“‘Til Debt Do us Part”
Throughout Unit one we learn about business combinations or intercorporate
acquisitions. To briefly describe this dense topic; companies may decide to acquire another
company in order to expand their presence, mitigate liabilities, or increase their economies of
scale. A company has multiple choices when deciding how to combine with another company.
Firstly, the two companies can participate in a merger where the acquiring company takes over
the assets and liabilities of the acquired company. Second, the companies could decide to
participate in a consolidation where both companies would dissipate after combining into a new
entity. Thirdly, a company can acquire the majority of another company’s common stock in
order to create a parent-subsidiary relationship. Both entities remain in business, but the
subsidiary is now managed by the parent company. The last option a company can use to acquire
another company is through the leveraged buyout. This option seems risky because the acquiring
company uses the assets of the acquired company as collateral for the loan in order to acquire the
company.
In July 2007, Blackstone, a private equity company, bought out the Hilton Hotel chain
through the use of a leveraged buyout. This acquisition was financed with $20.5 billion through
debt and $5.6 billion in equity resulting in a total of $26 billion (Eisen, 2022). This move was
extremely risky due to the 2008 credit crisis. Many people were strapped for cash and did not
have the luxury of travel and expensive hotel rooms, but this deal could not have worked out
better. Banks also felt the pressure due to the quantity of loans that were defaulting. This created
a perfect opportunity for Blackstone & Hilton. Due to the financial instability of the market
Blackstone & Hilton were able to stretch out the length of their loans to better affect their cash
flows. By extending the length of the loans Blackstone could hold onto more of their cash and
can utilize it for other investment opportunities. To further decrease their debt, Blackstone
converted $2 billion of debt into preferred stock. The transfer from debt to equity significantly
benefits both parties. Firstly, the banks have a secured asset that could be converted into cash if
needed, or the bank could leverage those shares for their own investments. The interest rate at the
time was 4.875% (Treasury Direct, 2007) therefore Blackstone saved dramatically on interest
nearly $100 million in one year alone ($2 billion * .04875). This buyout gave Blackstone
controlling interest in Hilton thus allowing Blackstone to make adjustments to Hilton as they see
fit. One adjustment that significantly benefited both companies was appointing Christopher
Nassetta as CEO. Nassetta helped make organizational changes that unified Hilton.
Even though the leveraged buyout was successful for Blackstone’s acquisition of Hilton,
was it the best option? Blackstone had the option to obtain debt financing on their own, but the
liabilities would lay directly onto them. As a private equity company they need to care for the
well being of their shareholders, so taking on all this debt would significantly impact their
financial statements. In 2007 Blackstone had $13 billion in assets, this deal alone would double
their liabilities. For investors that utilizes financial ratios this would make Blackstone look like
they were drowning in debt. Another option that Blackstone had was to issue equity to generate
the necessary cash needed to purchase Hilton. This is very unlikely due to the fact that
Blackstone had less than one billion dollars in cash as of December 2007. At the time of the deal
the company’s stock was trading around $12.40 (Macrotrends, 2025). Blackstone would have
needed to sell more than 2 billion shares at this price to buy Hilton. Issuing equity has incurred
risks other than just the ridiculous amount of shares needed to be sold. The issuance of a large
amount of shares opens Blackstone to the threat of a hostile takeover. All these new shares open
to the market, a competitor could take them over and this deal could be to the competitors
benefit. Also, like every company the investors will want to get a return on their investment.
These investors would turn out quite unhappy due to the performance of Blackstone in 2008,
with a net loss of over one billion dollars (Blackstone, 2008).
In a time of financial uncertainty Blackstone took the bull by the horns and rode it to
success. The leveraged buyout seems like a last ditch effort to acquire a company, but in this
scenario it worked perfectly. Through negotiation with the banks to extend their loans, and
converting debt to equity Blackstone was able to save millions of dollars with minimal risks. In
the worst case scenario Blackstone would have to hand over all Hilton assets to the bank. The
risk of Blackstone was limited to their initial investment of $5.6 billion. After reviewing all
possible options Blackstone made the best decision possible.
Work Cited
Annual interest rate certification. TreasuryDirect. (n.d.).
https://www.treasurydirect.gov/government/interest-rates-and-prices/certified-interestrates/annual/fiscal-year-2007/
Annual report. (n.d.). Blackstone
https://www.sec.gov/Archives/edgar/data/1393818/000119312509042585/d10k.htm
Blackstone - 18 year stock price history: BX. Macrotrends. (n.d.).
https://www.macrotrends.net/stocks/charts/BX/blackstone/stock-price-history
Eisen, D. (2022, June 26). Blackstone made a Fortune on hilton. is it the last of the hotel
megadeals?. Hospitality Investor. https://www.hospitalityinvestor.com/investment/howprivate-equity-giant-blackstone-became-real-estate-monolith
Guardian News and Media. (2007, July 4). Hilton’s founding family agrees to $26bn buyout
offer. The Guardian.
https://www.theguardian.com/business/2007/jul/04/privateequity.travelnews
Sec.gov. (n.d.). Hilton
https://www.sec.gov/Archives/edgar/data/47580/000110465907032925/a0712298_1ex99d1.htm