It’s crunch time for Marriott CEO Arne Sorenson, and we’ll get a close-up view of high-stakes leadership over the coming weeks. In general terms his situation is one we’ve seen many times. He has a deal to buy another company, Starwood Hotels and Resorts, which was agreed to last fall and set to close mid-year. Now a surprising newcomer, China’s Anbang Insurance, has made a higher bid. What should Sorenson do?
The stakes are high. This would be a big deal even for Marriott (MAR), creating by far the world’s biggest hotel company by number of rooms and by revenue. The money is significant; Marriott would spend about $12.2 billion for Starwood (HOT), while its 2014 annual revenue was about $13.8 billion.
And here’s the real issue for Sorenson: Big mergers can fail to deliver value to shareholders for many reasons – botched integration of the two businesses, cultural wars, unwise strategy – but the most common reason is more mundane. The buyer pays too much. In that case, nothing can rescue the deal, and paying too much is precisely the danger the current situation creates.
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Here’s why. Anbang shows signs of being a possibly irrational buyer that might be willing to bid way too high. In 2014, the company agreed to pay $1.95 billion for the Waldorf-Astoria in Manhattan, a trophy property, after other Chinese buyers had bought two other New York trophy hotels, the Plaza and the Carlyle. Just last week, Anbang agreed to pay $6.5 billion for a collection of luxury hotels that Blackstone Group had bought for $4 billion only four months earlier. And Anbang is offering all cash, while Marriott’s offer is largely stock. Other potential motivations for Anbang: It may want to buy hard assets outside of China before the yuan loses more value, and it may be a wish by CEO Wu Xiaohui, reportedly a billionaire, to move some personal wealth out of the country, as many wealthy Chinese are doing. Those motives wouldn’t apply to Marriott.
We can’t know the bottom line on Sorenson’s financial calculations. Among the factors: If Anbang buys Starwood, then Starwood remains a smaller competitor while Marriott remains the world’s largest hotel company, and Marriott would collect a $400 million breakup fee. There’s no assurance that regulators in the U.S. or elsewhere would approve an Anbang-Starwood deal. When Anbang’s bid became public on Monday, Marriott stock rose. Either investors think Marriott may also be in play, or they think Marriott was already paying too much and would be better off if the deal doesn’t happen.
And just to add some excitement, under the existing deal, Starwood has only until Thursday to talk to other bidders. Starwood and Marriott shareholders are scheduled to vote on the deal on March 28.
Sorenson faces some of the most important decisions of his CEO career. Watch and learn.