asEwER
Journal
of Financial
Economics
43 (1997)
241.274
Spinoffs and wealth transfers:
The Marriott case
Robert
(Rcaivid
September
1994: final
Parrino
version
nsivcd
March
1996)
This paper crtmincs changc3 in bondhoidcr and sharettoldcr wealth resulting from the
1993 Marriott spinoff. It documents a wealth transfer from boodbolders to shahokkrs
and a da4ine in the total value tif the firm following tbe spinotT announaancnt.
Sub
scqtunt modifications
to the qind:
plan rcduocd tbc bondloss. but tbc value of
Marriotfs
notes and dcbentutes remained WM.6 mihou bdow tbcir pre4anouncermznt
kvd on tbc distribution
date. lndrurr>.-adjusted
sharehokkr
gains during the same
period wee only SW.6 million. frzmsaab
co6ts and inctficirncLs
tesulting from the
spiaoBerplainmuchdthededincintheto(aiv~ueoltbc~
Key ww&
Spinoff; Restructuring
/EL clasificotiac
G32; G34
Agency
costs
Financti
policy
In October 1993. Marriott Corporation distributed the equity in its manage
mcnt busincsscs to shareholders This spinoff reduced financial constraints that
had resulted from a deterioration in the firm’s pprformana
durinp the early
[kta pawidcd
by Hospitality
Valuation
Smias.
Kcmpcr
FinancuL
‘fenill
Lynch
Smith Travel
Resarch.
chc Univccaty
of Texas System investment
o&c.
ud Ban
Witler is gralcfutly
a&nowkd@.
I would like to thank David Blackwell.
Kenneth
Borokbovich
ikad
Chiquua
Go&n
Ha&a.
Mark Husan. David Ikcnberry.
Sandy Koch, scoC1 Lee, 1. Rusdl
Kampk
Rul Laur Mn
Martin.
Lisa Meulbroek
(the &nx),
Rune&
Rau, Ehud Rona Laun
Strrks.
Michael
Wcisbmcb.
and the editors (Richard
Ruhack and Karen Wruckl
for their conunatts
Tbc paper abo bendited
tram comments
by saninrr
participants
at the University
of Texas. the University
td Houston.
and
the 1994 Financial
Ma nagaunt
Association
Meeting.
0304-405X/97,S15.00
3‘ I997
P/I S0304-405X(96)00SR5-9
Elscvicr
Scicna
S.A. All rights
reserved
242
R. Pum’no~Journol
of Financial
Economic,>
43 llW7)
241.
274
1990s. A decline in cash flows from operations and a weak market for hotel
property sales had left Marriott with a historically high level ofdebt, prompting
rating agencies to lower their ratings of Marriott’s public notes and debentures
to the lowest investment grade. The spinoff improved the ability of the management businesses to fund new investments by limiting bondholder claims on their
cash flows. However, it also left the parent with only real estate assets and the
relatively small airport and highway concessions business to service most of the
company’s long-term debt.
The Marriott spinotT illustrates how the separation of a ftrm’s businesses
t’lrough a pro rata distribution of the equity in some of those businesses can
transfer wealth among securityhoiders. This restructuring is highly unusual in
that Marriott distributed shares that represented almost 80% of the value of its
equity and substantially incmased the leverage of the parent. Previous studies
suggest that spinoff distributions typically involve shares worth only 10% of the
total market value of the equity (Hite and Owers. 1983; Miles and Rose&l&
1953) and that. on average. the kveracle of the parent changes little (Chipper
.I~J CmiI+,
1?‘8t:
T’ : :.I. + .U ;pr.100 hranskrrcd wealth from bondholdets
to
shareholders and caused the total value of the company’s public securities to
decline.
This spinoff is also noteworthy in that Marriott’s bondholders were able to
force the company to alter its plans even though no provisions in the bondholder indenture agmement prohibited the restructuring Rondhoklers initiated
a coordinated eRort to block tbe spinofT almost immediately after it was
announced in October 1992 and suaxxdai in forcing Marriott to change the
structure of the spinofTand bondholder claims in ways that reduced the magnitude of the wealth transfer. The post-spinoff kverage of the parent was lower
than originally anticipated by the company and bondholders emerged from the
spinoff with new claims that included higher coupon payments.
Tbe limits that the spinoR pkxed on bondholder claims suggest that it was
designed to benefit all shareholders However, the Marriott family. which owned
25.8% of the common stock, benefited in ways that public shareholders did not.
The spinoff reduced the likelihood that the family would lose control of the
management businesses and much of its wealth if economic conditions continued to deteriorate The spinoffalso enabled Marriott to continue to grow the
management businesses without diluting the family’s control.
The paper is organized as follows. Section 2 describes !M data and methodology used to measure securityholder returns An overview of Marriott’s businesses at tbe time of the spinotTannouncement
and the pre-spin08 performance
of the firm is provided in Section 3. !kctioo 4 documen t.s how the values of
Marriott’s public securities changed between the announcemen t and the distribution. Section 5 discusses the effect of the spinoff on firm value and Section 6
describes the be&its of the spinoff to the Marriott family. Conclusions are
presented in Section 7.
R. Pam’no
‘Journal
of Financial
Economks
43 0997)
241
274
243
Closing prices from the New York Stock Exchange and bond dealer bid prices
are used to document the effect of the spinoff on the value of all of Marriott’s
publicly traded securities. These securities, which had an aggregate market value
of&&232 milliou at the end of the quarter preceding the spinoff announcement.
-ted
approximately 8 I % of the total value of Marriott’s long-term debt
and equity (Table I ). The remaining 19% consisted of S493 million in mortgage
debt, U93 million in private unsecured notu and 5290 million outstanding on
a revolving line of cred;t.
Daily closing price, dividend. and volume data for the common stock are
from The Wall Street JOWMI and The Daily Stock Price Record. Daily marketTabk
I
cqluly
M~lCofpontiLmliabilllwsand~-
._-
. ..---
on Scptcmbcr
--.---
&d
vatuc
-----.
-.--.---_
cumo1
liabihtics
scoiol
tong-tmm
debt
!salior oous and 6tbcntum
Mortgage
dkbt
aheroots
Rcdviog
line of credit
Total
coavcrtlbk
suboldimIai
detd
ottlcl
toog-tcml
liabilities
Coourtibk
pdcrd
stock’
Cowmsoo
equity and rchud
earnings
Total tiditks
and equity
Total market
uluc of public sccuritks
- _____
-_
The
an IKNowmrnI
quarter
I I. WI?
tS mrllwms)
----
immahtcly
ptuaiing
51.329
the spmotT
‘8.2%
Iiquid ykkt option
I& 675.ooO LYONS
um
dcbcnturcs
and their
I.872
493
I93
-so
$2.019
-% I.250
200
516
$6.425
226
35
I .7?2
_.-.____--
mlcnrbordiaareddcbt.prrCrrreduodr.rn4
ammo0
stock
pifa~tbc~‘;orLStodrEsctu~onScpcemberll.l997Thc~alucdthc~iornotarnd
debmum
is cumpuud
using de&r
bid ptks
for !kptcmher
*Marriott
bad I3 senior notesand
nogal
hen 599 to S250 million
..-.
Mark4
vatuc’
- . . - __ _ -.-...-...
outstandingon
m8Witics
hm
_.._ _,-_
__.--
cndd
on !septcmtlcr
I i. 1992.
valuer
arc computal
usmg
Ia
‘F~rmillionshtcrdamveniMc~scod;wcre~inDaxmberIWlwithadi~ol
8.25%. Each pined
share was convertibk
stock.
into
2874
S200 millioa.
shares
cbsiog
!99L
September
Il. I992. Their
nine months
to r0 )cln.
boot;
odes (LYONS)
issad
in June I991 and maturing
in JUIX -X06.
convertible
into 13.277 shares of Marriott
C *~rporation
common
‘Includes
a casualty
self-insurana reserve d approximately
milliondderrediaawactaxcsoC564~~iUionadot~~bilitiasucb~Jobliglionrundcr(hc
frequent stay plograol
and l#&m!d
colopmsation.
s4 c-‘3’
-_-.
of Marriott
ddcrmd
income
Cuporation
valuts
Frh of
stock.
d S2Oit
common
244
R. Purrino/Journol
of Financial
Economics
43 (1997)
241 -274
adjusted common stock returns equal the excess of daily returns on Marriott’s
common stock over the corresponding daily returns predicted by a market
model, R, = x + /lR,,,, + e,. The S&P 500 index proxies for the market portfolio.
The methodology employed by Mikkelson and Ruback (1991) is used to estimate the market-adjusted
returns over the period beginning 60 trading days
before the spinoff announcement (July 10.1992) and ending 60 trading days after
the distribution (January 4.1994). Two estimated sets ofc&Ecients
incorporate
potential changes in the market model parameters. The first two coefRcients, zl
and fl,, are estimated using daily returns over the 200 trading days ending 61
trading days before the announcement. The other two coeRicients, zz and &, are
estimated over the 200 trading days beginning 61 trading days after the distribution. Market-adjusted returns prior to the announcement are computed using x1
and /?,. while all subsequent returns are computed using zz and fi2. The market
model parameter estimates are as follows: zr = - 0.04.
/I, = 1.3540. zz =
1.5512.
A
Chow
test
does
not
reject
the
hypothesis
that the
0.0005. and /f2 =
model paraak;ters are the same in the two periods (F(198.198) = 0.25).
111:\li~-y...+~-!‘3
~~:rn-;, itoc‘h returns equal the excess of daily Marriott
stock returns over the daily returns on a hotel industry index. A market model
approach is not used to adjust the Marriott stock returns for industry changes
because the shares of two firms in the industry index were not publicly traded
before 1992 The firms in the industry index come from an initial list of 135 public
firms with U.S. hotel operations. The index is restricted to hotel tirms because
there were no public firms with over 50% of their cash Rows from contract food
servias and a market value of equity exceeding SM million on October 21992
The final list contains six firms that meet the following four criteria:
I) prices for the firm’s shares are published in the NYSE AMEX, or OTC Doily
Stock Price Record;
2) the firm operates or owns at least ten hotels in at least three states and the
market value of its equity is at least S30 million on October 2. 1992 (this
criterion excludes firms with relatively ilhquid sharesk
3) a majority of the firm*s operating profits are from lodging businesses and less
than one-third of its lodging-related profits are from casino operations (this
criterion limits the effect of non-hotel industry performana
on the index
returns);’ and
4) the firm is not operating under Chapter I1 bankruptcy protection.
