would retain nearly all of MCs long-term debt of nearly $3 billion, although it would have
access through December 1997 to a revolving line of credit of $600 million from MII. However, MII
itself would have very little long-term debt. The value of the company will be higher after the

restructuring, because the value of HMC and MII is higher combined. The theory was that added
value came from finding investment opportunities and developing and managing hotels.

3. U.S. courts had held that corporations have no responsibilities to safeguard the interests of
bondholders other than those spelled out by the terms of the bond indenture. The responsibility of
the management is thus serving the shareholder, because shareholders are the owners of the
company. The management needs to increase the shareholder value. Their main task is to invest in
projects that increases shareholder value. The management has the option to execute project
Chariot or they can stay intact and try to improve the financial state of the company. The
shareholders will benefit from project Chariot as shown before, so the proposed restructuring is
consistent with managements responsibilities.
4. As the members of the board, we will advise for restructuring Marriot. The implementation of the
project will protect the reputation of Marriot Corporation and improve the financial state of the firm.
After the separation, MII will be able to increase capital to buy other firms assets and HMC will be
under less pressure to sell their properties. Both firms will generate further equity funds. Each
management of the firms can focus on their core business and make them more competitive in their
field. Therefore each firm can implement their own company strategy. Project Chariot will also offer
more career opportunities for the managers in both firms. Employees working in MII will be more
motivated and rewarded , because of the improved valuation. Furthermore, shareholders will be
better informed because of the divided financial statements.
5. Marriott should not make any concessions to the bondholders, because the implementation of the
project will have little to no effect on the value of the bonds (as shown before in 2.b.).