Market changes over time; predominantly, its approximate development could be known via the prognosis done by business analytics. As a response to these changes and the availability of data about them, corporations’ leaders and top management decide to pursue definite strategies. Some companies choose to merge with others to create a combination that can withstand market changes and enlarge their profit. The outcomes of merging are different for various organizations under distinct external influences; it is essential to understand the benefits and risks of this strategy and valuate businesses effectively. The case study analyzes the merge of Starwood company with Mariott into one entity. Both organizations are engaged in the hotels & resorts business, and the combination can be beneficial to them, yet it might seem risky for shareholders (Ferraro, 2015). In the course of the study, different aspects of Starwood’s acquisition are discussed, and the strategy as a whole is evaluated.
First and foremost, it is vital to analyze the market reaction to events related to the deal between Starwood and Marriott. Based on rumors and sentiment about Starwood’s planned action, the market expected Starwood to interact and merge with several Chinese companies, Inter-Continental Hotels Group and Hyatt Hotels (Ferraro, 2015). However, Marriott was not expected to participate in such events, and the more strange and unusual for the market was such a decision by the management of the two companies. The decision to interact with the above companies came to Starwood to study various strategies to optimize profitability. Marriott was not interested in Starwood, based on a first glance at the available information. However, over the next seven months, Marriott management realized the value of working with Starwood to further their interesting expansion. Based on this, it can be understood that the initial skepticism in the market environment is related to the unexpectedness of the sudden cooperation of the two companies. In the future, looking at the decisions made by the management of both Marriott and Starwood, one could judge the market’s positive attitude towards joint expansion.
Starwood’s decision to suspend its “asset light” strategy, as well as a leveraged recapitalization, looks attractive at first glance, but one needs to understand its reasons. Starwood decided to conduct strategic research to maximize the shareholder value of its assets. Research by JMP Securities found that the Sheraton Starwood brand was in crisis (Ferraro, 2015). This situation with one of the most significant assets of Starwood was a fundamental reason for the change in further strategy. To work out a solution to this issue, Starwood hired Lazard and Citi to analyze strategic alternatives for the company. The result of their work was the decision to further develop the “asset light” strategy to ease the pressure from the Sheraton brand. The strategy also included the idea of leveraged recapitalization and selling or merging with another company.
This is what happened later, as the strategy resulted in cooperation with Marriott, a company seeking to expand and minimize the burden on Starwood when transferring some of its assets to the latter and selling them. The solution to solving Starwood’s problems through a relationship with Marriott, which, in the opinion of management, was able to correct the situation with the company’s problem assets, went through synergy. Thus, through a two-year synergy with Marriott, Starwood has solved some of its problems. Starwood also came to a mutually beneficial agreement with a company from the same area, thereby abandoning the past strategy as unnecessary in the current situation.
Next, Starwoods’ approach to the process of strategic exploration reveals valuable information about the level of forethought behind the company’s final decision. Precisely, after announcing such a process, “between April and August Starwood engaged 10 lodging companies, and investors in lodging companies, in an effort to find the best strategy” (Ferraro, 2015, p. 2). Such behavior might be considered both as desperate due to the inability to find the appropriate strategy or as a comprehensive procedure of value maximization. It is more likely that the second variant is more valid due to several factors that underlie the case. First of all, the company had already developed strategies of “leveraged recapitalization, selling Starwood outright, or acquiring or merging with another company” (Ferraro, 2015, p. 2). Therefore, considering different offers was not only reviewing the possible options without previous planning.
Second, the merge with Marriot is seen as beneficial by Starwood. One may consider the statement of Starwood’s analyst about the future of its brand that Marriot’s influence could enhance (Ferraro, 2015). In this case, the choice of the company is dictated by its best interests. The merger with Marriot would maximize the value and enhance the existing assets of Starwood while bringing it some profit. Thus, the deliberate selection of the most appropriate strategy and the combination can result in a beneficial outcome for Starwood.
Another consideration while evaluating the merge should be about the value of Starwood and its impact on the final decision of Marriot as for acquiring its assets. The enterprise value of Starwood as an independent concern constitutes $14005,6 million. If the data from 2015 and 2016 forecasts are considered, the company’s present value equals $420,9 million. Next, the values of the expected cost savings can be calculated through the addition of lesser debt, the value of operating leases, and deferred taxes. Then, it would be $4363,7 million. Finally, the price of acquiring Starwood for Marriot is $72,27 million. Hence, it was determined the costs of the Starwood merge with Marriot as well as its value.
Looking at the current situation on behalf of the owner of Marriott shares, it is difficult to disagree that it is worth keeping the shares in the future. First, it should be borne in mind that in this deal, the initiative is on the side of Marriott. This factor already suggests that Marriott’s decision was made with a rational income to further maximize the shareholder value of assets. It is also essential to consider that the transaction was concluded with the condition that if one of the parties ceases to meet the agreement’s requirements, the other party will receive a large payment. Such a condition, taking into account the confident position of Marriott, unlike Starwood, provides a specific guarantee of the safety of shareholders’ money. Additionally, in case of successful synergy at the end of a couple of planned years, shareholders’ capital will only increase since Marriott counts on increasing profits and shareholder value. To summarize, on the part of the shareholder, Marriott is in a strong position. If not profitable in the future, their deal with Starwood will most likely not worsen its shareholder value.
To conclude, the case study was aimed to analyze the corporate combination of Starwood and Marriot in terms of various aspects. It was found that Starwood developed a beneficial strategy that maximizes the wealth of its shareholders wealth and enhances the company’s revenue and structure. The study is critical due to its illustrative purpose of showing the process of merging and the possible outcomes of it.
Ferraro, S. (2015). Marriott international’s acquisition of Starwood hotels & resorts worldwide.