‘Finns with significant
casino operations
arccxdurkd
because
during the uurly pcriud due to a m
in tbc caxino industry.
to this Rztrictiom
wax cxamir-4
by including
two large lodging
ot thdr casino operations:
Hilton
Hotels Corporation
and
Hampton
Inn Embassy
Suites, and Homewood
SuitexL The
cxtirnatcd
with thee two firms (eight firms total) are higher
thctr shares genetaUy pcrfoonnad
well
Tbc sensitivity
of the in&x rctumx
firms that had ban excluded
bccausc
Promux
Companies
lttc (Harralu
cumulative
industry
index rcturtxs
bevern
the rnnounamcat
and the
R. Pam’noiJoumal
of Financial
Ecunomics
43 (1997)
241-274
245
The six firms in the index are Hospitality Franchise Systems, Inc. (Days Inn,
Howard Johnson, and Ramada), La Quinta Motor Inns, Inc., La Quinta Motor
Inns L.P., Marcus Corporation (Budgetel and full service hotels), Red Lion Inns
L.P., and ShoLodge, Inc. (Shoney’s Inn). Daily industry index returns are
calculated as the simpk average of the stock split- and dividend-adjusted daily
returns for the common stock of the six firms. (A value-weighted index return
from the annou nament to the distribution is higher than the equal-weighted
index return, suggesting that the choice of an equal-weighted index does not bias
tbe industry-adjusted
returns downward.) The r-statistics for the industryadjusted retu.ns are calculated using a methodology similar to that employed
by Ritter (1991).
la contrast to previous studies, which examine the relatively few d&t issues
that are traded on the New York Exchange, this paper uses deakr bid prices to
determine changes in the value of the 13 senior note and debenture issues that
were outstanding at the time of the spinotr announcement. These prices were
provided by financial institutions that trade the Marriott securities, Bloomberg
Business News Service. and Standard and Poor’s for 45 days during the period
from 60 trading days before the spinoIT armoulKxmen t to 60 trading days after
thedistribution.Severalso(l~werrusedb#austacompktesetoCI3priacsis
den mavailable from a singk source on a given day. A comparison of bid
prices from the alternative sO.rr~cs reveals no systematic di&rence& suggesting
that data from a particular source are unlikely to bias tbe price estimates. Bid
~wcrcobtainedforeachissuefordays
-60. -31. -IS, -10, -5through
5. IQ 15,2Q and approximately every 1 I trading days thereafter through day
316(January4,1994).CMtbe143bidpr&scolkctedfortbe
lldayssurrounding
tbe spinoff announcemen t I36 were obtairkd from a single firm that actively
traded Marriott notes and debentures.
All of tbe note and de&nture prices ate adjusted to mfkct cbcnges in tna~let
yields after July JO, 1992 (day -60). These adjustments are made usrng 8883
industrial bond indexes reported by the Bloomherg Business News smioc.
BBB3 indexes are used because they correspond to tbe credit rating of the
Marriott senior notes and debentures at the time of the spinoffannouneement.
Siwc Bloomberg reports only yields tar the above indexes, these yields are
first restated as prices, indexed to a value of 10 on July 10.1992 Tbe prices for
the Marriott notes and debentures are then individually adjusted using the
percentage change in the value of the index that most closely matches the
maturity of each issue. Jhis adjustment is computed using the relation
(1)
P,.i = pl.j - (P- tt0.j Afr.w).
dixtribution
than tbe in&x
tetums
estimated
without
~umsom
the Marriott
common
stock are lower when
than when they am not.
than.
Hdton
Coarcquc13tly.
and Promu:
the industry-adjusted
alrc included
in the index
246
R. Pam~no/Joumal
of Financial
Economics
43 (1997)
241-274
where Pt,j is the price of bond j on day r and AltsM is the percentage change in
the value of the index for bonds with maturity M between day -60 and day 7.
The overbar indicates the adjusted value.
The market-adjusted note and debenture prices are multiplied by the number
of bonds outstanding to obtain the total value of each issue. These values
are then summed to obtain the aggregate value of the notes and debentures.
An adjustment to the bond values after October I.1993 r&e& the retircmeat
of $174 million of these securities with Marriott stock and cash. Aggregate
bond values after this date equal the market-adjusted value of the bonds
that mained
outstanding plus the market value of tbe shares that were
distributed and the value of the cash payment. The values of two notes that
matured between the announcement and distribution dates are calculated
by assuming that the procads from their retirement are reinvested to earn
8% per year. The value of a third note. which was eliminated through
a defeasana 01 the di&budou
date, is set equal to its faa value after that
date.
Llruly returns for the subordinated convertibk debentun5 and preferred stock
are computed using closing price and dividend data reported in The Wull Street
Jowrrcrl. These returns are not adjusted for market changes. Two-factor market
models, with ten-year BBB3 industrial bond returns and S&P 500 returns as
factors, were estimated for these securities, but have no significant explanatory
power.
In 199L Marriott had revenues of S8.7 billion and operating profits of S4%
million. The lodging amnagcmetu group, which indudad hotel, timcsharc, aad
golf facility management busiaesscs contributa!
52% ($4.5 billion) of the
revenues and 68% ($338 million) ofthe operating profits (Tabk 2). The company
owned, managed, or franch&d
746 hotels. Marriott’s otbcr rcvcllues and
operating profits came from tbe contract services group. which consistai of food
service and facilities maqprunt,
airport and highway m
r&ancnt
community maniyment,
and restaurant supply dis!ri+$n
busiwsscs Tbc
food rmicc and facilities manamt
bu&esq with 1992 revenue ofapproximatdy S3 billion, provided fimkes to a wide range ofdients induding corporations health care f&ilitieq and secondary schools and colleges. Tbe Host/Travel
plazas airport and highway concessions business, with revenues of SO.9 billion,
in airports, on tollroads. and in stadiums, am
and
Operated dons
otber public attractions. Tbe retirement community management and distribution businesses were both rdativciy small. With two-thirds of its operating profit
from lodging-related businesses, Marriott was generally viewed as a hotel
company.
R. Pam’no:Joumal
Tabk
2
Marriott
Corporation
major
lines
of Finonrial
of business
Economics
and
43 (1997)
1992 operating
241.274
?47
profits
1992
opcratmg
IS millions)
---
_---_.--_
Lodging
Hot&
Mmiou
Mmiott
Cootract
Food
.__-._
Management
Group
owfck
ms0ft.s
and
Owtcrship
Golf fgou
Smias
!krvie
Senior Living
Rcstaunnts
__.
_ _ __._
tW.5 billion
suite5
._. _ _
Resorts
(timeshare)
facility
mJnagcmcntl
lairport
and highway
!Setvices (resIaurant
Service
tretircmcnt
Percent
of lOILl
_
in revenue)
Group
(54.2 billioo in rwcnuc)
and Fac5litks
Management
Host~ravel
Plazas
Marriott
Lktribuhon
diSUibUliOO)
MJrriotI
_-___.
__ .__
profit’
conassions)
supply
communiry
managcmemt
312
26
Mb
62.9%
5.2%
nab
74
14.9?i
62
12.Y.
2.4’..
21)Yk
Mb
lllul
1000’.
--.--
_-.
‘Esrion~cd
from
documents
*lasufscsml
btJ
-
arc rcailiible
.--hkd
._ ______.
hy Marriott
10 c5mlJtc
-8th
lhesc
--__-__
the SE<.
VJluK
Marriott financed most of its Lapital requirements through the sale of notes
and debentures at the corporate kvel. The company’s senior notes and debentures. which accounted for 65.7% of the senior long-term debt (Table I ). were all
general obl&ations of the firm. Mortgage debt totaled only $493 million
(17.3%). Marriott soM virtually no equity in the 1980s and early 1990s. in fact,
the company reduced the total number of common shares outstanding ffmn
132.8 million in 1982 to 95.5 million in 1991 through stock repurchases.
Marriott pursued ambitious growth and prditability
objectives in the hotel
business through a strategy ofdeveloping and then selling hotels whik retaining
the right to manage them. An important financial aspect of this strategy was the
separation of property management from ownership. which cot only reduced
the amount of capital necessary to fund ragid growth but also provided
Marriott with kss volatile cash flows than with direct hotel ownership. Under
management contracts. the company was reimbursed for all direct and indirect
costs, and received 3-5% of total revenue (base fees) and a portion of the
operatin
profits (incentive f&s) above a specitieJ Imel. fin an October 1992
presentation to security analysts, Marriott’s chieflinancia! oflicer indicatal that
base kes were expected to contribute approximately 74% of 1992 operating
income from hotel management operations.) T~K low volatility of the cash flows
from the management contracts enabled the firm to maintain d higher kvel of
debt relative to cash flows than would have been possible had the firm owned
248
R. Pam’nolJoumal
o/i?nancial
Economics
43 (1997)
241-274
the hotels it managed. Marriott acknowledged the relation between the stability
of its cash flows and its debt capacity in its annual reports. For instance, the
1991 annual report states that ‘the company’s debt capacity is determined by the
amount and variability of its cash flows’ (p. 3 1). The combination of low capital
requirements and high debt capacity enabled the Marriott family to retain
control of the firm even as Marriott’s revenue increased 5 12% between 1980 and
1992.
Marriott’s operating profits increased each year from 1986 to 1989 in both the
lodging management and contract services groups. Beginning in 1990, however,
the U.S. recession ended this record of steady growth. The rate ofgrowth in the
demand for domestic hotel rooms plunged from WIOO rooms per year in 1989
to onIy 2,000 rooms per year in 1991. driving down occupancy rates and hotel
profits as growth in the supply of new hotel rooms continued at higher kvels.*
Profits in the contract services group also dropped after 1989 as demand
weakened.
