Starwood Hotels & Resorts Worldwide, Inc.
Starwood Hotels & Resorts Worldwide, Inc.
Incorporated: 1991 as Starwood Capital Group
Sales: $3.88 billion (2002)
Stock Exchanges: New York
Ticker Symbol: HOT
NAIC: 721110 Hotels (Except Casino Hotels) and Motels
Starwood Hotels & Resorts Worldwide, Inc. is one of the top hotel companies in the world. The company owns and operates hotels under leading brands such as Sheraton, Westin, St. Regis, Four Points, and its recently developed W brand. The majority of Starwood’s hotels are owned by franchisees, and the company directly owns or leases about 170 of its approximately 750 hotels worldwide. Close to 500 of the company’s hotels are in North America. Starwood also runs hotels in some 80 countries in Asia, Europe, Africa, and South America, including a chain of prestigious European palaces called the Ciga Group. The company began as a small investment firm and then became a real estate investment trust (REIT). In 1998 Starwood purchased ITT Corporation, a company seven times its size and at the time the world’s largest lodging and gaming company. Starwood beat out the Hilton Hotels Corporation to get ITT, in what was one of the most dramatic takeover battles of the 1990s. Starwood is run by Barry Sternlicht, whose consummate dealsmanship parlayed the small trust into a global lodging company.
Brash Beginnings in the Early 1990s
Starwood grew to be a hotel behemoth through the hard work and ambition of Barry Sternlicht, its chairman and chief executive officer. Sternlicht was described by Business Week (November 3, 1997) as a “vulture investor,” and his eye for unusual opportunities led to rapid growth of the companies he directed. Sternlicht transformed a small investment firm into one of Wall Street’s hottest stocks by making extraordinary real estate deals in markets others overlooked, and by capitalizing on a little-known legal loophole that gave his real estate investment trust (REIT) powers few could match. Sternlicht was born in New York City in 1960 and graduated magna cum laude from Brown University in 1982. He got his M.B.A. from Harvard Business School in 1986. Sternlicht’s first job after Harvard was with JMB Realty, a Chicago firm known for multimillion-dollar land deals and corporate takeovers. Soon after joining JMB, Sternlicht spearheaded the acquisition of a Disney subsidiary, Arvida Corp., a transaction worth $400 million. Sternlicht apparently thrived on the high drama of deals like this. His job ended at JMB, however, after the acquisition of a London realty portfolio went bust. Sternlicht was lead analyst on a $425 million acquisition of the Randsworth Trust PLC in 1989. Shortly after JMB and its partners made the deal, the London real estate market collapsed. Although the fiasco was not said to be Sternlicht’s fault, he nevertheless left JMB at this time. In September 1991 Sternlicht had a new job, investing $60 million for members of the Ziff and Burden families. The investment company was named Starwood Capital Group, after the luxurious Starwood section of Aspen, Colorado, where the Ziffs had a home.
Sternlicht began making a string of astonishing deals for Starwood Capital. Where other real estate investors were attracted to prime markets like New York and San Francisco, Sternlicht bought up rental properties in overlooked spots such as San Antonio, Texas, and Colorado Springs. Within 18 months of starting Starwood Capital, Sternlicht had tripled his investors’ money. Starwood unloaded 6,000 apartments it owned in 1992, swapping them for a 22 percent stake in a new public company, Equity Residential Properties, run by another consummate dealmaker, Sam Zell. The stock in Zell’s company was worth $140 million. Then in 1993, Starwood changed focus from apartments to hotels. The hotel industry had been overbuilt in the 1980s, and by the early 1990s, many assets were being sold at significant discounts. Starwood spent $81 million to pick up a string of hotels owned by Westinghouse, and then in 1994 the company initiated a complex deal for control of the Westin Hotel Co. Westin was a languishing brand that had changed hands in 1988 when the Japanese construction company Aoki Corp. bought it for $1.53 billion from Allegis Corp. Westin managed 80 upscale hotels in 19 countries, with some prestigious properties such as the Arizona Biltmore, near Phoenix, and the Westin St. Francis in San Francisco. Revenues were more than $2 billion. Starwood went in on Westin with Goldman, Sachs & Company, and acquired the hotel chain for around $540 million. The deal took six months to complete.
