Case study on Marriott

Marriot Case Study

Why is Marriott's chief financial officer proposing Project Chariot?

The chief financial officer is proposing Project Chariot due primarily to economic uncertainty regarding the future. Marriot prior to the collapse of the hotel and leisure industry was growing at a very rapid rate. The case indicates that annual growth rates approached 20% a year in the 1970's and 1980's. However, as is the case in many business cycles, 20% growth can not be maintained forever. Subsequently during the hotel and leisure industry collapse many of Marriot's properties became undervalued relative to their intrinsic worth. This was a detriment to Marriot who often sold real estate properties in an effort to manage the facilities on the property that was originally sold. During this economic downturn however, investors where either unwilling to purchase such properties, or they were only willing to do so at extremely depressed prices. Marriot therefore was straddled with depreciating property values in the midst of a business decline. Due to these circumstances the CFO thought it prudent to break the company up into two separate entities that encompass both business practices of Marriot separately. One company would focus primarily on management of hotel and leisure facilities while the other focused on real estate. By separating the two entities, the hotel management business would not be burdened by the real estate business. Likewise, once the real estate market rebounds, the other entity would realize increased profits due to sales at higher prices. Project compass also allows the newly formed hotel management company to borrow more to finance expansion. By borrowing or increasing the companies leverage position, Marriot can still maintain the 20% growth rates it had accomplished in earlier decades.

2. Is the proposed restructuring consistent with management's responsibilities?

Yes the restructuring is consistent with management's responsibilities. Management must always be cognizant of changing business practices and economic cycles. Once a change is identified management must act in the best interests of its shareholders. By restructuring the business, Marriott has positioned itself for future long-term growth. For one, the hotel management business is not burdened by the real estate market directly due to this restructuring. This will allow the hotel management business to transfer its long-term obligations to that of the real estate company formed in the restructuring. By alleviating itself of long-term debt, Marriott is in better position to purchase assets at depressed prices in the open market, thus positioning itself for future profitability. By positioning itself for future profitability, management is acting consistently with its responsibilities to all stakeholder groups. Bondholders will see their principle repaid with all corresponding coupons. Stockholders will likewise see rising share prices as the companies earnings grow. Both of which are the responsibilities of management.

3. The case describes two conceptions of managers fiduciary responsibility (page 9). Which do you favor: the shareholder conception or the corporate conception? Does your stance make a difference in this case?