Marriott International officials have announced the $13.3-billion acquisition of Starwood Hotels & Resorts Worldwide has closed, firmly cementing the combined entity as the largest hotel company in the world.
Editor’s note: This story will be updated with additional commentary and reaction throughout the course of the day. (23 September 2016)
Updated 1:55 p.m., Eastern Daylight Time, 23 September 2016, with comments from Sean Hennessey, CEO of Lodging Advisors
BETHESDA, Maryland—Almost a year after initially announcing the transaction, Marriott International executives announced the official closing for the $13.3-billion acquisition of Starwood Hotels & Resorts Worldwide.
First announced in November 2015, the deal makes Marriott unquestionably the largest hotel company in the world, with company officials stating they “operate or franchise more than 5,700 properties and 1.1 million rooms.” Marriott president and CEO Arne Sorenson said 1,200 properties came into the company via the Starwood buy.
August numbers from STR, Hotel News Now’s parent company, have Marriott and Starwood’s combined room count at 1,136,814 rooms in 5,809 properties. That room count is 47.1% higher than the closest competitor, Hilton Worldwide Holdings, which has 772,834 rooms in 4,726 properties.
The deal became official the morning of 23 September with the removal of Starwood (HOT) from the New York Stock Exchange and a payout of $21 in cash and 0.8 shares of Marriott class A common stock for each share of Starwood common stock.
The closing of the Starwood acquisition comes months later than Marriott officials had originally projected and at a significantly higher cost than originally planned, since the deal was originally announced with a $12 billion price tag and a mid-2016 closing date.
Both of these issues can be tied back to issues in China, starting with a bidding war for Starwood with Beijing-based Anbang Insurance Group and ending with a prolonged regulatory review for the deal with Chinese anti-trust regulators.
During a media conference call announcing the deal this morning, Sorenson said the company still has significant work to do in integrating the culture and systems of the two companies, and described the work to close the deal as a “race to the starting line.”
“There’s been a lot of work that’s been done over the last 11 months or so to get ready for this day, but in many respects the real work begins now,” he said. “I think we are overwhelmingly excited about the opportunity to make what we can make of this new, big company, but at the same time, there’s a lot of work to do.”
Anthony Capuano, Marriott’s EVP and global chief development officer, echoed Sorenson’s comments in an interview with HNN that the heavy lifting to combine both companies is just beginning.
On the global development side, he said he’s especially excited about bringing new brands to a worldwide audience, particularly select-service ones.
“In many ways, our development goals will just be a larger version of what we’ve been doing over the last few years,” he said. “Both Marriott and Starwood in 2015 set all-time production records in terms of their unit growth around the world, and we expect that momentum to continue.”
Sorenson said there are three main groups Marriott officials must make sure the acquisition ultimately benefits: employees, guests and owners.
Also speaking on the conference call, Executive Chairman Bill Marriott said the deal brings the company’s employee count up to roughly 500,000, and he’s excited about how the company’s expanded scope will benefit associates.
“We hope to continue the trend of promoting, developing and working with people,” Marriott said. “We have the strongest culture, I think, of any lodging company, and of most companies in America. And we’ll continue to promote and really strengthen that culture.”
Sorenson said the number of executives coming over from Starwood is still up in the air, and many could remain working in or around Starwood’s existing headquarters in Stamford, Connecticut, or the company’s Manhattan office.
“We will certainly have people in both those locations for some period of time, maybe forever,” he said. “There are also at least some that have already signed on who will be moving to Bethesda, but we don’t have an overarching count yet, and I would expect the largest number of Starwood associates who join us, beside the hotel level folks who obviously stay at their hotels, that they will be probably collocated in places. Maybe continuing to live and work where they live and work today, at least preliminarily.”
The company also announced the expansion of the Marriott International Board of Directors from 11 to 14 to include some members who formerly served on Starwood’s board. The new members are Bruce Duncan, chairman, president and CEO of First Industrial Realty Trust; Eric Hippeau, partner with Lerer Hippeau Ventures; and Aylwin Lewis, chairman and CEO of Potbelly Corporation.
