Marriott Corporation Harvard Case Solution & Analysis

PAYING SHAREHODLERS DIVIDENDS

The first alternative available to the management of Marriott Corporation is to pay dividends to the company’s shareholders from the cash raised from the issuance of debt. This would increase the share price of the company and this move will also attract more investors who are more interested in the constant stream of dividends rather than capital gains.

case marriott corporation solution

case marriott corporation solution

However, raising debt to pay dividends to shareholders does seem a good option. The company already has excessive cash which is unused. Therefore, utilizing the debt capacity of the company for paying the dividends to the shareholders, seems to be not a good strategy for the future of the business. The company will also have to pay interest on debt in future. There is a big risk of default in this area.

REPURCHASING ITS OWN STOCK

The second option available to the company is to repurchase the stock of the company with its raised capital. This option seems to be a good option if we talk about utilizing the debt capacity of the company with the minimum of risk being held by the company. If the management of the company issues debt to repurchase the stock, the shareholders value would be created and the share price of the company would also increase. The share price value per share currently is $ 19.5 per share. However, this value would increase to $ 44.18 per share after the repurchase program. Marriott Corporation has also previously repurchased its stock to adjust its capital structure and increase the share price; therefore, this option seems to be at the top.

INVESTING IN ITS EXISTING BUSINESS

The third option available to the company is to invest the proceeds of the debt issue in the existing business. This alternative also seems to be a good fit for the company, provided the company identifies a significant opportunity to invest in its existing business. If the company invests in its current business, the sales of the company would increase and the cash flow of the corporation will also improve. However, the company will have to make sure that it could generate enough cash in future to meet its debt commitments as they fall due. Also, it should be considered that if the company raises debt, most of the covenants would have to be renegotiated with the insurance companies and this time the terms would be more strict. Therefore, the company needs to consider all the factors before going for this option.

ACQUIRING OTHER FIRM

The final and the forth option is to acquire another company with the proceeds of the debt issued. The company will have to estimate the fair value of the target company. If the company fails to assess the potential risks associated with the target company than the debt would constrain the resources of the company. However, this option is not suitable to a company like Marriott, given the excessive cash held by the company, its large brand equity and market share. The company will have to identify an acquisition target which will create synergies after being acquired.

Looking at all the four options, the share repurchase option seems to be the most beneficial option to go for. This would increase the wealth of the shareholders and it would also improve the earning per share of the company. Therefore, management should raise the debt of around @ 235 million to repurchase the 10 million shares...................................

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