Jeff Holdaway, SVP and associate general counsel at Marriott International, shares some behind-the-scenes details about Marriott’s acquisition and integration of Starwood Hotels & Resorts Worldwide.
HOUSTON—Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide was the largest deal in the hotel industry in recent history, but it almost fell apart—a couple of times, actually.
During a “fireside chat” at the Hospitality Law Conference, Jeff Holdaway, SVP and associate general counsel for Marriott, shared with attendees some of the inner story behind the Marriott-Starwood deal and how integration efforts are progressing.
Maybe, maybe not
When acquiring brands, Marriott had traditionally taken on a more bolt-on approach, such as with Delta Hotels and Gaylord Hotels, Holdaway said. However, Starwood had 12 hotel brands with a strong presence both internationally as well as in the lifestyle space, all of which was appealing to Marriott, he said. Scale matters more and more now, he said, and technology and distribution platforms are increasingly important. Pursuing Starwood was also a defensive move, he said, as the question became: If not Marriott, then who would?
“All of that came into play when Starwood came on the market the summer of 2015,” he said.
Starwood prepared a confidential offering memorandum, and Marriott signed a nondisclosure agreement, Holdaway said. But in the process, Marriott executives decided the pricing would be too high, he said. Between July and August that year, Marriott backed out and was no longer an active purchaser.
However, in October, Marriott received signals it should take another look based on what other companies were bidding.
“There were indicators the pricing in the deal terms Starwood was receiving was not quite as rich as we anticipated,” he said. “That led us to believe an offer within our range might be favorable. That was enough for us to rejoin the party and take another drink from the punchbowl.”
Marriott sent over to Starwood what it would be willing to spend, which led to the two entering into an exclusive arrangement in which Starwood would not pursue any other offers during three weeks of heavy negotiation and due diligence.
The two companies signed a deal the following November, Holdaway said, and started looking at which countries would need to give their approval. The companies filed paperwork in 17 countries that December, at the same time they filed their proxy statements.
“Then, we started to wait,” he said. “It took about two days until the first of seven shareholder lawsuits.”
What worked to the benefit of Marriott and Starwood is the lawsuits were all heard in Delaware, he said, so the courts “took a jaundiced look at shareholder suit shakedowns.” Within six to eight weeks, the courts dismissed all of the suits, he said.
In the meantime, the companies waited for antitrust approval from the various countries, Holdaway said. Though he expected to receive a second request for information from the United States Department of Justice or the Federal Trade Commission, he was pleasantly surprised when the U.S. and Canadian governments came back quickly with their approval, he said. One by one, each country came back greenlighting the deal until it was just Saudi Arabia, Mexico and China left by June 2016.
“We thought Saudi Arabia and Mexico we could deal with,” he said. “China was a concern.”
In March 2016, a consortium led by Beijing-based Anbang Insurance Group made an all-cash bid for nearly $14 billion, topping Marriott’s cash and stock offer of $12.2 billion. It was like playing poker, Holdaway said, explaining Marriott had to determine what Anbang’s appetite would be for going higher compared to how high Marriott would be willing to go.
There was a question whether Anbang would be able to close the deal, he said, but Marriott’s initial agreement included a “nice breakup fee of several hundred million.”
“We topped Anbang, and we said internally, ‘we’re done,’” he said, referring to Marriott’s final offer of $13.2 billion in stock and cash. “We didn’t tell that to Starwood or Anbang. We waited. We fully expected to be topped. Five days later, Anbang dropped out.”
Shareholders for Marriott and Starwood voted to approve the acquisition in April, but the company was still awaiting antitrust approval from the three remaining countries. Saudi Arabia and Mexico soon gave their OK, but China required several extended periods of review.
It was a sensitive situation, Holdaway said, as Anbang’s chairman had close political ties in the region and it’s possible politics played a part in the approval process. However, Marriott’s market share in China was lower than it was in the U.S., he said, so it didn’t feel like a big risk. By September, the deal received its clearance from China. Less than a week later, he said, the deal closed.
“You have all the stakeholders: the associates, customers, in our case owners, franchisees, suppliers,” Holdaway said. “All of them are wondering, ‘what is this going to do to me or for me?’”
Marriott’s goal after integrating Starwood was to grow as an organization by 22%, he said, but one of the challenges was that post-acquisition, Marriott was 50% larger. The task required taking the best of both companies, he said, drawing on both human talent and other systems in place and coming up with something that actually worked.
This should be the year for the final integration, Holdaway said. The company announced at midnight on day one that members of Marriott’s and Starwood’s loyalty programs could trade points back and forth between their accounts, and the earliest trades occurred within 15 minutes, he said. The goal is to have both programs fully merged by 2019, he said.
It takes time to combine two different reservation systems into one single set of channels for all consumer-facing activity, he said, and this has probably been the company’s biggest issue.
Before the acquisition, Marriott had 19 brands and Starwood had 11, he said. Starwood created a number of those to compete with Marriott, he said, but Marriott also created brands to compete with Starwood.
“What do you do with two potentially competing brands?” he asked.
Radio stations can change brands literally overnight, moving from country to hip hop with the flip of a switch, he said. In the hotel industry, it’s harder to decide what to do with two brands, figuring out whether to move one up or move one down or into the lifestyle space, he said.
“You have to decide what that brand represents,” he said. “Even if you land on that, think about what it takes to move a brand from the guests’ perception.”
On top of that, owners are going through their seven-year and 10-year soft good and case good rotations, he said. It’s a challenge to convince an owner who just invested in a Westin hotel to move it up, down or to the side, he said. The owner might agree to it, he said, but then come back insisting that Marriott cover the $20 million price tag because it was Marriott’s idea.
“We’re creating what we call swim lanes for each brand,” he said. “The plan is to retain all 30 brands. The goal is each will have a distinct personality, a distinct look and feel from the guest perspective.”
Most owners and franchisees on the Starwood legacy side provided positive feedback to the deal, Holdaway said. Many felt uncertainty while Starwood was on the market, and the acquisition provided some stability, he said. The deal also provided them with better economies of scale through third-party agreements and online travel agency agreements, he said.
Marriott owners and franchisees took more of a “wait-and-see” approach, he said, but there’s been enough added value to assuage their concerns.
The day the two companies signed the agreement, Holdaway said, a number of owners and franchisees called to say that while they signed on for a certain brand for a property under development, they wanted to change to a brand newly available to them. The company approved a few of those requests on a selective basis, because it was necessary to prevent cannibalizing its own pipeline, he said.