The recession occurrt.4 at a particularly crucial time for Marriott. As shown
in Tabtz 3. the firm? inventory of h :A properties being devrloped for sak was
ti~ AI air-time mgn. Sinu: this mventorv was tinanced largely with debt, Marriott
was highly levered and required substantial cash for interest payluents A $134
million decline (from $509 to f375 million) in cash flow from operations reduced
the company% cash flow coverage ratio (the ratio of cash flow from operations
to interest expense) from 2.75 in 1989 to 2.05 in 1990. This weakening financial
position prompted Moody’s to downgrade Marriott’s debt in 1990 and again in
1991.
Marriott could have used proceeds from hotel sales to reduce debt. However,
hotel values in the U.S. dropped 18% between I989 and 1991, making it difficult
for the company to sell hotels for prices that it considered acceptable.’ The
impact of the weak hotel market on Marriott’s financial position after 1990 can
be seen in Table 3. From 1986 to 1989. Marriott invested an average of f77S
million each year in new hotel development and sold ownership interests of
roughly the same value. However, hotel sales declined dramatically after 1989.
Proceeds from hotel safes dropped from $900 million in 1989 to $600 million in
1990 and to only $33 million in 1991. Even though capital expenditures fell to
%IC supfdy and &mad
tigwu
arc lrom Smith Travel Rexarch
(STR) of Gallatin.
Tcnncssa.
STR
atimatcs
the cbustk
supply d hotel rooms from pubhkd
hotel directoks
and demand
fraa
OpCrh.I6
data provikd
by hod
operators
IO 1993, the STR dat&asc
induckd
inform&on
on
31.ooO lodgiqf popmics
Operating
data xuch a.5 occupancy
and avcrags room rates were mportcd
by operators
of approximatdy
17.CNlO of tbcsc popcrtk
in 1993.
‘The 18Y0 QIIIZ
ix computal
from the hotd valuatmn
index report4
by Hospitality
Valuation
!kvicc~(HVS)dMincda.fUcw
York.Theindca~antir~sseparate
HVSbotel
valucindexcxfor23
major US cities The city indexes are dcvdopcd
using data provided
by STR and HVS cxtimatcs
local anls and fequind
investor
feturnk
d
R. Pam~no!Jovmal
Table 3
Marriott
Corporatton
senior debt ratings
._ -... ..-_ -. . .-.
hatoncal
y/i?nanciai
balance
- .
sheets.
Economics
43 (1997)
hotel property
sales development
1986
19lt7
1988
--____-_-----..--_-_-_-__
b~bncv
249
274
expenditures,
and
. . -- _-.-
-.Cwt.so/i&ted
241
.s/uvt.s us fff haul
!-ear
1989
1990
1991
1992
end (5 mtllionsr
Asms
currcn1
asuts
Properly
and equipment
Assets held kr sak:
Hotels dcvulqcd
k r sak
other
olkrasscls
Total assets
l
Estimated
from
documents
919
2w578
9%
2575
I.173
2.298
I.428
2.174
1.023
2485
1.4%
3.461
2
384
I.158
213
288
I .372
475
571
I .370
927
577
1.707
I.062
212
I.450
I .?o?
‘21
1.368
I.453
5.97:!
6.732
6.926
GiiL410
4Jn)Gii
Liabilitks
and sharehokkrs~
equity
Current
liabdiltes
L4mg-tcrm
debt
Convcrtibk
subordinated
J&t
(LYWQ
Other
long-temt
liabdtlks
Conwttibte
prcfcrmd
stwk
Comm
stock and retatncd
earnings
Moody’5
rating for scmor
Dooanbcr
31
ml
2207
note5
I.018
1,663
I.123
2499
I.292
2.857
I.416
3.286
I.637
3.S%
I.335
2979
1.4%
2.732
908
938
I.122
I.402
lJt4
210
I.197
,x0
22K
I.169
200
991
811
701
62X
407
479
snc
900
Qo
32
346
890
733
199
46
A3
Bad
Baa3
on
A3
tikd
by Mamott
A3
urth
A3
ad
the SEC.
reflect changing economic conditions in the industry. the book value of hotels
heJd for sale increased from what was already an all-time high of5927 million in
1989 to S1.303 million in 1991.
In an etrort to strengthen its weakening financial position. Marriott replaced
some of its senior debt with subordinated debt and convertible preferred stock
issues in 1991. The subordinated debt. which consists 4 convertible zero coupon
notes (LYONS), reduced the amount of cash required for interest payments by
approximately $18 million per year or 6.8% of the S265 million total interest
expense in 1991. Both the LYON and preferred issues lcwered the riskiness of
Marriott% remaining senior notes and debentures by reducing interest obligations and the total amount of senior debt outstanding.
250
R. ParrinolJownal
of Financial
Economics
43 (1997)
241-274
At the beginning of 1992, Marriott’s ability to finance new investments with
low-cost debt was limited by its Baa3 bond rating. Furthermore, an equity
financing would have diluted the Marriott family’s ownership. This financial
inflexibility prompted the firm to search for a means of removing the unsold
hotels and the associated debt from its balance sheet. On October 5, 1992,
Marriott announced its spinoff plan.
4.1.
The announcemenr
Under the spinoff plan announced in October 1992 the lodging management,
food service and facilities management. senior living services, and distribution
businesses were to be spun off into a new entity called Marriott International
(International). The parent, to be renamed Host Marriott (Host), would retain
ownership of the hotel and senior living service properties other real estate
;Tt:k ;:. Ald fi,, khb. -f-,. .dkl Play busins
International would manage the
hotel properties under long-term contracts similar to those with unalISated
owners. Marriott family members would continue to oversee all of the businesses and the senior mana@rs would be split between the two post-spinoff
companies. The Appendix provides a detaikzd chronolw
of events surrounding
the spinofr.
Marriott ofkials argued that the separation of the management businesses
from the rest of the firm would create value in several ways. First. it would allow
the company to mote fully exploit growth opportunities in the management
businesses J.W. Marriott, Jr, the firm’s chairman, stated that International.
with its ‘strong earnings, stable cash Bow. and improved investment capacity’
would have greater growth potential after the restructuring because of its
improved financial strength. Second, the company proposed that better financial information after the spinoff would enable the capital markets to more
accurately assess the true value of the firm. Finally, Marriott executives maintained that the spinoff would be&t
shareholders by providing them with
improved in vestment alternatives J.W. Marriott, Jr. stated that it would give
investors a clear choioe betwan a management company positioned for growth
and a capital-intensive company with strong cash flow and long-term appreciation’.
Panel A of Tabk 4 presents pro forma balance sheet and income statement
figures for Host and International
that were released by Marriott after the
spinoliannouncement
Virtually all of the long-term debt would remain at Host.
International’s exposure to long-term creditors would be limited to a Saoo
million line of credit that it would extend to Host. Marriott managers indicated
that pro forma I992 interest coverage at Host, excluding capital expenditure
R. Pam’no/Jownal
of &anciat
Economics
43 (IVY?)
241-274
251
and working capital requirements, was expected to be only 1.6 times the
projected annual interest expense of S225 million. Based on actual 1991 cash
flows, pro forma interest coverage at Host was half of that at Marriott (1.3
versus 2.6).
The stock market response to the announcement was consistent with the
benefits proposed by the company. The price of Marriott’s common stock
increased 11.68% during the three days following the announcement (from
$17.125 on October 2. 1992 to S19.125 on October 7). The value of both the
Standard and Poor’s composite index and the hotel index declined during this
period. resulting in market- and industry-adjusted returns of 13.79% (S236.3
million) and 13& % ($224.9 million). respectively. These returns are significant
at the 1% level.
Whik Mamott managers did not publicly acknowledge the possibility that
some of the shareholder gain had been realized at the expense of the bondholders. it quickly became apparent that the spinoff was expected to redua the
value of bondholder claims. Moody’s lowered its rating of Marriott’s senior debt
Tab& 4
Pro loma bdamx
udcr
lbc oliginal
majnr boadbolder
ratios d EBITDA
..__-
sbaa ad irstatamnl
data lof Marmot
Intcmatwnal
and tirm Mamott
bpinoll phi Iaaf was ainOcloturI992araithelinalpheaq*adby
groups in M8rrh
I993 and unplanentcd
tn October
l994? all numhm
cnucpl lhc
IO intcre+l cxpc. u arc tn mifbons
d dollars
Pad
lpimgplm
A: original
Marriott
Corp~ratioll
Marriott
Intcmaricmal
pro-
Ii054 Mar-riot1
pro hlm.a
hell
Curt
assets
Property
and quipmcnt
orbcr
awes
Total assc~s
I.230
3.672
1.431
I.120
.Mo
870
h.33?
xiii
30
3.310
I.060
Tzii
Liabditics
and cqwty
Cumnl
liabilities
Long-~
d&l
Other long-term
liabilities
?%areboldcrs’
equity
I.189
2.891
I.500
753
1.l.W
20
690
520
?I0
1870
I.310
230
8.331
478
82
2.6
7.426
314
145
20.3
I.656
I48
WJI
Immne
starmaem~
I I I 92Bb
RCWXllU
Opcnting
profit
Netinwme
EBITDNintrnxt
rxpcnsc’
___.--- -_.. -
. . ..
._._...
..-..
I.3
--
.
---.-
R. Pam~no/Jownal
252
Table
4 (continued)
Panel
B: Final
__._.
.
._ __
Balanw
-__--.
of Financid
Economics
43 (1997)
241-
274
--.---._-.-.
spinoflplan
_- - _.__. - ..-
Marriott
Corporation
Marriott
lntemationai
pro forma
Host Marriott
pro forma
.shrrr f1/1/93)L
Anuts
Currcnl
asseta
Property
and equipment
ohraswts
Total assets
1.4%
3.461
I .453
1250
772
995
301
2689
8%
6.410
3.017
3.888
Li8bihties
and equity
currco1
IiaMtk
lmlpkrm
debt
otkr
loag-tmn
liabititi
shrspicy
I .4%
2.732
I.-7
7R.z
I280
899
4ctt-l
438
394
2.313
794
387
8.722
483
85
28
7.787
331
I36
6.5
;,r,c*fu
rru4r#nenr
Rmnuc
oparw
v&t
Netinamc
EBllDAhtuest
I : 4 93,”
expense‘
from Baa3 to Bat on the day of the ann ouament
and. two days later, press
reports indicated that prices of some Marriott long-term debt issues had
deciined by as much as 30%.
The dealer bid price data reveal that the prices of ail of Marriott’s fixedincome =uritics
declined during the three days following the spinofl announcement. The aggregate market-adjusted value of the 13 senior notes and
debentures f&l1 16.51% ($333.3 million). In addition, daily closing prices from
The Wall Srreer Jound
reveal that the aggregate values of the LYON and
prcknzd stock issues also declined during this period by 7.09% ($16-0 million)
and 3.59% (S9.0 million), reqectively. The 3358.3 million decline in the value of
the debt and prderred stock -ted
14.35% of their combined value.
The decline in the aggregate value of Marriott’s fixed-income securities
indicates that there was a wealth transtcr to the shareholders. Furthermore, the
R. Panitto/Jounwl
oJ Financial
Economies
43 (I W?)
24i-
274
253
fact that the magnitude of the bondholder and preferred shareholder loss
exceeds the common shareholder gain suggests that all of the shareholder gain
resulted from a wealth transfer and that the spinolI was expected to destroy
vaIte4 No evidence of wealth transfm around spinoffs has been reported in
other studies Schipper and Smith (19%3) find that prices decline for only I 1 of 26
bonds arouod spinoff annou ocemeots whik Hite ami Owers (1983) report that
risk-adjusted bond returns around spinoII annou ncements are not signilkantly
diffc!fuIt from zero.
The low pro forma coverage ratio at Host was one reason that the value of
Marriott’s notes a~ul debentures de&red folIowing the announcement. However, the e&ct of the proposed transaction on the average variability of Host-s
cash IIows also contributed to this &dine. The spit&f would increase the
average riskiness of the cash flows undetlying boddder
daims by distributing
the B
with the most stabk cash flows to International. An example of
this can be seen in the proposed allocation of the cash flows from the unsold
hoteI properties between International and Host. Under the manawt
contracts between he two post-spinoII finm, International would tive
a large
portion of its cash flows through meaue-based
base I&s whik Host would
receive only a share of the more vcrhtik operating profits. A presentation by
Marriott executives shortly after the spiooIf announcmka t indicated that over
50% of Host’s post-spinoIIc&
flows would be provirkd by the volatik hotel
operating pro&~ To the exten that the payoff for bondholders is similar to that
forthewriterdaputoption.af~adbySmith(1979),aninxcasintht
variability of tbe assets underlying bondhokkr daims reduces their vahre.
A review of the indenture a-t
for tbe Marriott senior notes and
debentures teveak that it contained 10 provisions that would prohibit tbe type
of distribution that Marriott proposed. This raises the question of wbetber the
bondbohlers were compensated, ex ante, for the possibility of opportunistic
behavior on tbe part of Marriott Compring
the ykkls on Marriott debt with
the BBB3 Bloomberg indexes reveals that tbe Marriott bond yields were in fact
higher than those for other debt with similar ratings. Tbe yields on Marriott
‘Whik
value
lars
thr musud
of th minmon
this difTcmm
involving
Marriott
&dine
stock
in cht value d tk
following
tbc spinoff
sccuritics
cxeds
Ibe inause
mtitisddKcdltosaypecibdybow
hrahxmmc
an-
ir An industry
analyst
informed
the authr
tha1 tbac
bonds immcdiatdy
hIlowing
the spinotT anwunamen
ext(lcM
umczrtunty
cawed 8 lack Cc liquidity.
which.
tru.
dealers had ks
incOruutio0
available
to lhan
were
kty
I. He
nuiaclhrd
in turn. ‘irmMd the number
wbm
they vet their prim
io the
W
tmks
that
of trades
If ibis
Carscqucatly.
Is
the
~oCtbcbidpicawupcubrblylowrd~Ibopaiadthrnei~beCorctbc~
lneatorPCWmO~in~aabwItht~~avaiLMc!o~~aputidpmrr.Thc
analyst’s
comments
aho suggest that it is unlikely
hudtosdlblldsaftcrtludcbt
IbcpYicesoflhclKttcsanddebcntu~
wasdlnmgdd
that
ding
by Moody’s
pesw~rc
contributed
by institutions
to the sharp
that
doclinc
ycrc
in
254
R. Pam~no/Joumal
of Financial
Economics
43 (1997)
241-274
notes with two-, five-, and ten-year maturities were 37,80, and 56 basis points
higher, respectively, than the yields on BBB3 debt of corresponding maturities in
early 1992. These yield differentials are consistent with the expectation that
premiums would be required to compensate investors for the lack of protection
against such opportunistic distributions to shareholders. However, they could
also reflect compensation for higher risks associated with other aspects of the
bondholder claims.
If Marriott’s bondholders did require yield premiums to compensate for the
possibility of a spinoff. then at least part of the decline in bondholder wealth
fo’lowing the spinolTannoutuzmen t is not a wealth transfer in the strictest sense.
Only the difl&nce between the decline in bondholder wealth and the value of
the premiums that bondholders received before the announcemen tdaterepresents a net ex post wealth transfer to shareholders The remainder represents
a recapture by shareholders of wealth that had been distributed to bondholders
through the premiums.
The bondholder reaction to the spinoff plan was both swift and unambiguous
Within ten days of the announcemen L, two das+acGon suits were filed against
Marriott and several large bondholders had formed a committee to expIore
ways of Mocking the spinoIL By the end of December, a total of ten class-ircrion
suitsaadoDcsuitbyalgoupol~boad~hsdbeeafikdtoMocirtbc
spit~ofLlhecontroversy
Prompted Merrill Lynch which had been both a principal underwriter for some of Marriott’s senior debt issues and art advisor to
Marriott on the spittolL to witMraw as ao advisor. By Iate December, Marriott
agreed to hold d&us& ns with repmentatives of the major bondholder groups
opposing the distribution. The pressure on Marriott to modify its phn was so
severe that the firm agreed to pay the f&s of the advisors to the bondholder
groups to bring the bondhokIers to the bargaining table.
An agreement was reached between Marriott, the class-action plaintiffs, and
several large bondholders in early March 1993. although the group bf laq~e
bondbol&m
that had filed suit in the call of I992 did not lind the revisions
acceptable and decided to continue its legal action. Major modifications to the
initial spinolI plan includedz
I) the transfer of $400 million in additional assets and debt to International;
2) an agreement through which International would provide $125 million in
financing for the unfinished Philadelphia Marriott hotel;
3) an increase in the line of credit provided to Host by International from S&N)
to $630 million;
4) the retirement or defeasance of all of the debt maturing before February 19w
(thre issues with a face value of S350 million);
R. Pam’m~Jownal
of Financial
Economics
43 (1997)
241-274
255
5) the exchange of all remaining notes and debentures (ten issues with a face
value of S1,520 million) for new Host debt with stricter covenants;
6) an agreement that Host would use up to 75% of the net proceeds from
certain asset sales to repurchase debt issued under tbe exchange agreement.
The coupon payments on the debt issued under the exchange agreement would
be loo basis points higher than the corresponding rata on the old notes and the
maturities would be extended by four years for nine issues and reduced by five
years fbr one. As part of the exchange agctmcat, $174 million of tbe $1,520
miUion of exchanged debt would also be retired with $70 million of Marriott
stock and $104 million in cash In addition to the spinoff plan moditicationr
Marriott agreed to pay $1 million to the das+act&n plaintiffs for lea and
expenses and to issue 7.7 milhon five-year warrants to purchase Host stock to
bondbokiers who sold their claims at a loss following the October 1992 announcement
~financlalimpactoTthcmodificdspi~planibapplrtntinpandBol
TaMc 4. The ratio of book debt to total capital at Host would be lower than
under the initial plan (0.89 versus 0.95) and the interest coverage ratio. based on
the pro forma msuhs from the previous year, would be hi&r (1.8 versus 1.3)
Furthermore. the mised capital structure and the extension oft& maturities for
most of the notes reduced tbe immediate threat oCa Host ddauh ;Oylowering
debt service and principal tepayments during the first few years Mowing
the
qinoli.
The revised spinoff plan was approved by the Marriott sharebokkrs oo July
23.1993 aud the distribution was completed on October 8 in with
the revised plan. AU but two bondholder groups. the grwp that fikd suit in the
fall of 192 and the Florida state pen&n fund which filed suit in late March
1993 to block the revised plan, settled their claims by Lhc distribution date. The
suit by the Florida pension fund was ultimately settled in April 1994 and the lall
1992 suit was dism&al
in January 1995. The agreement with the Florida
pension fund required Marriott to purchase the $7.6 million in bonds owned by
the fund at face value.
4.3. Skcmrity rehms hetuven anno6weme nt and diswifwiott
4.3.1. Cwnnum smck
Table 5 reports common stock returns during the period between July IO.
1992 and January 4, 1994. Returns are teported for three-day event windows
around key events, except that a six-day window is used for the bondholder
pubhsbed
agreement anno uncement hecause two Wall Smef lmfmtd artida
three days apart, reveal nonoverlapping
information about that agmement.
Cumulative returns are also reported for the period from the announcement on
October 5, 1992 through the distribution on October 8. 1993.
Lynch
Merrill
stock
Announcetnmt
through
approve
Shareholders
born
announad
announced
returns
July
0.96%
I 80%
13.26%
3.90%
15.82%
93.93%
0 to 256
6.64%
I I .68%
10.429’.