In the meantime, Sternlicht had come up with a new plan for Starwood. Initially he had wanted to take the company’s growing hotel portfolio public as a REIT. But REITs operated under specific regulations that said that at least 75 percent of revenue had to come from real estate assets. In owning hotels, a significant percentage of revenue was derived from service. So typically, in order to own hotels in a REIT structure, the management of the hotels had to be farmed out to a separate entity to keep the service income discrete. Sternlicht discovered, however, that there were three REITs in the country that had a peculiar arrangement called “paired-share” that let them both own and manage hotels. These companies had been grandfathered in when the regulations governing REITs changed in 1984. One of these was a near bankrupt firm called Hotel Investors Trust. Hotel Investors, reminiscent of the optimistic names given to greyhounds and thoroughbreds, traded on the New York Stock Exchange under the ticker symbol HOT. But by 1994, it had been overburdened with debt for years, and its portfolio of 30 hotels and casinos traded sluggishly at under a dollar. Starwood bought control of Hotel Investors for $5 million in cash and nine hotels. Sternlicht immediately announced his intention to build the new company up to a billion-dollar REIT. Because of its paired-share structure, there was no legal constraint to the company both owning and managing hotels, as long as these functions were nominally separate. So Hotel Investors became Starwood Lodging Trust and Starwood Lodging Corp., and it went on buying hotels. After completing the deal for Westin in June 1995, the company spent $840 million on more than 30 hotels in the next year alone. Its HOT stock zoomed up to around $35 a share, and its market capitalization grew from $12 million to more than $800 million.
Going After ITT in 1997
The company flourished. Starwood’s paired-share status meant that it did not have to dilute earnings by paying a management firm to run its hotels. It also could hold on to its cash, because the REIT did not pay corporate tax as long as it distributed 95 percent of its revenue as shareholder dividends. Sternlicht seemed to have a magic touch. Only 36 years old in 1997, he told U.S. News & World Report (November 17, 1997) that he had “done over 180 transactions, and only two of them were bad investments.” Starwood’s stock continued to rise as the value of the company’s assets increased. The hotel industry was in good shape in the mid-1990s, recovered from its earlier slump, and Sternlicht had bought many hotels in urban areas, where building new hotels would have been exceedingly expensive. He paid attention to the details of running hotels once he had bought them, overseeing room design and helping roll out a new brand for the Westin chain, its small urban W brand. Starwood acquired what it did not already own of Westin in the fall of 1997, and in November began what Fortune magazine (December 8, 1997) characterized as “one of the nastiest takeover battles of the ‘90s,” its bid for ITT Corporation.
ITT was a venerable company that at one time had its hand in scores of different industries. During the 1970s it was a classic conglomerate, owning companies as disparate as Continental Baking, maker of Twinkies and Wonderbread, and Avis, the car rental firm. Under the direction of CEO Rand Araskog, ITT had sold more than 200 subsidiaries in the 1980s. By the mid-1990s, the company was still rather unfocused, with a diverse portfolio of leisure and entertainment businesses including a sports television channel, the basketball team the New York Knicks, a string of casinos, and the Sheraton hotels. In early 1997 ITT was about to embark on an expensive renovation and new construction campaign, aimed principally at bucking up its casinos. An equity offering failed, and the heavily leveraged company was in trouble. Its stock had fallen almost 40 percent over the past year, and it was unclear how the company would pay to refurbish its properties. Then ITT received an unsolicited takeover bid from Hilton Hotels Corporation. Hilton had a new CEO, Stephen Bollenbach, who had promised investors rapid growth. ITT’s hotels and casinos seemed just what Hilton needed, and the company offered $70 a share for ITT. But Starwood, too, was interested in ITT. The company was seven times Starwood’s size, but the confident Sternlicht sent ITT’s CEO a simple note stating, “We have to talk.” Starwood outbid Hilton, and outlined to investors ways the new owners could trim costs, principally because of Starwood’s beneficial tax status. Hilton counteroffered, but eventually Starwood prevailed, spending $10.2 billion in a deal that made the company the largest in the worldwide hotel industry. The purchase price was about twice ITT’s stock market value before the bidding war began, and twice what Starwood itself was worth.
Starwood’s Mission: To our shareholders, our goal is to grow EBITDA at least 8-10% per year and EPS at least 15% per year. To our customers, we want Starwood to be the easiest company with which to do business. And to our employees, our commitment is to make Starwood a great place to work.
