Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Oct 21 1992 Date: Wed, 21 Oct 92 04:30:09 EDT Message-ID: 10-21 0000 BONUS: Marriott irks bondholders USA TODAY Update Oct. 21, 1992 Source: USA TODAY:Gannett National Information Network Chairman J.W. "Bill" Marriott Jr. once had a heart attack. Now he's giving them. Bondholders and bond traders are the main people in need of CPR. Two weeks ago, Marriott announced it will become two companies this summer instead of one. WHAT ABOUT THE $2 BILLION THE COMPANY OWES ITS BONDHOLDERS? Well, it will be repaid, Marriott promises. But only from the cash flow of the smaller, more risky of the two companies. Marriott bonds fell 27% in value; bondholders are suing and plotting to stop the deal. And they're hopping mad. "I think it's amoral," says Barbara Kenworthy, a money manager for Dreyfus, owner of $8 million in Marriott bonds. "What they did is the scuz of the earth." WHAT DO THE STOCKHOLDERS THINK? They are mostly happy about the maneuver. If you own a share of Marriott stock, you will get a share of each company this summer. Analysts say the combined value may soon make you 25% to 50% richer. That's especially good news for the Marriott family, which owns 25% of the company. WILL BUSINESS TRAVELERS BE PLEASED? They will be pleased to see the number of Marriott-managed hotels start growing after a three-year freeze. The company, by the magic of reshuffling, has gone from being dead in the water to one that will grow by one hotel every three days. COULD THE EFFECT BE FAR-REACHING? But Kenworthy says everyone should care, because we're already paying for Marriott's selfish move in higher corporate interest rates. She says if Marriott is not stopped, other companies will follow suit and bondholders everywhere will have to demand higher rates because of increased risk. That will create a drag on the economy, and Kenworthy says she's surprised at the lack of response from Washington. Marriott showed "street smarts" by timing its move seemingly between administrations, she says. WHY DID MARRIOTT MAKE THE MANEUVER? Marriott got into this flap by uncovering a clever, never-tried way to free itself of suffocating debt. That debt started in the booming 1980s, when Marriott pioneered a technique of building hotels and quickly selling them to investors, who paid for the Marriott name and to have Marriott employees operate the hotels. Marriott grew from 38 hotels in 1978 to 737 today. It is the 10th-largest employer in the USA. WHAT HAPPENED WHEN THE RECESSION HIT? Fewer people traveled and there was a nationwide glut of hotel rooms, but Marriott kept building. About the time Marriott discovered it could no longer sell its new new hotels, the bottom fell out of the real-estate market. The company has continued to languish since 1989, too busy passing out IOUs to grow. There's been no end in sight. "We had a bunker mentality," says Bill Marriott, who recovered from a mild heart attack in 1989 just in time to begin CPR on the corporation that was started by his father. HOW DID THE SCHEME WORK? On Oct. 5, the company started sounding like Ross Perot. It had found a simple way to "fix it" by splitting into two companies. Company No. 1, Marriott International, will be cut loose of its debt to go on growing. It won't build and it won't buy. It will franchise the Marriott name and manage hotels for profit. Had it been a separate company in 1991, it would have earned $1.42 per share, and analysts predict its stock will trade at about $25 per share this summer. Marriott stock closed Tuesday at $19 3:4, up 15% since the announcement. WHAT ABOUT THE SECOND COMPANY? Host Marriott is the one stuck paying off bondholders. It will pay the interest from food and beverage concessions in 68 airports and along 14 toll roads. If Host Marriott were a separate company in 1991, it would have lost 71 cents per share, and analysts don't expect its stock to trade initially at more than $2 per share. DOES MARRIOTT HAVE ANY REGRETS? Bill Marriott expresses reserved regret for the bondholders, but says all the noise and plotting will do them no good. The company pored over bond contracts to be sure agreements weren't violated, and the company's split will be completed on schedule next summer. "It's absolutely legal and we tried to make it fair," Marriott says. "There are opportunities around the world and we wouldn't be able to do anything if we didn't divide. You can't stand still. You have to gain market share or you're going to go back down the hill." HOW ARE BONDHOLDERS REACTING? Marriott bondholders don't want to lose ground, either. Two small ones have already filed suit. Large bondholders have been plotting a strategy for two weeks, but nothing concrete has surfaced. Bloomberg Business News reports that some institutional bondholders, led by IDS Financial Services and Fidelity Management Research, plan to boycott Merrill Lynch because the firm's investment bankers authored the split. IDS and Fidelity both deny any such plot. WHAT DID MARRIOTT GET INTO TROUBLE? Some big bond traders feel they are now paying for the exodus of bright Marriott executives who left in the mid- to late 1980s, just before Marriott ran into trouble. They had the Marriott train chugging toward growth. Once they left, the train kept going under its own momentum and hotel construction continued for months after the first signs of recession. WHY DID EXECUTIVES LEAVE? It's no secret that Bill Marriott, 60, wants to eventually hand over the reins to another Marriott. He has two sons and a son-in-law working in the company, but none has risen to executive level. Someone else could be in charge, but that would create another "faceless corporation," he says. Bill Marriott's plans to groom an heir for the top seat may have caused the bright executives to see a glass ceiling and leave. They all say they left for new opportunity. DID THEY SEE THE SLUMP COMING? "Some of the most brilliant, brightest people in the United States didn't see (the real-estate slump) coming," says Stephen Bollenbach, who was treasurer for Marriott until 1986, made a name for himself with Holiday Inns and Donald Trump, and returned to Marriott as chief financial officer in February. Within five months he had masterminded the plan that has bondholders up in arms. WHERE DID THE IDEA COME FROM? He says the idea came largely from a variety of finance literature. But when pressed for a prototype, neither Bollenbach nor analysts can think of one. Most are calling it unique. Neither Bollenbach nor Bill Marriott believe they are starting a trend by splitting a company in two in order to free one to grow. But analysts aren't so sure and are wondering who might be next, and which bondholders will be left holding junk. Bonus Editor: Ed Kelleher. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM