Marriott Purchases Starwood: Stock Price Takes A Tumble After Acquisition Announcement

Starwood Hotels and Resorts is being purchased by Marriott International for a whopping $12.2 billion in cash and stock. The merger of the two will create the largest hotel company on the planet.

The Marriott purchase of Starwood is just one of many possible mergers that have caught the attention of Wall Street. As previously reported by the Inquisitr, Pfizer recently announced that it wants to buy industry rival, Allergan. The pharmaceutical merger deal is estimated to be worth $116 billion.

On Monday, hotel juggernaut Marriott agreed to pay $72.08 per share in cash and stock for Starwood. They will also be paid about $7.80 per share from the spin-off of Starwood’s timeshare business. After the acquisition is complete, holders of Starwood stock will retain 37 percent ownership in the new company, according to the New York Times.

With an uncertain global economy and business travel spending at a virtual standstill, Starwood stock has been on the decline, and under-performing when compared to its peers. After several consecutive quarters of falling sales, the company’s president and chief executive, Frits van Paasschen, resigned in February.

After Paasschen resigned, Starwood went up for sale. Former CEO of Starwood Hotels and Resorts Frits Van Paasschen. [Photo by Dave Kotinsky / Getty Images]In April, Starwood announced that it was working on plans for a turnaround. Most experts took that to mean the company would go up for sale. The subsequent speculation created a firestorm of conjecture as to who the Starwood buyer would be.

In July, it was rumored that Intercontinental Hotels was first in line to purchase Starwood. However, Intercontinental swiftly quashed the rumors by denying any interest in acquiring the hospitality giant.

According to insiders close to the negotiations, Hyatt was wanting to buy Starwood in October. However, talks ended, and the deal never came about.

Today, the speculation was quieted as a purchase deal was announced for the hotelier. Marriott will buy Starwood for a 19 percent premium over the company’s average stock price during the 20 days ending November 26. After the deal was announced, Starwood stock fell to $71.07 while Marriott fell to $71.65 in premarket trading.

Arne Sorenson, Marriott Chief Executive, is confident the purchase of Starwood by Marriott is a positive strategic move.

“The driving force behind this transaction is growth. We have been in the business for a long time, but Starwood is more global than Marriott is. It’s a good thing that we will have more sources (of growth) from around the world.”

Sorenson told CNBC that Marriott’s executives were not excited about purchasing Starwood at first. Yet, market forces eventually revealed a shift in the company’s worth that made it “attractive economically.” They ultimately saw a unique opportunity to increase value should the two companies be combined.

Arne Sorenson is confident about the Marriot's purchase of Starwood. President and CEO of Marriott International Arne Sorenson. [Photo by D Dipasupil / Getty Images for PFLAG]Three-quarters of Marriott’s rooms are in the United States, while Starwood earns nearly two-thirds of its revenue outside the U.S. With the brand power behind Starwood, Marriott will have a much stronger presence in markets like Europe, Latin America, and Asia.

Starwood has much to gain with the help of Marriott’s relationships as well. With Marriott’s influence and overall size of the new combined company, efficiencies in reservations and procurement will improve as well as property-level profitability.

According to a Starwood statement, “Our board concluded that a combination with Marriott provided the greatest long-term value for our shareholders, and the strongest and most certain path forward for our company.”

Sorenson agrees and believes uniting the two companies will create value and improve competitiveness in a consistently changing market. He will remain in charge after the transaction is complete.

Starwood and Marriot to merge and create world's largest hotel company. Marriott International announced plans to purchase Starwood Hotels & Resorts. [Photo by Justin Sullivan / Getty Images]By purchasing Starwood, Marriott will spend an estimated $100 million-$150 million in related one-time costs. However, Marriott expects to save $200 million in annual cost during the second year after closing.

With the addition of three Starwood members, Marriott’s board will increase to 14. Furthermore, Marriot plans to keep its headquarters in Bethesda, Maryland.

By buying Starwood, Marriot will expand its presence globally through brands like Westin, the W, Sheraton, Ritz Carlton, and St. Regis. The newly formed company will have more than 5,500 owned or franchised hotels with 1.1 million rooms throughout the world. The Marriot and Starwood purchase deal is expected to close sometime mid-2016.

[Photo by Justin Sullivan/Getty Images]