Marriott Corporation split into two companies…

Question:

Marriott Corporation split into two companies: Host Marriott Corporation and Marriott International. Host Marriott retained ownership of the corporation’s vast hotel and other properties, while Marriott International, rather than owning hotels, managed them. The purpose of this split was to free Marriott International from the “baggage” associated with Host Marriott, thus allowing it to be more aggressive in its pursuit of growth. The following information (in millions) is provided for each corporation for their first full year operating as independent companies. 

Instructions
a. The two companies were split by the issuance of shares of Marriott International to all shareholders of the previous combined company. Discuss the nature of this transaction.
b. Calculate the debt to assets ratio for each company.
c. Calculate the return on assets and return on common stockholders’ equity for each company.
d. The company’s debtholders were fiercely opposed to the original plan to split the two companies because the original plan had Host Marriott absorbing the majority of the company’s debt. They relented only when Marriott International agreed to absorb a larger share of the debt. Discuss the possible reasons the debtholders were opposed to the plan to split the company.

Answer:

a. The transaction involves split off of the two divisions of the Marriott corporations into two different companies by

b. allowing the companies to freely develop and achieve higher growth.
Debt Asset Ratio

Host Marriott
= Total Debt / Total Assets

= 3112/3822

= 0.8142 i.e. 81.42

Marriott International
= Total Debt / Total Assets

= 2440/3207

= 0.7608 i.e. 76.08%

c.

d. As the Host Marriott is a loss-making company and so the debtholders were afraid of the risk of loss of debt as the sales and income of Marriott International are far better than Host Marriott debtholders will feel safer going with the Marriott International.

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