Buying ITT took Sternlicht into new and uncharted territory. The young entrepreneur had risked tremendous amounts of money to build his empire, but he had not run a huge corporation. Sternlicht brought in an old college friend, Richard Nanula, to help oversee Starwood. Nanula had close personal ties to Sternlicht and his family, and was, like Sternlicht, a financial wunderkind. He had been chief financial officer of Disney since he was 31, and he had the kind of corporate background that Sternlicht lacked. The two seemed to have complementary skills that would enable them to shape up Starwood’s businesses after the merger. But things did not get off to a good start. Hilton’s CEO, stung by the loss of ITT, went to Washington to lobby for the closure of the loophole that gave Starwood the paired-share status. Within about six months of Starwood’s purchase of ITT, Congress acted to change the law governing REITs, and Starwood lost its tax advantage. It then converted to a traditional corporate structure. The change made accounting difficult, particularly in comparing financial results from before and after the restructuring. In addition, there seemed to be trouble in the top echelons of management. Nanula had been named CEO of Starwood, with Sternlicht chairman, but Sternlicht demoted his friend to president and gave himself back the CEO title after the New York Times ran an article on Nanula that implied that he was the head man. Sternlicht named a former Westin executive to head Caesar’s, the company’s casino division, without informing the presiding Caesar’s head what was happening, causing much bad blood. Juergen Bartels, who was credited with reviving Starwood’s Westin brand, threatened to quit because he did not like working under Nanula, who lacked experience in the hotel industry. Starwood’s stock price fell, and in December 1998 the company announced that fourth quarter earnings would be less than estimated. Other lodging stocks did badly as well, but Starwood was clearly struggling to integrate its vast new holdings. On May 10, 1999, Fortune magazine ran a profile of the company in which Sternlicht bemoaned having bought ITT. “Am I stupid, or am I a jerk?” he asked Fortune’s reporter. “Half the time, I think I’m stupid. The other half, I think I’m a jerk.” The article also laid bare the problems between Nanula and Sternlicht. Days after the Fortune story came out, Nanula quit. Several months later, Juergen Bartels also quit when it became clear he would not be offered the open position. The head of Starwood’s gambling unit, which was about to be sold, also left, as did the head of the company’s North American hotel operations.
Getting It Together in the New Millennium
Although Starwood clearly had a lot of problems, it also had enormous potential. It had several viable brands, and excess property it could unload for cash. The company sold off its casino division in 1999, making $3 billion on the deal with Park Place Entertainment. Starwood also began a push to renovate its Westin hotels, particularly in Europe. The company spent some $400 million on renovations, aiming to reposition Westin as a more upscale brand. Starwood had taken on a diverse collection of European palaces known as the Ciga Group when it bought ITT. In February 2000 the company announced plans to hang the Westin name on these properties, as well as to build more luxury Westins in Europe. While spending millions to renovate some of the ancient Ciga properties, later in 2000 the company announced that it would sell the group.
Starwood got a chief operating officer in 2000 when Robert Cotter took the spot left vacant by Richard Nanula’s turbulent departure. The company also adopted the so-called Six Sigma quality improvement plan that year. Six Sigma had been developed by Motorola and used by General Electric and other industrial companies to trim costs and eliminate errors. Starwood was reputedly the first company in the lodging industry to try the Six Sigma program, which Sternlicht hoped would “jolt the organization,” as he told the Wall Street Journal (February 5, 2000).
The slowing economy hurt Starwood and other hotel companies in 2001. The September 11 terrorist attacks were a huge blow to the industry. Starwood’s North American business fell drastically immediately after the attacks, and two weeks later the company announced that it would lay off 23 percent of its North American workforce. Revenue fell in 2001 and 2002 as the global economy remained weak and business travel was less than robust. The company’s European operations did better than its North American business, and Asia became the company’s next frontier. Less than 10 percent of Starwood’s operating profit came from its Asian operations in 2002, but the company aimed to increase that to 25 percent by 2007. Starwood planned to sell assets in other parts of the world in order to build and invest in Asia, particularly in China. The company hoped to have as many as 200 hotels in China in the next five years, and was also opening hotels in Singapore, Japan, and Korea. Starwood also continued to put money into renovations of its prime brands, particularly the Sheraton and Four Points brands, which had not done as well since the ITT takeover. Starwood sold four of its nine European Ciga Group properties in 2002, although it continued to manage the hotels.
Starwood Vacation Ownership, Inc.
Marriott International, Inc.; Hilton Hotels Corporation; Four Seasons Hotels Inc.
- Starwood Capital Group is founded.
- Starwood begins buying hotels.
- Starwood buys Hotel Investors Trust; gains special REIT status.
- Starwood acquires ITT Corporation.
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