A Written Analysis of a Case by Lloyd Ty
Brief Synopsis of Data
On October 5, 1992, Marriott Corporation announced their plan to restructure the company by splitting itself into two separate companies. The first of the two companies, Marriott International (MI), would manage and franchise over 700 hotels and motels. In addition, it would manage food and facilities for several thousand businesses, schools, retirement homes and health-care providers. On the other hand, Host Marriott (HM), which was the second of the two companies, was to own most of the hard assets. It would own 139 hotels or motels, 14 retirement communities, and nearly 100 restaurants/shops at airports and along toll roads.
The key element in the restructuring plan was that Host Marriott was to keep the debt associated with its assets, rounding to about $2.9 billion. Marriott International would then only have modest debt after restructuring. Their respective risks as investments were reflected through their new security ratings, with HM being rated with a single B by Standard & Poor's, while MI received a rating of single A - both deviating from the pre-restructured company's rating of BBB.
To help alleviate HM's position, MI was to provide a $630 million line of credit to HM, though the expiration date of the line was sooner than the maturities of many of the bond issues outstanding. On the part of the shareholders of the former company, one share of stock in each of the new companies was to be given to them for each share of stock they previously held.
This announcement caused immediate and opposite price movements for Marriott Corporation's stocks and bonds. Stockholders were elated with the decision, while bondholders were angered, particularly investors who bought bonds just that April. Nonetheless, Marriott management tried to assure bondholders...