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Forget Anbang, Marriott Is a Better Bet For Starwood

Let’s say you have offers for two different jobs that interest you. The first one pays more, but comes from a company you don’t know that much about. The second offer is a bit lower, but that company has a long history that you know well. How do you decide between the two?

By taking the higher offer, you guarantee yourself a bigger salary, but you also open yourself up to more unknowns down the road. The lower offer means you’d work for a firm you admire and while your initial paycheck would be smaller, you might realize other benefits such as professional development and career advancement down the road.

In a sense, this is the same dilemma facing Starwood Hotels & Resorts Worldwide, the Connecticut-based owner of such brands as Sheraton, Westin and St. Regis. Since agreeing to an initial $12.2 billion takeover offer from Marriott International (MAR), Inc. in November, Starwood (HOT) has become the object of a mad-lover’s pursuit between Marriott and a consortium led by China’s Anbang Insurance Group. Following a round of counteroffers, Maryland-based Marriott’s latest proposal values Starwood at $13.6 billion while Anbang Insurance Group came in with an all-cash bid of $14 billion.

Starwood now says the Anbang offer is “reasonably likely” to be the superior offer. But is it really? And, how does one go about making such a decision? Let’s answer those questions by taking a closer look at each suitor and their offer.

Anbang was founded in 2004 to sell car insurance, but ventured into the hospitality industry with its $2 billion dollar purchase of New York’s Waldorf Astoria in 2014. Still, the Chinese conglomerate is new to the hospitality industry and has yet to amass a track record. Published reports claim the company is already experiencing management challenges with it non-Chinese subsidiaries.

Marriott, on the other hand, represents one of the most well-established brands in hospitality with a strong reputation. Its courtship of Starwood, if successful, would create the world’s largest hotel company.

Anbang’s latest offer would clearly reward Starwood shareholders with the most money up front. But by merely looking at offering price, Starwood might run the risk of overlooking a truism in the M&A world: The highest offer doesn’t necessarily ensure the greatest value for the company.

In the hospitality industry, value is based upon customer volume and loyalty, which is derived from customer experience. That catch-all phrase refers to such things as whether you are treated with warmth at the reception desk; how clean and comfortable your bed is; and if your transactions are handled smoothly and quickly. Without question, achieving reliably good experiences for your customers is a function of good management.

What do I mean by good management? It’s the common element that ties together all those customer experiences – the friendly staff, the comfy room, the efficient service – that can be demonstrated by how the enterprise values its team. In other words, good customer experiences don’t just happen by accident, they are fostered by management practices that provide good jobs, offer decent wages, opportunities for training and advancement, flexible scheduling, health benefits, and sick leave. The list goes on, but you get the point.

 

 

Fortune’s 100 Best Companies to Work For 2016 rankings have five hospitality companies on the list; Marriott is at number 83 while Starwood doesn’t make the cut. It’s also worth noting that Marriott has established an above average reputation for valuing its employees, in particular, its hourly employees. In an industry too often characterized by dead-end jobs, Marriott has a long standing reputation for opening doors for hourly workers with training, promotion, and innovative workplace flexibility and scheduling practices.

Conversely, what do we know about Anbang’s approach? And, for that matter, what does Starwood know? The answer: Not much, by virtue of its rather short history in the industry.

All this talk of customer experiences and friendly smiles is well and good, but what about the Starwood shareholders – what should they value? Contrary to commonly held assumptions, the Starwood board is not obligated to take the highest price. Cornell law professor Lynn Stout’s book The Shareholder Value Myth debunks the idea that corporate law mandates shareholder primacy. By appearances, the higher priced deal would give shareholders an initial short-term boost. Board members actually have an obligation to decide what will create sustainable, long-term value for the business. And that’s a more complicated equation than just the offer price.

Being on the receiving end of a high-stakes game of corporate courtship can be an enviable position to find oneself, just like having multiple job offers. But making the right long-term choice requires careful consideration. After all, if you pick the wrong suitor, well, that’s the bed you’ll have to lie in, comfortable or not.

Barbara Dyer is president & CEO of The Hitachi Foundation and senior lecturer at the MIT Sloan School of Management.