Marriott Corporation Harvard Case Solution & Analysis

Marriott Corporation Case Study Solution

If Marriott has unused debt capacity, in which of the following ways should Marriott management invest the excess funds?

The company is required to fully utilize its unused or unutilized debt capacity, for which the company as well as its management are required to have a closer look on the long term strategic objectives and the growth plans of the business.  Since, the company’s long term objective is to become the most profitable company in the industry, so the company should take the decision very carefully.

In the case, the organization has an excessive debt capacity and excessive cash, because of which, expanding the levels of debt would decrease the capital expense of the organization. The weighted average cost of current debt’s capital is higher as compared to the weighted average cost of new debt’s capital.

 

The ultimate reason of this program is to improve the company’s shares’ value as well as to reduce the weighted average cost of the company’s, which can only be made possible by utilizing its unused or unutilized debt capacity.

Since, there are various negative impacts of the excess funds or excess cash, it is important for the company to strategically plan its future course of action. The negative impact of excessive funds and cash are as follows:

  1. Excess funds and excess cash reduce the return on assets. (ROA)
  2. Excess funds and excess cash increase the cost of capital of the company.
  3. Excess funds and excess cash would increase the overall risks by destroying the value of the business.

Paying shareholder dividends

The company can use its excess funds and excess cash to pay dividends to its shareholders. The advantages and disadvantages of paying dividends to the shareholders are as follows:

Advantages

  1. It would help the company in having the shareholders’ loyalty.
  2. It tends to attract the investors, who most likely prefer to have returns in terms of dividends.
  3. The investors would allow the company to raise the capital ata lower cost, due to the company’s ability to reach to a wider and a broader market.
  4. There would be an increase in the shares’ price of share,because of the increased dividends.
  5. The excess cash flows would be absorbed by paying the dividends.

Disadvantages

  1. The adverse impact on the stability of the company’s financials would not be achieved easily by changing the stable dividend policy.
  2. In case the company wouldn’t be able to pay dividends constantly in any year, it would reflect the company’s weakness in maintaining its stability.

Repurchasing its own stock

Since, the debt is less expensive as compared to the equity, the organization needs to utilize its debt capacity. The organization has made an arrangement to make an application for having a debt of approximately $ 235 million.

The proceeds of the debt issue would then be utilized to repurchase the offers, which would decrease the value by the estimation of $ 235 million. This would improve the winning per offer of the organization as well.

The advantages and disadvantages of buying the stocks back, are as follows:

Advantages

  1. By buying the stocks back; the number of shares issued would decrease, and the earnings per share would increase, in future.
  2. The repurchase of stocks allows the company to have an increase in the shares’ market price.
  3. The company can repurchase the stock for the profit sharing scheme or employee share option.

Disadvantages

  1. It might be viewed as a negative signal among the investors, as the company doesn’t have good investment opportunities.
  2. Repurchase of stocks would imply undervaluation of the company’s stock.
  3. The interest that the company could earn from surplus cash investment, would be lost.
  4. It would be difficult for the company to repurchase the shares at its current value, also the paid price might be too high to the detriments of remaining investors or shareholders.

Investing in its existing business

Another alternative is to invest the excess funds or excess cash in its existing business. Growing the existing business would result in many benefits, such as; it would create new opportunities in the market, generate more profits and bring in more customers.

The advantages and disadvantages of investing in the existing business are as follows:

Advantages

  1. One of the greatest advantage of the business growth is the company’s ability of to capitalize on the economies of scale. By increasing the production output; the company would be able to lower it’s per unit cost, and achieve savings in cost.
  2. It would allow the company to increase the stocks or resources.
  3. It would help the company in reaching to new markets or customers.
  4. It would allow the company to influence the market price.
  5. It would allow the company to reduce the external risk.
  6. It would help the company in generating more profits and sales.

Disadvantages

  1. The company would require to borrow additional money in order to meet the expansion cost.
  2. In case of allocating more work to the staff; the moral of the employees can get affected negatively, and the productivity level of employees would be reduced.

Acquiring another firm

A strategic acquisition is a very useful method for growing the business in future. The advantages and disadvantages of acquiring another firm are as follows:

Advantages

  1. It is a time efficient growth strategy which offers great opportunities of acquiring the competencies and resources to the company, which are lacking in the company.
  2. There would be a synergetic gain.
  3. The acquisition would most probably allow the company to eliminate the competition from new entrants, by reducing the risk of adverse competitive reaction.

Disadvantages

  1. The cultural fit would most likely be problematic for the company.
  2. There is a likelihood that the acquisition would not generate desirable returns.
  3. The company would require good change management skills.

Recommendations

After taking into consideration the pros and cons of the stated alternatives, it is analyzed that the company should acquire new business, because it would yield greater benefits for the company, and would help it in generating more profits and sales. The company can have the competitiveness and the resources, which it currently lacks, if its opts to acquires a new business.............

 

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