-- 4.71%
4.106?$
- 0 60%
2453%
5.77%
IWJrll
Ilnadjurtcd
January
MO
- I
2
.w
33
57
IXJ
IO5
III
to
- 601 through
203
204 to 253
254 to 236
257 to 316
--60 IO
0 IO
3 IO
31 IO
34 IO
58 IO
61 to
IO6 to
II2 IO
MI lo
Day relatiw
spinotT
announcrmcnt”
IO. I992 tday
-___---.--_-__--___I__-..
distribution
spinolf
- -____
agrccmcnt
i3ondhoMer
Distribution
negotiations
Bondholder
resignation
announcrmcnt
Spinoff
Event;holding
pwiod
Table 5
Marriott
common
_
41.12%
_-_ _ ._____.
1.3. IY%
I3.?9%
2.6R%
.- 5.X7%
-3.12%
-- 0.40%
I g.23?/;,
3 .-77%
2.49%
0.94%
5.57%
4.0 I %
9.929’0
? l:lrkcl.ulrust~d
r Irn’
4. 1994 (II;IY 316t’
0.99
0.62
3.36’
0.34
-2.1s’
-0.36
-0.14
I.48
0.88
-0.09
0.34
0.47
1.44
0.75
I-sta1.J
-.
__. .-. -._
4.84%
2.874,
13.06%
7.089’.
-6.17%
- 3.63%
- 4.24%
I .360/J
0.94%
-3.48%
3.64%
- 5.87%
3.31%
3.95%
Industr!.
adjusled
return‘
0.33
-0.18
4.35’
0.80
- 2.08
-0.41
- I.41
0.1 I
0.25
-0.17
I.19
-0.44
I .08
0.37
f-stat.’
returns
announad
that
are geometrically
it uould
spin
compounded
returns
ofT its management
Jaily
over
businesses
perrod.
on October
the indicated
5. 1992
using
the following
rclatron:
hy vuhlracling
the daily
returns
on an equal-wclghted
hotel
index
from
mtums
common
T is the number
on Marriott
model rcgrasion.
on the market.
the daily
return) ‘:n day r. Sl ts the variance
olthc
residuals from the market
*\f days used to ntim;ste
the market
model. and R, is the return
arc calculalcd
the duly return on
incorporate
potential
over the 200 trading
the MO trading days
prior to the sptnog
5ipnilicanl
at the 5%
Icvcl.
‘The I-statistics
for lhc industr:-adlustcd
rclurnr.
RIM *cl). ure calculamd
from CARq
with n, =I [?‘~rnr
t 2*(l - 1‘)*r*or]’
1, when CAR is the sum of
pnod.
r is the numkr
nfdays In lk cumulation
perrod. rar 1s the varianrr
of Ihe daily values of&,&&d)
over
dally values of A1.d 4d, ow the cumulation
the period begiunirg
60 days kfurc
the spinofl announcement
through
0 days following
the distrrbution
(376 trading days). and COI is the first-order
aumcovarirnti
of tk daily RI, *,, .scrics
returns
arc c.,mputcd
returns
‘Industry-adjusted
stock.
for the markct.adjcJicd
error (market-adjusted
period. N is the numkr
r-statistics
where PE, is tk prediction
of days in the cumuleuon
dThe
‘Market-adjusted
returns
arc computed
by subtracting
Ihe daily returns
prcdictcd
by H marker
model. R, - z + /R,, + d.,. from
Marnott’s
common
stock. Tbc !S&P 500 index is used as a proxy for the mAtkct
portfolio.
Two sets of caflicients
arc estimated
to
changes in the market model parameters.
Cocff&ents
klorc
the spinofTannounccmen~.
I, and /f,. arc estimated
using daily returns
days ending 61 trading days kbre
that announamm~.
Coefficients
aRcr tk spinofVannounamcnt.
I) and g,. arc cstimaicd
over
beginning
61 truding
days after the distribution
and ending 260 tradmg
days afler lhc distrihutton.
Markcl.iidjusted
Wums
announament
are estimated
using I, and 8,. whik all subrqucnc
returns arc cstimalcd
using x: and PI.
%larriott
‘All
2
2
y%
I”
2
**
p’
d.
;;
3
$
6’
w
4.
0
4
;
258
R. Pam’no!
Journal
o/Financial
Economics
43 (I 997)
241-274
The market- and industry-adjusted returns arc only significant around the
spinoff announcement and the Merrill Lynch resignation. The negative reaction
to the Merrill Lynch resignation indicates that the market interpreted this event
as a signal that shareholder gains from the distribution would be smaller than
previously expected and/or that the distribution was less likely to take place.
Merrill’s etTort to distance itself from the spinoff may have been interpreted as
a signal that bondholder opposition to the spinofT plan was stronger than
expected and/or that legal chalknges to the plan were likely to succeed.
While none of the adjusted returns around other events in Table 5 an
significant, the -4.24% industry-adjusted
return for the bondholder nego:iation annou ncement suggests that these negotiations were expezted to reduce
shareholder gains. In fact, the -4.24% value does not reflect the entire price
decline associated with this event. During the five trading days leading up to the
December 29. 1992 anaou ncement, the industry-adjusted return was -6.69%
(r-statistic of 1.80). suggesting thar information concerning the negotiations
began lo be reflected iv prices ar earl; as December 22.
Fig. 1 illustrates cumulative re: ms on Marriott’s cornwon stock for the
+iioU ctiver& AI, 1a1~ 3. ‘the industry-adjusted plot shows that the positive
return following the announcemen t was largely offset by the negative returns
around the Merrill Lynch resignation and the bondho&r
negotiations announcement. Marriott’s stock returns were similar to those of the industry from
January 1993 through the distribution
in October, except for one increase
around an eariy-January positive earnings announcement.
The stock returns during the period from announcement through distribution
provide little evidence that the spin& increased shareholder value. Whik the
unadjusted tetum on Marriott’s common stock during this period was 93.93%.
much of this return is explained by changes in the industry index. Tbe industryadjusted cumulative rptum is a statistically insignificant 4.84%.s Tbe industryadjusted change in the value of Marriott’s
common equity from ~be
announcement through the distribution was only 580.6 million. computed by
multiplying each daily return by the dividend-adjusted
dollar value of the
company’s equity at the end of the previous day and tben summing these daily
value changes.
iI is possible that the sharcholder gain cxcccded SO.6 million but rhat
poor performance relative to other industry firms offset much of the increase.
‘The period
hod industry
hod index
bchvccnthea
Motor Inns
Hospitality
inns L.P.
beman
the an nounammt
and distribution
coinckkd
with a strong raxwcry
in the
fdiowing
the 1990 -91 ramsionTlwraurastoshrrcholdmalaUOCthefinnsin~
cxacdcd
the 1114% mum
on I& S&P 500 index during &is period. Tbc total returns
~~wmccmc~t
and distribution
for the individual
hold firms are 38.39% br La Quinta
L.P.. 136.46% for La Quinta Motor
Inm Inc. 127.68% lor ShoLod~
Inc.. 143.33% for
Franchise
Systems.
Inc. 55.79% for Marcus
Corpomtion
and 36.76% for Red Lion
R. Pam’nolJoumal
of Financial
El wwntics
43 II V97) 241.-274
259
260
R. Pom’no/Jownal
of Financial
Economics
43 (1997)
241.-274
However. the evidence is not consistent with this explanation. Press reports
between the announcement and the distribution reveal no evidence of poor
relative performance at Marriott. Furthermore, the industry-adjusted plot in
Fig. 1 is inconsistent with poor relative petformance between January and
mid-October 1993. This curve would most likely have been downward-sloping
had the market received signals of poor petformance during that period.
Instead. it is flat.
4.3.2. F’mjid
stock
The unadjusted cumulative return for Marriott’s convertibte preferred stock
and its daily trading volume are illustrated in Fig. 2.a. The negative 3.59% return
following the spinoff announcement indicates that preierred shareholders initially expected the spinolf to reduce the value oi their claims However, this loss
was more than offset by gains during the following month as the unadjusted
value of Marriott’s co~mott eqr!ity increased beyond its post-announcement
level.
XL p.cterre;i sturare~,-me
couvertible only into shares of Host stock after
the distribution. Therefort, the change in the value of these securities between
the annou ntzment and distribution dates was agected by the adjustment of the
conversion ratio from shares of Marriott stock into shams d Host stock.
Apparently. most @erred shareholders believed that this adjustment would
not favor them because approximately 92% of prdemd
shares outstanding
were cortvcrtcd into Marriott common stock before the adjustment was announced. This was a costly error for those who converted because Marriott
overestimated the value dtbe distributed shares when it set the new conversion
ratio. The ratio was adjusted from 2874 shares of Marriott common to 19.160
shares 0; Host common based on the assumption that the distributed shares
represented 85% of the value of Marriott’s equity. The actual percentage, based
on the initial trading prices Ot the Host and International
shares, was 79%.
Consequently, p&&red shareholders who did not convert their hotdings prior
to the conversion ratio adjustment realized a pm-tax windfall gain of 40% on
the day that the new ratio was annotmced.6 This gain, which is a wealth tran&r
from the common sharchokkrs, is illustrated in Fig 2a by the sharp increase in
the cumulative return on October I, 1993.
Fig. 2b shows that the p&rred
share price premium over its conversion
value dropped sharply after the spinoff announcement from approximately 514
R. Pam’nolJoumaI
Fig 2b. Marriott
Jaonuuy 4. WM.
p&nuJ
rtoc&
price
of hanciat
Economics
io exas
d its amtwxion
43 (1997)
value
241
274
from
Julj
261
IO. 1992 rhr,.,gh
to $5, where it remained through the end of 1992 in 1993, the premium-toconversion value gradually declined to a level of approrimately $3 at the end of
June and then dropped to are during the T.ra week of July. The July drop
Mowed the denial by a Deiawar c court of a request from a p&&red shareholder group to postpone the meeting at which the common shareholders were
scheduled to vote on the spinoff.
4.3.3. L YONs
The Chkugo Trihw
reported on October 27.1992 that the language in the
LYON indenture was u&r
with respect to how those claims would be
a&ted by the spinoff and that the Marriott board had not yet decided how to
treat those obligations. Uncertainty concemmg how the LYON claims would be
R. Pom~no.lJoumal
262
Fig.
