In 2015, mergers and acquisitions (M&A) amounted to a total value of US$4.6 trillion, the highest since the 2007 peak (Source: The Economist, 2014a. and 2015). The pharma industry marked a record-breaking amount of M&A deals with Pfizer’s purchase of Allergan for US$183.7 billion. In the hotel industry, Marriott’s acquisition of Starwood for US$12.2 billion established a new high, and Accor’s US$2.9 billion purchase of Fairmont & Raffles, as well as Expedia’s US$3.9 billion acquisition of Homeaway, followed. Finally, HNA’s purchase of Carlson Rezidor, in April this year, confirms that more transactions are to come as this global economic trend unfolds.
The Marriott-Starwood merger has triggered several comments and reactions. As these two international chains join forces, they form the largest hotel operators in number of properties and brands. This news, obviously, generated a discussion about the size of this newly formed company and the economies of scale that they could enjoy. The effect of size on the bargaining power of OTAs, the implications on the loyalty programs and their members have dominated the discussion.
Yet, the impact on the key stakeholder in the business, the property owners, has been overlooked in this post-signature discussion. What are the possible business implications of these consolidations for hotel owners and how can they best prepare for them? Now that the positive implications of these mergers have been discussed, we want to articulate the possible challenges that these mergers might raise for property owners in business with hotel operators.
Research in strategic management on M&A is abundant and has reported consistent findings on the implications and challenges of this strategic move. A common conclusion amongst research on M&A is that, in most cases, the acquiring firm reports a neutral or negative return from the M&A acquisitions. However, a McKinsey paper reports that since 2012, acquirers’ stock prices have been stable or have risen. While this matter is still debated, the firm’s finding converge with academics’ report in concluding that the value of the target company increases boosted by the premium paid at the acquisition (The Economist, 2014). Empirical investigations on the phenomenon, report that when successful (i.e. when the M&A generated positive combined return), the target company accounted for most of this increase in return.
In practice, this means that the value of the target and the acquirer presents opposite prospects. Therefore, one of the key success factors for M&A is the acquirer’s capacity to efficiently integrate the target company. It is a long and complicated process which often the reason for M&A’s failure. In other words, the M&A post-signature phase is a massive move which mobilizes key resources and which defines future value creation.
M&A implications: An owner perspective
In the hotel business, the post-signature phase of operators’ M&A implies integrating existing operating systems such as the reservations, revenue management or PMS to mention a few. It also requires the assimilation of a different culture, processes, procedures, brand, and in the hotel business, loyalty programs.
As a result, the M&A can affect an owner doing business with an operator. Here is a list of the possible issues that are most likely to emerge as a result of the M&A. Next to each issue we suggest actions and steps that owners can take to best manage this M&A trend amongst operators.
Divert the attention of the operator toward internal restructuring
As the M&A unfolds and the implementation plan is executed, the focus of both companies is likely to shift into managing these major internal changes. These adjustments affect people and their roles.
As the operator’s attention is on its internal process, we recommend actions that would maintain the focus on the property, for instance:
- Meeting regularly with the regional VP
- Sending formal letters asking for regular updates on sales and marketing and operation oversight
- Take control of revenue management and request accountability
New investments that could be passed on to the property owners
Since the integration phase of the M&A is critical to its success, the choice of investing in a new system or integrating the existing two is likely to be key. Often, investing in a new system presents more advantages than integrating two existing ones. We, therefore, envision that such investments could be passed on to the property level.
To prevent unnecessary allocation of investments at the property level, we suggest to:
- Request to approve CapEx projects during the year, one-by-one and not at budget review
- Inform in writing GM & FC of the owner’s requirement to have the full break down of spending directly related to the merger
- Propose a delay in any upgrade
- After investing in a new software system, ensure that there is proper training afterwards and that the tools are used
- Request a ROI when possible on any investments
A larger and more diversified portfolio of brands to manage
The extension of the portfolio can present certain challenges for owners. First, as the portfolio extends, it is becoming more difficult, for owners and guests, to distinguish between brands. This raises the key question of the value of the brand. Second, as these networks increase in size, they can also lose in speed of reaction to market changes. Third, with the integration of two operators, an internal brand competition may emerge within the new company. Fourth, with certain brands operating in the same segment and already established in various locations, market saturation could become an issue. Finally, even if the industry is very fragmented, larger operators dominating certain markets can raise anti-trust questions.
To address this challenge, owners could opt for these options:
- Ask for a clear definition and differentiation of the property brand against the other brands to the regional VP
- Team up with other owners who use the same brand to influence corporate.
- Owner could play the competition between brands to ensure they get the best for their hotel
- Keep an active role in the sales and marketing and revenue management and challenge the hotel team
- Require full transparency of prices. Potential price fixing will be a challenge that would need management.
Specific implications on management agreements
The purpose of this article is to articulate and anticipate the main challenges that M&A can create for hotel owners. We suggest that owners are cognizant of the following potential impacts on their assets and take this into account with their operating or future hotel management agreement:
Service fees: M&A should help operators achieve economies of scale, which could allow them to reduce their service fees. However, considering the efforts required for the integration, this is unlikely, at least in the first stages after the M&A signature. Furthermore, it is unlikely that the saving will be passed on to the owner. We suggest that based on economy of scale, owners association are entitled to ask for discount or advantages.
Loyalty programs: With a new formed entity, with larger brand portfolio, brand exposure and loyalty programs, it is also likely that these costs could increase. As the bargaining power gained can also be leveraged with hotel owners. Hotel owners could request full transparency and control the number on a monthly basis (e.g. resort or tourist destination city) and put in place quota.
Marketing fees: As the integration of both operators unfolds, marketing expenses could also increase, which can be passed on to owners. Here, we recommend owners to take a proactive stand and react in advance to inform the operator that no increase will be acceptable.
Competitive analysis: sometimes operators do not include their own brands in the competitive set. This key aspect will have to be monitored to see how operators will handle it. But as a general suggestion, we see that a mix of discussion between corporate and local team will take place. During the first half of 2016, the local teams report to owners that they did not know what is going to happen. Owners could pressure that discussion for more information from the regional offices.
This M&A wave sets the stage for interesting scale-related dynamics in the industry. In our opinion, owners should take a proactive stand in this change. We recommend owners and hotel asset managers to be very detail-oriented on both process and analysis.
This M&A wave also raises field issues such as market differences over price, regulatory challenges in developing countries, lack of strategic ambition in certain destinations. These times call for more transparency, more coordination between owners and operators, and a focus on detail. Furthermore, we believe that the M&A wave sets a favorable stage for the negotiation of lower fees and better transparency.
Looking back at previous upward cycles in M&A, it is only reasonable to also raise the question of future blowbacks and disintegration, which could follow. It will be interesting to follow and see how this will unfold. But one thing is sure: hotel owners and hotel asset managers should be fully part of the process. Owner are key stakeholders, and in fact, customers in the asset light model.
External advisers should also help by reviewing processes objectively, including valuation models which account for the potential impact on hotel value. Also, the range of elements to examine under due diligence should be extended to commercial, financial, legal, regulatory, IT, operational, and sale and purchase contracts. We foresee that this M&A wave can have long-lasting effects on the role and implications of owners in the operator’s strategies.
Contributed by Alex Sogno, founding member of the Hospitality Asset Managers Association Asia Pacific (HAMA AP) and Middle East Africa (HAMA MEA), and the CEO of Global Asset Solution, Barcelona, and by Inès Blal, assistant professor of Strategic Management at the Ecole Hotelière de Lausanne, Switzerland