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One-on-One: Marriot's EVP Mergers & Acquisitions on Starwood DealNovember 24, 2015 By: David Eisen
The eventual acquisition of Starwood Hotels & Resorts Worldwide was not a shock. For months, there was rampant speculation that a sale of the company was imminent. The eventual buyer, however, was a surprise. When Marriott International ponied up $12.2 billion to buy the company, inclusive of brands, real estate and management contracts, many were left saying: "Where did they come from?"
The media were pegging either Hyatt Hotels Corp., or a Chinese hotel company, as the eventual buyer, but in the end, it was Marriott.
Rick Hoffman, Marriott International's EVP of mergers, acquisitions and business development, had a huge hand in the deal. We talked to him about the ins and outs of the deal, its ramifications for Marriott and its overall impact on the hotel industry.
How did you keep this deal so under the lid?
RH: On the point of how we kept it confidential, we worked hard at doing that. Our responsibility is not to talk about things. We work hard to keep things secret; we signed a nondisclosure agreement, so we're supposed to keep it confidential, as is the other side. Obviously, we can't control speculation and, to some extent, I guess we were lucky that nobody was speculating it would be us. We just keep our noses to the grindstone and know how to keep our mouths shut and, fortunately, we were able to complete it before anybody started talking about that. In this kind of deal, it really is helpful to work in an environment where you're not addressing rumors about it from our side. It's important for us to keep it confidential.
Why did you make the deal? What's the upside?
It's a combination of economics and strategy. As we looked at, it in the past, it was not economically attractive because of the relative value of our two securities, our two stocks. Over time, as it got closer to [the announcement], we got some advantage where the prices turned quite a bit in our favor. That helped. We look for a deal that works for us economically. Then, strategically, what Arne [Sorenson's] talked about from our perspective, it's a rapidly evolving marketplace, and the benefits of scale became more and more apparent to our senior leaders. They looked at this that if it could work financially, there was a lot of strategic benefits.
How is a deal like this an offensive against the OTAs and the home-sharing sites that keep digging into market share. How does that work in your favor?
I don't think about it that way. I don't think we necessarily think about whether it's defensive or offensive. What we think about is: Does this strategically make sense? Again, Arne's talked about these things; it makes sense at several important levels. We can achieve efficiencies from scale at the corporate level. There are synergies here that we clearly intend to realize. More than that, there are going to be enormous efficiencies at the property level, which makes us more competitive at our core business—which is to our partners and owners and franchisees. Everything from enhanced marketing power to generating revenue, to bigger technology platforms that allow you to leverage costs across a bigger base and to procurement.
A lot of this may not be very sexy, but it's blocking and tackling within our business. We've also talked about the fact that we are in a rapidly changing marketplace with a lot of new entrants. Some of those new entrants themselves are extremely large, and we want to be in a good position to be competitive against them, mostly on behalf of our owners and franchisees. That factors into it, too. You can call it either defensive or offensive, but more to the point are the advantages it gives us.
What about consolidation? Do you think we'll see more of it?
I'd say our industry is behind on consolidation. We are a remarkably fragmented, highly competitive industry. Think about how many hotel brands there are. There are hundreds of them, literally, especially if you take a global perspective. There are dozens of big companies and lots of smaller companies. I think it's natural that there will be some consolidation; it has picked up a bit.
We've been active in the last few years, but I wouldn't say what we've done is consolidation until this transaction. We were looking for niches that filled our portfolio. Think about Protea—we had no hotels in South Africa prior to that acquisition, so, for us, that had to do with geography in picking up a platform. Each one had its own rationale, and given the size of our company, they were relatively small.
For the industry as a whole, I think there'll be more transactions. There are a lot of people who'll want to be independent, who will want to stay that way, and with the incredible ability to have price transparency and price competition to all of the online marketplaces, you can adopt that model, too. Others will think they need to become part of scale to get advantages of the things we talked about, so I think they'll be more consolidation in the next year or two.
What are your current owners and developers saying about this deal? What do they think about it?
I don't know that anybody who's really unhappy the first week is going to call us up and say 'What a terrible deal.' With that caveat, we're getting tremendous positive response from franchisees, and as well from the owners and franchisees at Starwood. There's a lot of overlap. The comments that I've heard, and that I hear my colleagues are hearing, are so far universally positive. Hopefully, as we get out there and talk to more of them, we can continue that.
One of the big things that came out of this that Arne talked about is how this makes Marriott even more global than before. How important is that in terms of growing your footprint?
That was quite important and this accelerated our diversification. We have a big U.S. base that has served us very well. It's strong. Ultimately, becoming a bit more global is a good thing. We want to have the right product in the right place at the right price for every consumer. When you think about outbound travel, and the emerging middle class in places like India and China, we want them to know our brands, and you do that by being in their home countries, so when they travel elsewhere, they look to you. Think about not only the inbound travel in picking up those countries, but those people going outbound to visit their favorite travel destinations in the world, you want them to know who you are. Having a global footprint is very important, and Starwood's done a very good job on that.
The Sheraton brand has come under a lot of fire of late. It's such a recognizable brand—what do you think that Marriott can do with it once the deal does close?
Now you're probably out of my expertise. I'm the deal guy. We certainly have people who will be working on that. We know that they have some challenges, but we've seen their plan, and their plan looks very interesting. I think what we're saying here is give us some time, we're not there yet. We don't own it and we haven't had a chance to talk to their people. Especially globally, Sheraton, to us, is a very interesting brand. We tend to think about [business] through a U.S. lens. I think outside the U.S. it is quite strong and has great brand name recognition. We know there's a challenge and our brand people are very interested in tackling that when the time comes.
In terms of development and new deals that are being forged, are Marriott and Starwood still separate or are there any linkages there?
Absolutely separate. Until this deal closes we're competitors; we'll continue to compete. We will not discuss deal terms with them and they won't discuss them with us, so those are the rules of the road.
There are possible redundancies, and, maybe it's too early to tell, but is this something you will look at? The roster of brands, and see which make sense? Is there a possibility that some may be merged, sold off or terminated?
I think about it this way: It is early. In general, [the brands] are one of the things that attracted us to the transaction. We talked about, in general, some brands are complimentary. We believe in brands and each brand needs to have a distinctive positioning, so we need to work on that. I'm sure we believe, for example, that Ritz-Carlton and St. Regis can both live in the same universe of hotels quite successfully. In my strategic priorities, we've wanted another luxury brand in our portfolio.
In particular, will we look at these? Sure. Again, we want to talk to our partners. Our owners and franchisees are very important partners in this. We'll get their views and we'll see what comes of this, but I think our overall approach is that we like the brand platforms. We think we can enhance the growth of several of them and we think we'll probably keep their brands intact.
The other big question: What will come of the loyalty programs? What can you say right now to allay fears of Marriott Rewards members or SPG members, both right now and further out?
I guess the first thing I'd do is to call them to your blog with Arne's quotes because he was all over that. I'll repeat some of what he said. Hopefully, we can get people to calm down. We're going to approach this thoughtfully. The SPG program was a great asset to Starwood. We were conscious of that when we decided to try to do this transaction. It's one of the reasons we were interested. There are partners we need to consult about the right way to treat the program, so I wouldn't make any assumptions yet.
We are confident that we'll find a way to take care of our best customers in both loyalty programs. These are very valuable people to us; we're going to listen to them. It doesn't make sense to assume we're going to diminish their benefits. We don't want to diminish their loyalty. We hope this will be a great thing for SPG members and rewards members: We can enhance their loyalty by giving them more choices and better results for becoming loyal customers in the combined company. I guess I would say to them, 'Stay tuned, be calm, nothing's happening right away. Nothing's happening to your points or your benefits, and we'll talk to you and be thoughtful before we announce anything specific.'
What was Mr. Marriott's involvement in the deal, and what's been his overall reaction to it?
Bill Marriott is the executive chairmen of our board. He's involved in every big decision here, and even more so in something like this. He and the board of directors in general were involved in every element of the transaction. He was consulted regularly on it, and he had a lot of input. Not to be too specific, but, yes, he was very involved. And he's thrilled. Mr. Marriott likes to win, and this is a big win for both companies. I think he's very, very excited about it. He's done town halls with our associates and their associates and expressed his enthusiasm for the deal and I'm quite sure that's genuine.
What is something about the deal that no one's really talking about? What do you think is at the crux of this deal that is something that people should know?
Here's my message: You get people who always want to ascribe winners and losers—that seems to be human nature, sort of who got the better end of the deal. I think people are missing the fact that Starwood is not selling to us for cash. Starwood is joining our company. It's not possible for this to be a good deal for Marriott shareholders and a bad deal for Starwood shareholders. If it's a good deal, it's a good deal for both of us. At the end, assuming we're permitted to do this transaction, they're going to own 37-38 percent of our company. Everything good about this will be to the benefits of both shareholders. They're joining us, and we think it's becoming a better company. We [see] great growth potential from a shareholder value point of view, and both sides get to share in that. They're trading into our company by doing a stock-for-stock deal.
Down the line, if the deal does close, will there still be a Starwood, or will it all merge into Marriott?
The company will merge into Marriott. Whether there's going to be use of the Starwood name in any component—I think it is too early to say. As Arne said, we intend this to be a best of both companies. They have a lot of great talent, and we intend to use that talent to the maximum extent that we can, and clearly some of that talent is in Stamford, CT. It’s not going away any time soon.