The business model of

Marriott Corporation was

developing hotel properties
around the world
and selling them to outside
investors while retaining
the lucrative long-term
management
rights. However, the
company was severely
impacted by the real estate
market crash in the
late 1980s, leaving Marriott
Corporation plenty of newly
developed properties with
no buyers
and a massive burden of
debt. By the context
presented in the case, we
can determine that
the real estate market in
that period was having
certain difficulties. A
decrease of the market
price lead to losses for
several companies and
Marriot had several
properties that they were
not able to sell because of
the state of the market.
Therefore, the real estate
market prices
decrement the stockholders
of the company and they
had a noticeable amount of
losses and
as a result absence of
paybacks
The business model of
Marriott Corporation was
developing hotel properties
around the world
and selling them to outside
investors while retaining
the lucrative long-term
management
rights. However, the
company was severely
impacted by the real estate
market crash in the
late 1980s, leaving Marriott
Corporation plenty of newly
developed properties with
no buyers
and a massive burden of
debt. By the context
presented in the case, we
can determine that
the real estate market in
that period was having
certain difficulties. A
decrease of the market
price lead to losses for
several companies and
Marriot had several
properties that they were
not able to sell because of
the state of the market.
Therefore, the real estate
market prices
decrement the stockholders
of the company and they
had a noticeable amount of
losses and
as a result absence of
paybacks
1. Why is Marriott
management proposing
Project Chariot? What is it
trying to
accomplish?
Leadership & Corporate Accountability Assignment

Case Study – Marriot Corporation (A)

Study Questions for Marriott Corporation (A):

1. Why is Marriott management proposing project Chariot? What is it trying to accomplish?
Ans 1. The business model of Marriott corporation was majorly developing Hotel properties
around the world and selling them to outside investor while retaining the lucrative long-term
management rights. However due to economic slowdown in late 1980s where Mariott seen a
drastic drop in real estate market, leaving Marriott Corporation plenty of newly developed
properties with no buyers with the close-down of few of there food restaurant as well and a
massive burden of debt. Therefore, the real estate market prices decrement the stockholders of
the company and they had a noticeable amount of losses and as a result absence of paybacks.

In order to resolve this situation, Marriott management proposing Project Chariot through which
they will going to split off its management service from its property holding and debt, which
may give its investors a clearer view of its operating performance which management felt had
long been undervalued by the financial markets due to the difficult investors had in
distinguishing and separately valuing property ownership and management.

The new company would be created for service business and would have financial strength to
raise capital to take advantage of investment opportunities. The other one would be under less
pressure to sell its properties. Also given opportunities to both companies by isolating their
growth dynamic and more importantly , their capital structures.

This Project Chariot is aimed to separate Marriott’s into two different companies named as –
Host Marriott Corporation (HMC) and Marriott International (MII). Project Chariot is an effort
by management to align its corporate strategy with shareholder expectations. It would attract
investors and improve financial performance in the context of a real estate downturn, by splitting
Marriott into two "leaner" entities. This would enable investors to adapt their investment strategy
to each entities' activities, and would empower managers to better focus on core business
activities and create more value for Marriott as a whole

2. What is the likely impact of project Chariot on the wealth position of the shareholders?

Ans 2. After the collapse of the real estate market and Marriott’s lowest point in 1990, the
reputation of the entire company was in peril. By splitting the cash flows and operations,
investors interested in either part of the company would perceive less risk if they were to invest
in one of the two businesses. Currently, an investor who is interested in the food business of
Marriott suffers from the poor performance of the real estate holdings. In the new system, the
companies are not entirely separate. However, because the cash flows and dividends pay out
differently, different types of investors are attracted to the companies. Shareholders will receive
a similar stake in both companies, leaving their voting rights untouched

In general, we expect two things to happen. Firstly, the stock for MII will likely rise leaving the
shareholders with a lot more wealth. This will happen because the management of the businesses
and hotels are still of a very high quality. Using the reputation of the Marriott Corporation
(occupancy rates being 10% above industry standards), MII has the potential to improve stock
prices, having a positive impact on the wealth position of the shareholders of Marriott.
Secondly, the stocks for HMC will not have such a good time. The debt position of HMC will be
a lot worse, taking over almost all long-term debt from MC. The stock prices will reflect the lack
of confidence from investors, coupled with the bad bond ratings, and will initially go down as a
result. But with the commitment of the management from MC turning over to HMC, as long as
HMC can get through the difficult times ahead there is a lot of potential. Wait until the economy
recovers from the real estate downturn, which would lead to the properties of HMC appreciating.
Shareholders could still experience the rising of stock price if they are patient enough, and
Marriott should absolutely work as hard as possible to signal this to shareholders.
In conclusion, the stock for MII will likely rise, and while the stock for HMC will struggle for a
bit it will eventually stabilize or even rise as well, leaving the shareholders in a better wealth
position

3. Should Management be concerned by the loss of market value of the bonds if project Chariot
is implemented?
Ans 3. No. The Project Chariot was planned and designed as Marriott’s responsibility to its
shareholders, which aims to increase its investor trust in the Brand, which has been impacted by
the economic slowdown and explicitly the recent developments in the real estate. The
company’s duties are primarily to the stockholders, not to creditors. Hotels from Marriott have
already experienced bankruptcy in 1990, after the end of the boom in the real estate market
following the Tax Reform Act in 1986. Due to this, Marriott was saddled with a lot of debt and
limited options to finance them.
The bonds of Marriott have received very bad ratings as a result. Appendix A shows some of the
criteria for bond rating. Among these are debt ratio, times-interest-earned ratio, stability and
maturity. All of these are influenced when the company is in a worse shape. For Marriott, their
bonds have so far been rated as BBB by S&P and Baa3 by Moody’s, leading to bonds with rates
as high as 9.3%.
One of the major risk that has to be mitigated is the possibility of lawsuits. Though leveraged
buy-out (LBO) lawsuits are rarely successful, there have been examples before of a company
having to pay out to the bond holders, which could set a legal precedent for the future of
Marriott. The position of courts is changing, leading to corporations having more responsibility
over their bonds. If this leads to bankruptcy, they could very well be sued over their actions.
However, these cases are few and far between.
Also, since the rates of the bonds are so high and the risks so great (leading to high interest),
there is an implicit hope from bondholders they will only receive part of their money back.
Therefore, management should not be too concerned