Here’s What Starwood Is Telling Employees About The Takeover Bid

This morning we learned about a potentially massive roadblock for the merger between Marriott and Starwood, which has been underway since last November.

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Today’s announcement came after Monday’s news that a Chinese investor group made a superior bid for Starwood. This morning Starwood accepted their offer of $78 per share of stock, which means that for the time being the Marriott merger is off. However, Marriott can also make a counter-offer, so the more likely scenario is that we’ll see a bidding war here.

This is obviously a very confusing period for shareholders, employees, and customers. Following this morning’s announcement, Starwood’s CEO, Tom Mangas, sent the following letter to Starwood associates (I’ll post it in full, and then share my thoughts below):

Dear Associates,

We just issued a press release (attached) announcing that Starwood has received a revised binding proposal from the consortium consisting of Anbang Insurance Group, J.C. Flowers and Primavera Capital that Starwood’s Board of Directors has determined constitutes a “superior proposal” as defined in Starwood’s merger agreement with Marriott. This is a fluid, live process which is garnering worldwide press attention and has important implications for our people. Therefore I thought it would be helpful to provide you with some context:

• As Starwood’s Board has determined that the consortium’s proposal constitutes a “superior proposal,” the Board intends to terminate the Marriott merger agreement and enter into a new definitive agreement with the consortium, which, in addition to Anbang, also includes J.C. Flowers & Co. and Primavera Limited.
• Our merger agreement with Marriott gives them the right — until 11:59pm ET on March 28, 2016 — to negotiate revisions that would make it as good as or superior to the consortium’s proposal. While we cannot speculate what Marriott will do, Starwood will negotiate in good faith with Marriott during this period and our Board will consider in good faith any changes they propose.
• It’s important to note that Starwood is not permitted to enter into the binding agreement with the consortium — or terminate the Marriott agreement — until the negotiation period with Marriott has concluded on March 28, during which Marriott will have the opportunity to propose revisions to our existing merger agreement with them.
• Given these new developments and the resulting need for Starwood to be able to provide sufficient time for the filing and mailing of additional information regarding these developments to its stockholders, we are postponing our stockholder vote, which was scheduled for Monday, March 28th, to a new date to be determined after consultation with Marriott. Starwood’s Board has not changed its recommendation in support of Starwood’s merger with Marriott.

This is a complicated process that is unfolding in real time and we’re all working swiftly to reach resolution. We hope to have more news to share soon. In the meantime, let’s continue to do what we do best, win in the market place and delight our guests — I’ve been so impressed by our team’s ability to stay focused despite the noise.

Regards,
Tom

In terms of concrete information in the letter, we know that Marriott has until March 28 to submit an offer which is as good or superior. What the board considers to be “superior” will be interesting, since I doubt it will be an all cash offer. So there won’t be anything concrete until March 28, meaning until then Starwood won’t enter into a binding agreement with the new bidder, and won’t formally terminate their agreement with Marriott.

What’s also interesting is that they say that Starwood’s board has not changed their recommendation in support of Starwood’s merger with Marriott.

As I said earlier, as a consumer I’d rather see Starwood taken over by this investor group than by Marriott. Consolidation isn’t good for consumers.

At the same time, Starwood has been looking to be taken over since early last year, given that they’ve been underperforming. If they’re simply taken over by a Chinese investor group, there’s a chance they’ll let them more or less maintain the status quo.

That doesn’t solve any of the “problems” Starwood has, though. At the same time, there’s a good chance the investor group is fine with that — after all, it won’t be a publicly traded company. For them, this purchase may largely be about diversifying assets. Even though Starwood might not be performing that well compared to other hotel groups, it may still be performance which this investor group is happy with, since it’s at least a fairly stable investment.

I’m curious where Starwood’s current management team stands on this. Obviously the very top of management is usually compensated very well during takeovers, but what about those slightly lower on the totem pole? On one hand I assume they want to keep their jobs, while on the other hand they may very well have big incentives for the Starwood and Marriott merger to close, which might not be there if it’s a straight takeover from a Chinese investor group.

Bottom line

It’s probably going to be a bit over a week until we know substantially more. As a consumer consolidation isn’t a good thing, so I’m rooting for the Chinese investor group to come out ahead.

It’ll be very interesting to see how this plays out…

My gut tells me that the the Chinese investor group may come out victorious. They can likely justify overpaying for Starwood more than Marriott can. They paid $1.95 billion to buy the Waldorf Astoria New York, so they’re no strangers to overpaying…