Project Chariot
1.WHY IS M ARRIO TT M ANAG EM EN T PRO PO SING
AC C O M PLISH?
With Real Estate market crash in the late 1980s and
by then Marriott Corporation has plenty of newly
developed properties with no buyers and a massive
burden of debt. A decrease of the market price
lead to losses for several companies and Marriott
had several properties that they were not able to
sell because of the state of the market.
Marriott management believes that the financial
markets have long undervalued its operating
performance as a result of the difficulty investors
have in distinguishing and separately valuing
property ownership and management. To remedy
this situation, Marriott management is proposing
Project Chariot by separating its management
services from its property holdings and debt.
PRO JEC T C HARIO T? WHAT IS IT TRYING TO
The new business would be established for the
provision of services and would be financially
sound enough to generate money in order to seize
investment possibilities. Less pressure would be
placed on the previous one to sell properties for less
money.
Furthermore, there would be two businesses with
twice as many top-level roles, and with the
anticipated growth for the new company,
ambitious managers would be more likely to stay,
reducing the problem of top-level manager brain
drain.
2.WHAT IS THE LIKELY IM PAC T O F PRO JEC T C HARIO T O N THE WEALTH PO SITIO N OF
THE SHAREHO LDERS?

After the real estate market collapsed and Marriott reached its lowest point in 1990, the company's reputation as a whole was in
danger. Investors interested in either portion of the company would perceive less risk if they were to invest in one of the two
businesses as a result of the division of cash flows and activities. An investor who is interested in Marriott's food sector is
currently hurt by the real estate holdings' bad performance. The corporations are not fully separate under the new setup.
However, different types of investors are drawn to the companies because of how differently the cash flows and dividends pay
out. While voting rights will remain unaffected, shareholders will acquire a comparable ownership in both businesses.

The shareholders of MII will likely see a significant
increase in wealth when the stock price rises. This
will occur since the hotels' and companies'
management is still of the highest calibre. By
leveraging the Marriott Corporation's reputation
(occupancy rates that are 10% above industry
standards), MII has the ability to boost stock prices,
improving the financial situation of Marriott
Corporation shareholders.
Given that H M C will be taking on practically all of
M C ' s long-term debt, its debt position will be
significantly worse. The low bond ratings and lack of
investor confidence will be reflected in the stock
values, which will first decline as a result. However,
given M C ' s resolve to handing over administration to
HMC, H M C has a lot of potential—as long as it
can survive the challenging times that lie ahead.
3.SHO ULD M AN AG EM ENT BE C O N C ERNED BY THE LO SS O F THE M ARKET VALUE O F THE BO N DS
IF PRO JEC T C HARIO T IS IM PLEM ENTED?

One major risk that has to be mitigated is the possibility of

No, Project Chariot was created as Marriott's
obligation to its shareholders. It tries to boost investor
confidence in the business, which has been
negatively hit by the global economic slump and
particularly by recent changes in the real estate
market. In contrast to creditors, the company's
obligations are primarily to its stockholders.
lawsuits. Though LBO lawsuits are rarely successful, there
have been examples before of a company having to pay out to
the bond holders. This could set a legal precedent for the
future of Marriott. The position of courts is changing, leading
to corporations having more responsibility over their bonds. If
this leads to bankruptcy, they could very well be sued over
their actions. However, these cases are few and far between.

Due to Market Crash and low scaleability of the

properties, Marriott's bonds have received very poor
Additionally, there is an implicit assumption on the
ratings. Some of the bond rating criteria are listed in
side of bondholders that they will only receive a
Appendix A. Debt ratio, times-interest-earned ratio,
portion of their investment back due to the high
stability, and maturity are a few of them. Each of these is
interest rates and significant risk associated with
affected when the company's condition is worse. As of
the bonds.
now, Marriott's bonds have been assigned the BBB
rating by S&P and the Baa3 rating by Moody's, resulting
in interest rates as high as 9.3%.
 4.IS PRO JEC T C HARIO T A M ATTER O F SURVIVAL FO R M ARRIO T IN THE FALL O F 19 9 2? THE EXC E
W O RK BO O K ALLO W S YO U TO ESTIM ATE W HETHER M ARRIO T W ILL BE ABLE TO SERVIC E IT L
G I V E N Y O U R SA S S U M P T I O N S A B O U T F U T U R E P R O F I T A B I L I T Y , R E V E N U E G R O W T H , A N D P R O P E R
D TE Y
BT,
SALES PLEASE SEE C ASE EXHIBIT 6 FO R SUM M ARY STATISTIC S O N M ARRIO TT’S PAS PERFO RM AN C E.
. T
Exhibit 3: Sales can be from lodging and contract services. Since the contract services would have very less growth after the real estate
crisis, assuming the lodging services would be prosperous.

Taking the average growth rate as 5.2% for the years- 1989,1990 and 1991.
EBIT% Sales: From Table A,
Market Price/Share price = $16
Outstanding shares
=105million (Exhibit 4) P/E =
21.3
NetIncome = P*n/P/E =78.9
million
(Exhibit 6), Tax rate calculated = 13.179%(based on 1991)For 1992,
EBIT(1-T)-265+43=78.9 ;
EBIT = 3 4 9
Sales for 1991 = 8331
(Given), considering 5.2% growth rate, sales for 1992 would be 8809.
EBIT%Sales = 349/8809 = 4%(approx.)
Dividends : Assuming the company would pay the same dividend across the years, dividend = 0.28Asset Sales (During crisis, assume
that company wont be able to sell off anything)
Then, Debt%to capital (from excel calculations) = reduce from 8 2 % to 78%.

Hence, if its able to sell off its assets, the ratio will reduce even further.

Hence, Project Chariot is not a matter of survival for M C since it can withstand. But, the risk factor is very high here. It can also think
of selling the assets in a reduced price as the market is down.
5 . W O ULD YO U REC O M M EN D TH E IM PLEM EN TATIO N O F PRO JEC T C H ARIO T?

Yes! However as a Board Member, I would

weigh pros & cons of this project and explain
them to the board and help them take the
right decision.

1.The division enables management to concentrate on its main 1.Bond holders will be the worst affected if HMC is given
businesses: real estate for HMC and services and operations for all
MII.
the debt.
2.Working separately would enable both businesses to raise more
equity funding. 2.Splitting such a large corporation into two smaller entities
3.We may anticipate significant increases in MII's business valuation
and credit rating now that it is set up as a debt-free entity. will make it difficult for both companies to look for
4.The stockholders will benefit from this because they can anticipate institutional investors and would ultimately make
an increase in their investments.
5.Since there would be no internal competition between the two financing more expensive than before.
entities for the distribution of monies, the choice also enables better
3.The credit rating of HMC will be downgraded. If we look
administration within the corporation.
6.The acquisition also enables MII to concentrate on growing its at the valuation of the companies
management companies, as each of those prospects only needs
a minor amount of funding.