Marriott and Starwood Merger

Back when I was a consultant, one of the questions you asked a new co-worker was, “Marriott or Starwood?” (Correct answer – Starwood SPG points). Imagine my surprise to wake up this morning and find out that question is now irrelevant. This morning, Marriott International (MAR) and Starwood Hotels (HOT) announced they’re merging, as Marriott is acquiring Starwood in a deal worth $12.2 billion.

The merger will create the biggest hotel chain in the world. Together, the companies will operate or franchise 5,500 hotels across 100 countries, with a total of 1.1 million rooms.

Marriott and Starwood Merger
Source: Marriott

Given how massive this deal is, and how many of you it’s likely to affect – either as shareholders or customers (I’ve already gotten a text message asking what this means for SPG points) – I thought I’d answer some potential questions arising from the merger.

  1. How will this affect my Marriott rewards points?

Most likely, the only benefits you’d see would be positive ones. As the acquiring company, there shouldn’t be any changes to your Marriott rewards points or redemption tiers. You might actually be able to redeem your points at more hotels now, if the new combined company allows Marriott rewards members to use their points at Starwood properties.

  1. How will this affect my Starwood SPG points?

It’s unclear so far how the merger will affect Starwood Preferred Guest (SPG) members. If you’re an SPG member you definitely won’t lose all of your points, but they might be worth less next year (Starwood points are considered the most valuable among hotel chains).

Your best case scenario is for Marriott and Starwood to continue to run their loyalty programs separately, the choice Intercontinental Hotels Group (IHG) did after it acquired Kimpton hotels. Given that I just got an email from Starwood with a new SPG promotion this morning, I’m triple crossing my fingers that this is the case (but doubt it – sigh).

The hotel chains could also choose the route US Airways and American Airlines took after their merger, when they merged their rewards miles programs. US Airways’ Dividend Miles transferred into AAdvantage miles at a 1:1 ratio, so everyone became an American Airlines member. This wouldn’t be great for Starwood members, as Marriott stays book your more points that Starwood stays, but Marriott’s redemption options are significantly more expensive than Starwood’s.

The only comment Marriott made regarding its loyalty programs is that, “They should be even stronger when the companies merge.” Ok then.

The merger won’t take place until mid-2016, so you we should see some more information on the loyalty system in the next few months. Just in case, I’d start planning your dream vacations now, SPG holders.

  1. How will this affect me as a Starwood shareholder?

Much like your loyalty points, if you own Starwood stock, your shares aren’t disappearing. Shareholders are expected to get 0.92 shares of Marriott stock per share of Starwood, plus an additional $2 per share. Base on the 20 day average price ending Friday November 13, you’d have $70.08 worth of Marriott shares, plus $2, for a total value of $72.08 per share.

Interestingly, Starwood shares are trading around $70.75 today, so the shares are under-valued by about $1.50 currently. If you think Marriott shares prices are going up, and Starwood share prices are not (or just wait until they drop a bit), this could be an interesting buying opportunity. Basically, you could use cheaper Starwood shares to get Marriott shares at a discount. For example, if you buy Starwood stock today at $70.75 a share, and Marriott shares go up to $75, you’ll pay $70.75 for $71 worth of Marriott stock ($75*0.92 + $2). Granted, since the merger isn’t taking place until mid-2016, you might not find the few extra dollars you could make on this trade worth the timing risk.

  1. How will this affect me as a Marriott shareholder?

Again, I only see positive benefits for Marriott shareholders. Marriott is set to become the biggest hotel company in the world, in a growing industry. During the first nine months of this year, guests filled 67.3% of the available rooms in the US, according to research firm STR – the highest level since STR started collecting data in 1987. That number was compounded by the fact that the rate for each night was also the highest of any year, even adjusted for inflation.

On top of that, Marriott is using this acquisition to tap into the fastest growing segment of the travel market – millennials. Millennials tend to prefer spending money on experiences, like travel, than on material goods. Research indicates that “over the next five to 10 years, millennials will become the biggest customer segment for hotels worldwide.” Given that Starwood’s hotels skew younger and trendier, Marriott will be better equipped to take advantage of this trend.

On top of the revenue growth, Marriott is expected to cut operating costs of the combined companies by $200 million in the second full year of operations.

Adding this potential growth to Marriott’s strong financials makes me call Marriott a buy opportunity.

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