July
of financial
Economics
3a. Marriott
liquid yield option IWIC cumulatlvc
IO, 1992 through
January
4 1994.
b-~g. 3b.
through
Marriott
January
liquid yidd
4. I994
optLo
note
pncc
wadjustcd
In caocu;
ul~ts
43 11997)
returns
u~wsion
24/-
274
and trading
value
frum
volume
July
Iram
IO. I992
treated in the spinoff appears to have contributed to the 7.09% decline in the
aggregate market value of those securities during the three days following the
announcement (Fig. 3a). After the initial decline, however. the cumulative
LYON return exhibits a pattern similar to that of the preferred share price,
gradually increa&ng with the unadjusted common stock price. The LYON price
in excess of the conversion value also dropped sharp!y at the time of the
announcement and then gradually declined to zero (Fig. 3b).
Unlike the p&erred shares, the value dthe 1 YON claims was altered little by
the spinofi. Tbe LYONS became an obligation of both Host (IO%) and Intemational(90%) and remained convertible into an equal number of shares of each
company. Tbe lo/90 split is consistent with early estimates d the relative values
of the two post-spinoff companies. suggesting that an effort was made to
R. Pawiiwihmd
of Financial
h-momics
43 (1997)
241-274
structure the LYON claims so that they retained proportionate
cash flows after the distribution.
263
rights to the
4.3.4. Notes and dehentures
Fig. 4 illustrates the cumulative unadjusted and market-adjusted returns on
Marriotl’s senior notes and debentures. The cumulative market- and industryadjusted common stock returns are also presented for comparison. The initial
decline in the aggregate value of the notes and debentures was followed by
modest increases ir. mid-October 1992 and between mid-December and midJanuary. lhesc incteases correspond to events that ate likely to have been
interpre:ed as r~&cing the expected bondholder loss from the spinoff. Tbe
October increase coincided with the filing of the class-action suits and the
formation of the bondholder committee directed at Mocking the initial spinoff
plan. The increase at the end of 1992 occurred around the initiation of the
negotiations between Marriott and the bondholders
lhe wealth loss ultrrllately incurred by holders of the senior notes and
debentures was less than the 5333 t million decline that followed the spinoff
announcement. By the end of January. the market-adjusted value of the notes
and detzntures was only SI 51.0 million below their value on tbe day hefore the
spinoH annou ncement. The aggregate senior bondholder loss remained at
roughly this level through A.*gust and then increased gradually to 5194.6
million (9.98%) on the distribution date.
The dif5zretu.z between the 5194.6 mGon market-adjusted bondholder loss
and the 580.6 million industry-adjustea
shareholder gain suggests that the
spinogcaused a $I 14.0 million decline in the total value of these securities The
wealth transfer to preferred shanholders that resulted from the error in the
conversion ratio adjustment accounts for approximately $12 5 million of this
decline.’ If the LYON claims were unatTected by the spinotT. the di&rence
between the S114.0 million and S12.5 million figctres indicates that tbecost ofthe
spinofi was expected to exceed the value it created by S1’31.5 million. This
section considers why the value or Marriott’s securities declined.
‘Tbm
were 326..366 prckmzd
shares outstanding
when the con-on
ratio was adjusted.
If
Marriott
had cortrctly
cstimakd
the value of the disttihution.
the convcvion
ratio would have been
13.666n1hcrthan
19.160. ThcSI2.5milkn
Egurris
theproducl
ufthcdilicrenabctw&n
these two
ratios the 57.000 price at which the Host shares bepn trading and the number of pcrcmed
shares
outstanding.
R. PawinoiJoumd
I
I
/
if
Y :
i
of Finmcial
Economics
43 i!H7)
241
274
R. Pom’nofJoumal
5. I. Sources
oJ Financial
Economics
43 (1997)
241-
274
265
of t;alue
Comments by Marriott officials as well as arguments in the literature suggest
several ways in which the spinoff could have been expected to increase firm
value. As .I. W. Marriott, Jr., suggested, the spinoff might enable tbe company to
more fully exploit value-creating growth opportunities
in tbe management
businesses by reducing capital constraints. However, it is not clear how large
this benefit would be. The capital constraints were largely &f-imposed since
Marriott could bcve financed attractive investments through equity s&s when
ite %tancial position deteriorated It is also worth noting tbat Marriott was able
to s:ll $400 million in lO- and 20-year debentures at 9.50% and lO.OO%,
respectively, during April 1992. Tbe magnitude of tbe value reabxed from
improved access to debt capital depends on the extent to which tbe Marriott
family was willing :o turn down valuable investments in order to avoid equity
Saks.
As Marriott of?iciais also suggested. tbe spinoff might enable the capital
markets to more accurately assess the true value of tbe firm by improving tbe
quality of financial infombation available to investors. However, a spinofi is not
necessarily tbe least costly way to provide the markets witb such infotmrtion.
nor will tbe benefits from the availability of better information -rily
outweigh tbe costs of pro&ii 9 it. The incremen talcostofmaintainingasecond
setoffinancia I records and maiaging a separate stock is5ue can be substantial.
In addition, tbe diiure
of more detailed information concerning Marriott’s
businesses might beip its competrtors.
Fig
4. Cumulatiw
returns
on Marriott
senior
ocbt
and qutty
bewun
July
10.1992
and Januaty
4.
WM.
Tbcunadj~sfflior~rcturosarr~~drom~priotriortbci3prMidycrd+dpawsd
notes and ckbcnlurtx
0uIstandiq
on hc dale dthc
spinolfanncunm.mt
~llnrs~Qctobcr8,1993rrtlcdchm~inthr\~ucoTquityrmivcd~ancrcslng
c!k
The nurkc:-adjusted
senior tkbl tclwm
am ahhal
from dunp
IO-)ru8B83bondindicesnporttdbyBbom~wairrcuNrrrSmiEccmrtLcwnplt~
(oT,cbtr
m rhc ydds
5. I992l.
Bad
04 2-. 5-. ad
TbevIh*oCadraocc~~urrIcriaLiadividur~vldjugodunn8lht~~isdcxthc
mm4 dmdy
rnatdwx
its matunty.
The market-adjustfd
coamwn
stcdimumsquallbccomprmdal
daily p~~Ji&on
erron from a market model The&y
prcdikm
erron fmm July IO. I992
throu#h
the tradh
day paccd&
the spina(l lnnounaCmen
t @rmbcr
Z 1992) arc obtained
uxing
tk pramctcrs
from a market
&
estimated
over the 200 tr,.hng
days ending 61 trading days
bdorcthcan
llouncXmcnt
Daily prsdiclioa
cmns
hm
the Jllmnmccma
1 day foctobcr
J. 1992)
hnnamixrkctmoddttuci5cstianatiovcr
through
January 4.1994 YE obtained
ting
pammetax
tb 200 trading days bCgiIlllifl~6i ~twlhg
days d&r the distribution
on Cktobcr
8 1993. The sdr P
500 index is used to estimate
the market
models
The indwtry-a&ted
rrturnx
CqupI tbc cornpcmdd
dilfcmna
bctwcm
the daily mum
00 Marriott’s
common
stoc+ and the daily return on an
quai-weighted
index amstructsd
usi08 ruumx
kw six hotel lirw.
The timlx used to amstmct
the
hctd index include Hospitality
Franchise
Systems (aticr &amber
IO. l99Zk Ins.. La Quinta
Motor
Inns Inc., La Quinta
Motor Inns L.P.. Marcux Corporation.
Ral Lion inns 1 P., and Sholodgc
Inc.
266
R. Pam~no/Joumal
of Financial
Economics
43 (1997)
241-
274
The Marriott argument that the spinoff would benefit shareholders by
providing them with improved investment opportunities
is consistent with
Hakansson’s (1982) conclusion that a spinoff can increase the set of investments
available to investors in an incomplete market. However, this benefit is unlikely
to be large, as a wide variety of real estate investment trusts and hotel firms were
already publicly traded in 1992.
To the extent that accounting and market performance measures would
better ref¶ect managerial performance in the post-spinoff companies+ as suggested by Aron (1991), the spinoff might also enabk Marriott to write more efbcknt
contracts with managers owning modest equity stakes. However, the potential
gain from improved contracts with managers is likely to be limited by the active
participation of the Marriott family in the management of the company. The
family has strong incentives to closely monitor senior managers and access to
proprietary information that would be useful in evaluating their performance
The spinotT is alio uuhkely (0 substantially increase tbe value of tk firm
:hr oug!, .4xr m&s Ii<TS lh?! Za\c .xen examined in the literature. A review
of the spinoff pian indicates that there are no meaningful tax or regulatory
benefits of the sort identified by Schipper and Smith (1983). Furthermore, since
separation of the ownership of the hotel and senior living properties from the
management of those facilities is largely a financial transaction, it is unlikely that
the spinoff would improve operating e&ienc&
by streamlining Marriott’s
organizational structure (Glassnuq 1988) or better position the firm for tnerm
or takeover activity (Hite and Owers, 1983; Cttsatis, Miks and Woolridge,
1993). In fact, Marriott executives conceded that the major reason the Host/
Travel Plazas business was separated from the management busincsscs was to
ensure that Host’s cash flow would be sutlicient to meet its debt service
obligations.
5.2. S@inofl carts
Whik the potential for the spinoff to create value is unclear, the direct costs
and ine&kncies
appear relatively large. Table 6 lists some costs associated
with the spinotT. International
and Host recognized spinoff-related pre-tax
charges of $39 million in 1992 and 1993. These charges, which are for expenditures on items such as legal, accounting, and investment banking activities,
cost securityholders approximately 523.4 million on an after-tax basis, based on
a tax rate of 40% (similar to the marginal rate at International in 1992 and
1993).
The spinotfako reduced the after-tax cash flows to securityholders by accderating some tax payments. After the spinoff, the firm was no longer able to
immediately use tax shields generated by Host’s businesses The magnitude of
this cost can be estimated by considering that Host reported $12 million in loss
carryforwards at the end of 1993 (after th,ee months of independent operation)
R. Porrim/JowaaI
Tabk
Cat8
!soora
-.
