Marriott Corporation Case
FBE 421
Marriott Corporation
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Introduction
Founded in 1927, Marriott Corporation has become one of the leading food service companies in the United States. As of 1987, Marriott recorded a profit of $233 million on sales of $6.5 billion and retained a high sales growth rate of 24%. Marriott runs on three major lines of business lodging, contract services, and restaurants. Lodging division which includes 361 hotels generated 41% of 1987 sales and 51% profits. Contract services division which provides food and services management generated 46% of 1987 sales and 33% of profits. Lastly, the restaurant division generated 13% of 1987 sales and 16% of profits.
Marriott had been successful with its financial strategy which focused on the four key elements. First, Marriott managed the hotel assets rather than owning them. Marriott sold the hotel assets to limited partners while still retaining operating control under the long-term management contract. Second, Marriott invested in projects that increased shareholder value. The company used discount cash flow techniques to evaluate projects that could be profitable. Third, Marriott optimized the use of debt in the capital structure. The company determined the optimal amount of debt based on its ability to service the debt. As of 1987, Marriott had $2.5 billion debt which accounted for 59% of its capital. Lastly, Marriott repurchased undervalued shares. On regular bases, Marriott calculated a “warranted equity value” of its common shares and purchased the stocks that fell below the value. Marriott believed the repurchases of those shares were better uses of the company capital than acquisitions or owning real estate.
In April 1988, the vice president of project finance, Dan Cohrs, was preparing his annual recommendations for the discount rates of Marriott’s three divisions. The investment projects would be selected by discounting them with appropriate cash flows
Marriott Corporation
-------------------------------------------------
Introduction
Founded in 1927, Marriott Corporation has become one of the leading food service companies in the United States. As of 1987, Marriott recorded a profit of $233 million on sales of $6.5 billion and retained a high sales growth rate of 24%. Marriott runs on three major lines of business lodging, contract services, and restaurants. Lodging division which includes 361 hotels generated 41% of 1987 sales and 51% profits. Contract services division which provides food and services management generated 46% of 1987 sales and 33% of profits. Lastly, the restaurant division generated 13% of 1987 sales and 16% of profits.
Marriott had been successful with its financial strategy which focused on the four key elements. First, Marriott managed the hotel assets rather than owning them. Marriott sold the hotel assets to limited partners while still retaining operating control under the long-term management contract. Second, Marriott invested in projects that increased shareholder value. The company used discount cash flow techniques to evaluate projects that could be profitable. Third, Marriott optimized the use of debt in the capital structure. The company determined the optimal amount of debt based on its ability to service the debt. As of 1987, Marriott had $2.5 billion debt which accounted for 59% of its capital. Lastly, Marriott repurchased undervalued shares. On regular bases, Marriott calculated a “warranted equity value” of its common shares and purchased the stocks that fell below the value. Marriott believed the repurchases of those shares were better uses of the company capital than acquisitions or owning real estate.
In April 1988, the vice president of project finance, Dan Cohrs, was preparing his annual recommendations for the discount rates of Marriott’s three divisions. The investment projects would be selected by discounting them with appropriate cash flows