Marriott Essay

901 Words Feb 16th, 2015 4 Pages
1. Project Chariot involves a conflict of interests. Describe this conflict, who it is between, and who stand to gain or lose from this project.

The conflict of interest exists between the shareholders and the bondholders. After Project Chariot is implemented, MII will be of low debt level and HMC will be with high debt. The original bondholders will be tied to risky real estate assets with uncertain appreciation and expected income. Shareholders will gain and bondholders will lose, since splitting the company in two will give shareholders the business upside and bondholders the real-estate downside.

2. In the lecture, we saw a number of different conflicts of interest. Which of these is this project most similar to?

The risk
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We prefer the “shareholder view”. Because the responsibility of management team is to maximize shareholder’s wealth. The debt holders can protect their interests through covenants, although those protection clauses are not written into covenants in this case. When debt holders buy the bonds, they should have already taken the scenario of dropping below investment grade into consideration when they buy the bonds. Also, although some institutional holders have to sell the bonds after them dropping below investment grades, that’s their own rule/policy, which should not have any impacts on Marriott management team’s decision making.

The transaction is consistent with management responsibilities. Because:
First, the Chariot project give MII opportunity to invest in more profitable opportunities, since it can maintain investment grade without old debt burden and could access the capital market by borrowing with lower cost. Second, this Chariot transaction gives shareholders a better opportunity to benefit from the firm’s upside potential. In brief, although in short term shareholders may suffer a small loss due to the waste of tax credit generated from HMC’s operating loss, the shareholders can benefit in long-term with MII’s investment in more profitable project and HMC’s properties value appreciation.

Third, if management doesn’t do this Chariot transaction, the entire Marriott may enter a “vicious cycle”, i.e., the firm stuck in the not

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