6
dtk
Marriott
ofhancia~
Economics
4J (1997)
241-274
267
spittoP
----
______
---_.-_---.
.---.-.-----..--^_
COSt
cOustharMbequulbtkd
Dimctdm~taqnizdiafttuthJstatcttunts’
LooO((brability(oodidHo4bPawilbMlrrio(tlntanrtioarlpoh~
Akr-t8xlo88fraoboad~
V8htcdw8tTaot8i88dulMkl-~t’
Total
otkrco8ts
.
.
Dt+amod8aYoootiog8od~8y8tao8
Higkrsawity
inamaacortr
S23.4
S3.1
S5.0
s29.3
Giiii
IN’
Id
and a S19 million pretax Ios in 1994. If the spinoff had not been compktai,
these cartyfotwards and losses could have o&et profits
from tbc vt
busincosff Assuming that Host is unabk to use tbe associated tax shields for
~)~aadusinsamarsi~tarratcof40%andadisoouotratcdl~~,
thepnscatvalutoftbecostoldeCerriogthtuscdthcsetaxshiddsisS3.1
million. Additional losses at Host ord&rraJ
of the use of the tax shidds for
more than three yeas will add to this cost.
268
R. PawinnlJoumal
of Financial
Economics
43 lIW7)
241.
?i4
Marriott’s tax payments could also be accelerated for another reason. By
isolating the hotel properties from most of the firm’s cash flows, Marriott is no
longer able to immediately use tax shields arising from the sale of hotel
properties for less than their book values. With many hotel property values still
below their 1989 kvels, there was a real possibility of such sales at the time dtbe
distribution.
The March 1993 bondholder agreement also proved very costly. In addition
to the $1 million cash settkment with the class-action plaintiffs (&kc&d in the
spinoff-related charges discussed above), Host recognized a $5 million after-tax
loss on the exchange of the notes and debentures. Furthermore, the 7.7 million
warrants that Marriott agreed to distribute to former bondholders were already
in the money when they were distributed. The value of these warrants, estimated
using a binomial option pricing model. was $29.3 million on the day that the
o&ring prospectus was filed.
The spinoff could ako result in o?erating i&ii&&s
and incmased costs
tF: I ala: zn1 tail,
AUdf.
I!% ujmg guMic info,mation. For instance, the duplication dadministrative
f&as
at Hart and International could increase total
operating costs. Each firm maintains separate accounting and finance stafis. as
well as systems ror lmnqing
&uebokkr
rdations and tracking share ownership. Fur&rmom,
as rudegted by Hite and Owers (1983), the spinofl could
limit ecoom&s d sak in future eii0rt.s to raise capital.
Finally. the rpinoIT is likely to mise the cost d future debt issues and/or force
Marriott to accept more restrictive covenants. The etkct of the spinotTon the
cost d future debt issues was mentioned frequently in press reports following tbe
announameot.
Comments attributed to financial profeAo!rak
indicated that
the spinog would make it more difbcult for Marriott to raise capital because it
would cause investors to revise their estimates of the likelihuod that Marriott
would behave opportunistically
in the future.
ICmarkacstimatcsdtbecosts
associated with the spin& were similar to
those reported in Tabk 6, the diRerena between the 360.8 million in quantifil bk costs and the $101.5 net securityholder loss suggests a lower bound ofS40.7
million for the expected cost of ir&cien&
and higher debt issuance costs
~tingfromtbtspinoll:Thir~.fmilliondiRrrtaocw~equabI.l%o(tbe
market vahre dtbe Marriott-s public securities on the distribution date, is a lower
bound because it is net of any value that was created by the restructuring.
If the shareholder gain following the announcement was largely o&t by price
declines in November and December 1992, and the stock price performance in
1993 was no different than it would have been haJ the spin& not been
proposed, the question arises as to why Marriott completed the distribution.
R. Pam’no/Jownal
of Financial
Economics
43 (1997)
241-274
269
One explanation is that the Marriott family feared that backing down in tbe face
of strong bondholder opposition might harm its reputation and the reputations
of other senior managers. As long as the public shareholders were not harmed,
the family may have seen no reason to alter its plans. While this explanation is
plausible, the Marriott family could have expected to beadit from the spinotT in
other ways
First, the spinoff reduced the likelihood that the family would lose control of
tbe entire firm. The deterioration of Marriott’s financial condition had left it in
a precarious position and prospects for improved performance were uncertain.
Continned poor performance might have pushed the firm into financial distress
and caused the lamily to lose control. By legally -rating
the profitable
management businesses from the real estate and much of the pubhc debt, the
family was able to redtnx the likelihood of losing control.
ThespiaoAalso~tedthcpotca~losscstothcMarriottlPmilyinthetvent
of a default With Marriott stock comp&ngahighproportiooofitstotalnet
worth, the Marriott tily
is likely to have been more conarnod than other
rvdldiversified investors &out the unsystematic risk ofits po&lio.
To theextent
tbPttbcCamilyval~thend~dthioristt&lamifyhadaninocntiveto
compkrcthcspiooacreailitJidwta&aaIbemuirctpriadlhtfim?‘ssbans.
Finally, the family benefited from the spiaotT because it improvod the maaagemat businesses* access to A-51 capital By using the spinoff to separate tbe
maoagcmcnt businesses from he asociata4 teal estate, tbe family was once
again in a position to aggressively pursue growth opportunities without risking
dilution of its ownership position.
7. cMarriott spun off its management businesses in reaction to changes in
economic conditions that made its operating strategy meft&tive. The spinoff
accomplished what the practice of selling hotel properties had done for the 6rm
ia the l9tlOs. It enabled Marriott to separate its management businesses from
mucbofthe associated real estate. However. tbc e&t of the spiooff on tbe firm’s
securityholders was quite difTercnt from that of hotel sales 1 Mike hotd sales,
the spinoff reduced the value of the assets underlying bondholder claims. The
dedine in interest coverage at Host was not accompanied by a commensurate
increase in bondholder returns.
Nonetheless, this case illustrates how bondholders can inguenaz corporate
policy even in the absence of explicit covenant protection. The bondholders
were able to force the company to modify the spinotT plan in ways that
eliminated most of the initial shareholder gain. The value created by the spinoff
was more than offset by its cost and the remaining bondholder loss was largely
consumed by transaction costs and inefficiencies
Chronology
oJer!ents
in the Marriott
spinofl
Ocroher 5. 1992
Marriott announces the spinoff plan. Shares in the company’s management businesses are to be distributed, on a pro rata basis, to the shareholders. The new firm
will becalled Marriott International(Inrernurionul)
and the parent will be renamed
Host Marriott (Host).
Moody’s lowers its rating of the Marriott
senior debt from Baa3 to Ba2 and
subordinated
debt from Bal to BI. Standard and Poor’s places Marriott on its
CreditWatch
list for possible downgrade.
oclokr
9.1992
Two class-action suits arc filed on behalf of Marriott bondholders
oclokr
15.1992
News reports indicate that a bondholder steering committee. consisting of representatives frcjrn 1 I !d~gc institut8onal investors. has been formed to explore alterna:iq rnurSer of Rr*ion aimed 11 bls, cmg the proposed transac :ion.
Ub.dw
~9.
iW,’
A third lawsuit is filed by a group of investon coikctively
hording approximately
SIZO million of senior Marriott debt. The suit alleges that Marriott improperly
failed to disclost the restructuring
plan wben it issued S400 million worth of Series
Land!kriesMSeniorNotesinAprili!?Q.
The bondholder
steering committee is reduced IO seven members with the defection of three members to the group filing the suit and tbe departure danother
for
otber feasons
Norm&r
9.1992
First Na*ional Bank d Chicago resigns as trusta for the 13 note and debenture
issues that Marriott has outstanding.
Normher
II. 1992
Bane One af6liate First Chicago Corporation
is named as the new trustee for the
Marriott debt.
Duff and Phe!ps downgrades
Marriott
nom and debcnturrs from BBB to B.
Liquid Yield Option Notes (LYONS) from BBB- to B-. and convertibk
prefer&
stock from BE LO CCC.
Norember It. 1992
%andard and Poor’s announces tbat it will downgrade
Marriott’s
senior unsecured &%t from BBB to B. its LYONS from BBB- IO B. and its convertible
pderred
stock from BBB to CCC when it becomes clear that the spinoff will
occur as currently planned.
Normber
17. 1992
Merrill Lynch & Co. w&draws
as an advisor to Marriott on the spir&
plan.
Merrill. an underwriter
d several Marriott debt issws. has been criticized for its
association with tbe restructuring
plan.
Nowder
20.1992
A Federal judtqz combines the bondholder
suits against Marriott
and delays
interviews with potential witnesses until January 8 1993 so that Fe-trial paper
work can be annpkted.
R. Pam’no.
December
Journal
of
Financial
Economics
43 (I 997) 241-2
29. I992
Marriott
announces
that it has begun discussions
with
address
their concerns
with the spinoffTen class-action
suits have been tiled against
Marriott
74
271
bondholders
by this
in an sfiort
to
date.
Janwwy 8, 1993
Marriott
and
agree to postpone
Jammy
the
bondholder
next court
groups
hearing,
suing
to
block
the
reorganization
scheduled
for January
8. until January
28.
If, 1993
J. W. Marrioa.
1992 Operatintoperating
profits
Jammy
the
Jr.. announus
that
profits
are expefzted
were S478.
Marriott
had
to be between
strong
1490
pro
and
forma
eamiog
SSOO million.
in
1991
IL 1993
Marriott provides
details
of its bond exchange
proposal
to the bondholder
groups
with which
it is negotiating.
The proposal
inch&s
lcq+cniog
the matunty
of the
bonds
by four years and a sweetener
consisting
off50
million
of Marriott
common
stock.
Janwl~
25.lW3
Each of the three bo:tiho&r
groups
countcr~
the Marriott
proposzt
The rernarning members
d the bondholder
staring
committee
propose
keeping
tbe company
as a singk
entity
while distributing
separate
shares Tar each of the two segments.
