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Marriot Corporation Essay

2. Is the proposed restructuring consistent with management’s responsibility? 3. The case describes two conceptions of managers’ fiduciary duty (p. 9). Which do you favor: the shareholder conception or the corporate conception? Does your stance make a difference in this case? 4. Should Mr. Marriott recommend the proposed restructuring to the board? Marriott Corporation (A)

1. Why is Marriott’s chief financial officer proposing Project Chariot? What is your assessment of MC’s financial condition? Is this project necessary for the company’s survival?. 2. Is Project Chariot consistent with management’s responsibilities? To bondholders? To shareholders? To the public? 3. The case describes two conceptions of manager’s fiduciary duty. Which do you favor: the shareholder conception or the corporate conception? Does your stance make a difference in this case? 4. Should Mr. Marriott recommend the proposed restructuring to the board? 5. Who will be affected by Project Chariot? Should MC make any concessions to the bondholders?


Ans. 1

Project Chariot involves a conflict of interest between the shareholders and the bondholders since in this case the debt being held by Marriott Corporation (MC) is risky. Project Chariot aims to create MII with low debt and HMC with high debt. Thus bondholders will find that their investment gets tied to risky real estate assets whose appreciation is uncertain. Food management which is a major segment of MC remains with MII. Thus Project Chariot aims to give shareholders the business upside and bondholders the real-estate downside. Hence this appears to be a case of risk shifting. Shareholders stand to gain while bondholders will lose if Project Chariot is implemented.

Ans. 2

This seems to be a case of ‘Cashing out’/’Wealth Transfer’ where the ‘overall’ wealth is being transferred from the bond holders to the equity holders. The following points lead us to the direction of it being a ‘wealth transfer’ type of conflict: * Chariot will result in a loss to bondholders and a gain to shareholders as the bonds will be downgraded by rating agencies and the returns of the bondholders will be attached to a heavily indebted duty * Total Debt will become more risky, and bonds will be downgraded to ‘below investment grade’ level

* MC would be divided into two separate companies. MII would do MC’s lodging, food, and facilities management businesses, whereas HMC would retain MC’s real estate holdings and its concessions on toll roads and in airports, Hence bond holders will now have a claim on only the payoffs of HMC and not MII. So, because of the above reasons ‘Project Chariot’ seems like a case of ‘Wealth Transfer’ conflict of interest.

Ans. 3

We believe in the broad view of manager responsibility. We think that managers should not only consider the interests of shareholders but also the interests of bondholders, employees, and other related parties. This responsibility is even more important in the case of a B2C company like Marriott. If they get…

1. If the Project Chariot is implemented i.e. Marriott is divided into 2 companies Marriott International(MI) with the risk free profit generating operating hotel and service business while the other Host Marriott(HM) a would own Marriott’s hotel and undeveloped real estate businesses and other non service businesses, this will affect the following players:

a) Shareholders:

Shareholder now have majority stake in a corporation with a lower probability of default while all the risk is transferred to debt holders. So all the risky investments are highly leveraged with bond holders exposed to the risk. On the other hand MI backed mainly by shareholders equity and performing assets and thus would be able to issue new debt increasing value for both shareholders and the corporation. Thus the shareholders would gain at the expense of bond holders and the equity value of the company would increase.

b) Bondholders

Bondholders had a lot to lose as according to Project Chariot almost all the debt would be assigned to HM. Given the problems in real estate and hotel markets there was a concern of HM’s ability to meet its debt payment and there was a high probability of default. This meant that the risk was issued at investment grade but now was not backed by valuable assets of the companies which were to be spun off to MI which was to be backed by equity. The value of the bonds would decline substantially and the bond holders would loose a lot of their investment.

c) Management(The Mariott brothers)

The management gains from the spin off since it is able to split its distressed assets from the profit driving assets and there was a new company which was not under distress thus helping them retain their management positions and start from scratch. They can concentrate on core businesses thus improving efficiency and value. d) The value of the whole company:

The spin off does not create value for the company as a whole but only distributes the…

What: Under Project Chariot, Marriott Corporation (MC) would become two separate companies. The new company, Marriott International Incorporated (MII), would consist of MC’s lodging, food, and facilities management businesses, as well as the management of its life-care facilities. The existing company, renamed Host Marriott Corporation (HMC), would retain all MC’s real estate holdings and its concessions on toll roads and airports. Why: This project is being proposed because the economic slowdown in the late 1980s and the 1990 real estate market crash left MC owning many newly developed properties for which there were no buyers, together with a massive burden of debt. The new company (MII) would have the financial strength to raise capital in order to take advantage of investment opportunities. The existing company (HMC) would take on the newly developed properties and most of the existing debt.

HMC would be valued for the chance of appreciation in the property holdings when the real estate market recovered, not on the basis of earnings, thereby reducing the pressure to sell properties at depressed prices. 2- The fiduciary duty of management is to the shareholders because they are more than creditors; they are the actual owners of the firm. Management is entrusted with the responsibility to increase shareholder value and their main focus should be on investing in projects that accomplish that task. As stated in the case: “U.S. courts had held that corporations have no responsibilities to safeguard the interests of bondholders other than those spelled out by the terms of the bond indenture”.

3- I first looked at the initial market reaction; the change resulting from October 2, 1992 (pre-announcement) through October 7, 1992 (post-announcement). I used October 7 for my initial market reaction because in 1992 many people may have still relied on newspapers for investment information. In addition, I assessed this narrow amount of time separately because widening the range of dates used to evaluate the change in prices may allow other variables outside of Project Chariot to come into play. However, I also looked at a wider range of time [October 2, 1992 (pre-announcement) through December 31, 1992]. If you can reasonably assume no extraneous variables affected the prices during this time, widening the range of dates assessed can give an idea of the impact to prices after the initial market over/under-re…

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