Marriott officials are projecting $250 million in “annual corporate cost synergies” through the deal as well added savings from “leveraging scale in operations and sharing best practices.”
The acquisition came with roughly $140 million in associated transaction costs, but company officials expect to sell off Starwood’s $1.5 billion to $2 billion worth of owned assets within the next two years.
“Starwood was in the process of trying to recycle that capital, and we look forward to jumping in and taking it from there,” said CFO Kathleen Oberg during the conference call.
Capuano also addressed the rumor that Starwood’s owned assets may have played a role in garnering Chinese approval of the deal. He said those assets were not at play in the deal at all, and that the process of getting approval in China followed what he called “a normal course.”
“We learned at the outset that the Chinese would be thoughtful in their evaluation of the deal,” he said.
The power of loyalty and brand
Sorenson reiterated his commitment to keeping all 30 brands that were under the Starwood and Marriott umbrellas, which includes 27 hotel brands, and he pointed to the loyalty benefits of that as a large motivator.
“The expectation is we will keep all these brands and try and grow them for a few reasons,” he said. “The strength of the loyalty program is driven in significant part by the size of the portfolio and the range of choice that is offered to loyalty program members. So, by having 30 brands with options in many markets around the world, whether resort or urban, whether lifestyle or luxury or economy, we think that program is stronger.”
He said he also plans to keep brands, out of respect for existing owners.
“Our contracts don’t give us the right to change the brands that are associated with their hotels, and they have made the deliberate bets with their valuable real estate about which brands they’d like to have at their hotels. So, that is something we intend to continue to respect.”
Sorenson said part of the post-transaction work will be figuring out how to “drive distinction between those brands.”
Capuano said the Aloft and Element platforms have been “under distributed.”
“When you look at our global platform of select-service brands, you’ll see a fairly significant acceleration of the growth of those platforms outside North America moving forward,” he said.
Adding Starwood’s lifestyle brands to the Marriott mix is another highlight, he said.
“Now with the completion of the merger, Marriott offers the most vertical and complete stack of lifestyle brands in the industry, and when you look at changing global demographics, there’s an increasingly strong appetite for lifestyle brands.”
Sorenson said one of the “biggest draws” of the deal is the integration of the two companies’ loyalty programs, Starwood Preferred Guest and Marriott Rewards. The two programs will continue to operate but members can now link their accounts and transfer balances between platforms at a ratio of 1 Starpoint to 3 Marriott Rewards points.
During the conference call, Sorenson said the first person to make use of the link-and-exchange program was an SPG member who booked a stay at a Marriott property in Osaka, Japan, which he described as a small example of the power of this deal because that guest also could’ve booked at a Ritz Carlton or St. Regis property in that market.
“That SPG customer had a choice but undoubtedly the luxury hotels were a bit more expensive in terms of points required for the free stay,” he said. “He decided lets jump at the Marriott quickly, and it shows again the power of breadth of choice that we think will make this program better.”
In a live Facebook interview with The Points Guy, Thom Kozik, VP of global loyalty at Marriott, and David Flueck, VP of global revenue at Starwood, said finding the best structure for the merged loyalty programs would take time.
Kozik said “it’s too early to know when the harmonization of the two programs would be complete,” and that the company is not “so much worried about the dates” as they are the structure of the program.
Flueck said “everything is on the table at this point.”
“So for us, when you have the scale that we’ll have together, I think it unlocks a lot of opportunities that we haven’t had before,” he said. “And so as we think about, ‘How do you bring the best of both programs?” not only is it the best of our existing programs, but it’s also to look further and say, ‘What are the things members care most about?’ ‘How can we figure out how to bring that into the program?’
“That hard work is still to come, but I’m very optimistic that in the next, whatever the right timeframe is, we’re going to have some great news for our members.”