The group
that filed suit on October
29.1992
(the suing boodbolder
group)
agrus
with the steering
commitproposal
but adds that if Marriott
insixts
on spinning
oIV Inrrrmariad
that tk latter
should
cross-guaraalcr
the Host &bt.
ReprruntaIives of the class-action
plair.tilts
propose
an initial
public
of&q
of Irrtminnal
stoctwithtk~uscdtopay&wasomedHozt’sdebc
Marriott
rejects
these propos&
but o&s
to change
the s~ucturr
d the transaction so that fnrrrnarionol
will take land valued
at 5265 rnillioo
and asxume
the
associated
debt.
Febnwy
2. 1993
The suing
bondholder
group
annd>unces
that
broken
down’.
A Marriott
spokesman
says that
‘major
bond-.
h4aJz-h 8. toy3
Thr Wall Strref Journal
Marc-h
Mach
Man-h
reports that Marriott
ing proposal.
Marriott
says that
it expects
bondholders
within
the next few days.
9, lW3
t in principle
Marriott
reaches
an apreemen
discussions
disunions
is o&ring
to rCMh
‘have
substantiallyare continuing
with
to almond
tk
an agreement
with the c&s-action
restructurwith
the
plaintiffs.
IO. 1993
Marriott
mittee.
II. I993
Marriott
agreement
reaches
an
announces
between
agrecmcnt
that the
Marriott.
in
primzip&
spinoff
is b&g
the class-action
with
the
moo&A
pIaim%
bondholder
steering
in accordance
with
an
and the steering
corn-
mittee.
March
2.5. iW3
florida’s
state pension
The suing
bondholder
fund
group
files suit to block
sa)b that it may
mm-
the revised
spinoff
plan.
expand
its sllit against
Marriott.
272
R. Pom’nolJournal
of Financial
Economrcs
43 (1997)
241.-274
April I. I993
Tke Wall Street Journal reports that holders of Marriott’s
convertibk
preferred
stock have formed a group to oppose the spinoff. Thos shares, which are currently
convertible into 2.874 shams of Marriott common, will be convertibk
into only
Host shares after the spinotT. The conversion price will be based on the relative
values of Host and /n~mtati~~nal at the time that the latter is spun off.
April 2. lW3
The prckrrcd shareholder group files suit to block the spinoff. The suit claims that
the reorganiwtion
will result in common stockholders recetving dividends before
preferred shanbolders.
Under the spinog plan holders of lntemurioaol
common
shares are likely to receive dividends while holders of Host prhmd
sham are
unlikely to rtive
any.
April. 4. 1993
Tk Wail Sweer Journal reports that Marriott
has rejected demands by the
preferred shareholder group that the spinoff plan be modified.
April II. 1993
Marriott announces that. adjusting for an accounting change. firstquarter
net
income is 513 r;iilliou. Ihis compares with net income of Sl 1 million in the first
qu: ierof
1992
M&I.,, ., IYY.,
Marriott Bks a SICK3 million countersuit against the suing bondholder group. On
May 21. I993 Tk fhd Eqrr reports that a Marriott spokesman described tbe
suit as alkging lhat [the suing bondhddtf
group] sought to intcrfem both in our
deals with our fina&al
advisors. . . and also that it conspi~~I to organize a group
boycott Ot Marriott hotels and other serv&s’.
hi* 9.1993
The Marriott !kries H notes mature. The local fact value of Marriott’s pubhc notes
and debentures is nxluccd from 51.87 to Sl.77 billion.
May IO. 1093
Marriott fiks its bond exchange ollix with the SEC.
May 25. 1993
Marriott ammmwxa that the June 22 sha~cholder meeting will be res&dukd
for
July. Tbe SEC has not completed its mvkw of the prosy mate&Is.
May 26. 1993
Standard & Poor’s announces that it plans to assign an A- debt fatirg
to Interrsariotsat and that it has lowered its rating on Marriott’s senior notes from BBB to B.
Jwte 9. 1993
A Delaware wurt dismisses the claim by the p&erred sharrhoider group that rbe
spitmU constitutes a breach of fiduciary duty. Other claims remain unresolved in
this
suit.
Jk+ I. loo3
The Ddaware court denies a request by the prekrred shareholder group to delay
the July 23 shareholder meeting.
July 19. 1993
Marriott begins the debt exchange o&u.
J& 23. I993
The spinoff plan is approved by 85% of the votes cast at the annual shamholder
dng
Marriott announces that it has reached an agreement with the prdemd
&archolder soup
that had sued to Mock the reorganization.
The agreement calls for
the preferred shareholders
to dismiss the litigation,
retease Marriott
from all
R. Pam~nolJawd
August
August
o/Financial
Ecnnomics
43 (1997)
24/-
274
213
claims, and convert their shares into Marriott common stock before the distribution date. In exchange. Maniott agrees to pay the plaintiffs SXtO.000.
18, I993
Marriott extends the expiration dale for the bond exchange ofkf to August 20 due
to a lower than expected response as of the previous August 17 deadline.
24.1993
7% Wd/ Street lovnal reports that MatliOlt has luuilalcraJly dtangai tk swap
ruks’, by announcing that it MI Jongcr nucds 51% of each of two bond issuu. for
which it has faikd to ICC&C that amount in order to proceed with tk exchange
Ok.
31.1993
Marxiotl sets a new faord date of September 30 and distribution date of
October 8.
ssTptcnltxe1.1993
The Mamiolt &rim J noles mature. lk tocz’ face value of Marriott’s public notes
and dekntures IS reduced from Sl.77 to Sl.62 billion.
sepmrbrr 28. 1993
Tk IRS informs Marriott that tk spinotT will be tax-free.
septtuher.‘9.1993
Mamoll annouuccs lhat ah cond~knts necessaryto proceed wxtJitk spnoft have
bcm met Tk annpanv abo seports thal. adjusting For uoncash income tax
changes and tk e!Tects&lodging dispositiom operating pro& net income. and
earnings per share am up 7%. 20%. rad 15%. mspaztivdy. over lk third quarter
in 1992.
cklok 1.1993
Marsiott anuounm that 92% 4 tk fimr adlioo convertible preened shares have
been amvested into 10.6 million sham of Marriott common stock. Tk nmainiug
326.366 shams d prefemd stock will beoa&mb each k coovertibk into 19.16
shares d Host stock.
htemationrrl begins trading on lk Yew Yorh Stmk Exckngc ‘wi’ (whm issuait
and Host begins trading both with &idend and ‘ui’ (wbm issued witbout tbe
divideod rights). Qandard & Po.A aunoukas lhat Intenuujollol will replaa
Marriott in tk SBtP MO imkx aftex the dose d lrading on Octoher 8.
alober8.1993
Marriott issueslk special divida~J. dWiveJy compiling tk spim5.
fntematiold amounces au inilial quarteriy cash dividcad d SO.07per share. This
dividend equals the quarterly dividend previously paid by Marriott.
TbeSericsGnotathatmatureonFebnrar)
1,1994arcd&ascdandmnovbd
from tk Hmr baJame sheet. Tk total hsce value d Hmr’s public uotes and
debmlures is fuduczd lo SI.35 Wioa. The fl.ol billion on Szplmber 1 hat he-u
reducaJbySO.1 biJlionasarcsuJtdtkdelksmm
and SO.Ii hibiom through stock
and cash payments ma& as part of tk exchange o&r.
ocrober 12.1993
The Host shares trade exdividend.
April 28. I994
Thch~tfiledbytkFkwidasca(epcnsionfundisstrled.HosragmtonPudYgc
approximately 57.6 million of oki notes held by Rorida fund at tkir par value.
octo&r I,: 1994
Host fiks a Prospectus for tk issu.mce of 7.7 million wan-acts lo acquire shares of
common stock at a price of Sg per share for three years and SIO per share during
the following two years. Host shares close at SlO.750.
August
214
October
R. Parrho/Joumol
ojFinmcial
Economics
43 (1997)
241-274
19. I994
The trial involving the suing bondholder group ends with the jury hop&sly
deadlocked. The judge declares a rcistrial. The plaintifT is seeking damages of
approximately S18 million.
Jamuty
25. I995
A U.S. District Court juds dismissesthe suit filed by the suing bondholder group.
The jw
ruks that Marriott did not violate federal security laws in failing to
~theporriMspiaoRwhrnitsoldtheScriesLandMSclliorNotuiaApri1
Aron, Ikbra
J, 1991. Using I& apiur
nmkd
as a monitor:
Corporate
spind%
in an agncy
framework.
Rand Journal
of Eamoak
2f 505-518.
Cuutis,
Pat&k
J, Jama A. Mila. ami J. Randall Woolride.
1993. ltcstneuring
tbrougb
spkdk
Thesto&multctevideaat.JomulofFimncialE.umcmb33.293-311.
citamu&
David M, 1988 spin4s
and spir+Juts
using ‘suutitizatioa’
to beat the bu~uaacy.
kxund
of Applial
Cotpomte
Finance
I. 82 (19.
Hvh~-vn.
:.:Ts j4, ;Yb, ;‘ha,,-;
JllklitWLd~rtCl:\i’&Rmdpicrcllatr~thCbuic
cbsacaadvaluc
eoammh,
Jamal
d Fi37.977-ltXJ4.
H&e, G&n
L and Jama E <)*cn, 1983.sbauity prioc rewdons aluuncl awpolelc spin-d
anaoua~csc~ts,Jound dFI2 09-436.
Mikkdrs
Waynt H. and Ridud
S Rubck,
1991. Tupred
rqmhses
md mman.m
stock
mums,&mdJtidEummah22,544-561.
RI%
James A. mad Jamr
n RmmkM,
1983. Ibe dkct d \duntary
s@o-otTannoummam
oo
shchd&rraW.JomrmaldFinamx38.1%7-1606
Riner. Jay R.. 1991. lk
bq-rpa
fbchBuwdiniti8lpuMicolferingJounulorF-46,
3-27.