Integrating the companies
During the conference call, Sorenson said one of the biggest tasks ahead of Marriott is integrating myriad tech systems employed by both legacy Marriott and former Starwood properties.
“I think in many respects the technology questions will be the longest ones to get definitive answers,” Sorenson said.
He estimated the company now has 100 or more technology platforms today, which will require significant work to integrate.
“There is some overlap already with Starwood and Marriott, but it is typically the case that we’ve got separate systems supporting the hotels in the two portfolios.”
He said the company will remain sensitive to the needs of owners in the integration process and will be careful to keep expenses from increasing during the process.
Capuano said the company will put work into addressing owner and franchisees concerns about the transition, particularly when it comes to overlap and impact.
Notably, he said standing franchise agreements on both sides won’t change, and Marriott will continue to have open dialogue with its owners and franchisees to work out impact issues.
“I would characterize the owner feedback as largely enthusiastic,” he said. “They’re excited about the revenue and margin opportunities that will emerge from this transaction. We have a longstanding, demonstrated track record of being a partner of all our owners and franchisees, and they have confidence that we’ll continue to collaborate and discuss those significant circumstances on all sides.”
Reaction to the deal
Aaron Greenman, EVP of acquisitions and development for Europe, the Middle East and Africa at Interstate Hotels & Resorts, which has brands Marriott and Renaissance among its portfolio, said he looked forward to continuing to work with the combined entity.
“Both Marriott and Starwood were critically important brand partners on their own for Interstate’s managed portfolio, and they will continue to be so after the combination,” Greenman said.
Adam Maclennan, director, head of UK and Ireland at business consultancy PKF hotelexperts, believes the acquisition will beneficial for Marriott in Europe, where Starwood and Marriott have been very active in recent months and years.
“(It) should be very positive for the newly expanded company’s European operations. In contrast to North America, which is much more brand focused and where Marriott and Starwood each had a considerably larger piece of the pie, the companies in Europe are much smaller players,” Maclennan said.
He said the combined company will have impressive scope in Europe, making it the third largest in the region.
“This should allow Marriott to increasingly flex its muscle on the continent in several important ways,” Maclennan said. “On the corporate side, there are some obvious cost-saving opportunities to streamline central office functions and potentially improve supply chains. Those responsible for signing new franchise and management deals will also now be able to boast even bigger loyalty programs, offer a wider range of brands, and potentially deliver improved cost savings to owners without being in a situation where their brands have already reached saturation point.”
Speaking Friday morning at the International Society of Hospitality Consultants annual conference in Seattle, Lodging Advisors CEO Sean Hennessey said some Wall Street analysts expect Marriott’s annual savings to be as much as $350 million when the dust settles.
In addition to the cost savings, Hennessey pointed out several other opportunities for the new Marriott, including:
- Significant savings in overhead expenses—possibly beyond the $200 million to $250 million that Marriott projects to save.
- More leverage in negotiations with online travel agencies.
- More cross-selling across the variety of brands in the portfolio.
- The potential to sell between $2.5 billion and $4 billion in former Starwood assets now on the balance sheets to match Marriott’s asset-light strategy.
- Possibly selling some of the hotel brands: “Is there the ability to create more compelling value proposition for all of these brands?” Hennessey asked.
- International growth: “Starwood had a significant portion of its pipeline outside of the U.S., and that was attractive to Marriott,” Hennessey said.
- Pricing power: “Marriott and Starwood … the combined behemoth has in some cases up to 50% of the major corporate spend in some markets.”
Hennessey also outlined some potential risks, including:
- Area of protection conflicts with hotel owners who find themselves competing with more hotels on their own distribution platforms;
- how the combined 75 million members of the loyalty programs will be integrated;
- brand redundancy; and
- corporate stagnation—achieving a sense of accomplishment and the danger of not maintaining its thought-leadership position.
Reporters Terence Baker and Danielle Hess, Editor-in-chief Stephanie Ricca and Editorial Director Jeff Higley contributed to this report.