MC's debt continuously had increased. Project Chariot could makesome opportunities for HMC and MII.

For HMC, it would be under less pressure of selling off the hotels at lower price from other investors. On the other hand, the MII does not take a lot of debts, and it would have the ability to raise additional capital and finance growth.

Looking at the numbers in Exhibit 5 Cash Flow from operating activities just experienced a drop in 1990. In 1991 they were back up to $552(millions of dollars). Furthermore by issuing the convertible preferred stock of $195 in 1991 the number of cash and equivalents, end of year awent down, but would have been up at $229.

As mentioned before the stockholders would gain from the change,since no cash would actually be transferred. It will also diversify the portfolio. Looking at the secured investment in the case Host Marriott Corporation will default on its debt.

The returns of the bondholders are now attached to a heavily indebted firm with massive leverage in comparison with its parent company. The lower security rating to show for it (from a BBB - Adequate capacity to pay for Marriott Corporation, to a single B - Greater vulnerability to default, but currently has capacity to pay for Host Marriott Corporation. Bondholders were never informed of such corporate restructuringplans before they bought bonds from Marriott when it is arguable that the corporation must have already been planning months before for such a major move. The central issue now is that bondholders' wealth was expropriated in favor of stockholders and it is natural that the both parties act in the way they did.

Recommendation and Conclusion According to the above calculation it becomes obvious that byadopting "Project Chariot" have its advantages and disadvantages. The value of the company is much higher with the restructuring. Beginning debts might be high in comparison with the profits, something that usually happens when adopting a new system. However, in the long run the situation turns around and the company can start to gain benefits. With making two companies out of one, the debt issue is also divided. While MI can start with basically no (or lower) debt, HMC will take over the old debt from MC, which makes at least one of the two more profitable. Furthermore, the cash flows mentioned will propel HMC so far that it will be more than adequate to cover the debt in the future.

Looking at the Stockholders, who will gain from this new project, through diversification of the portfolio, the only negative thing that would leave us, would be the bondholders. The greatest risk associated with Project Chariot appears to be the fact that HMC would assume almost the entire existing debt burden associated with the existing organization, while MII, with the greatest cash flow potential would emerge essentially debt free. While this strategy may bode well for MII, HMC emerges from Project Chariot as a debt encumbered entity with an anticipated net loss of $66 million annually. The primary sources of the existing long-term debt of the Marriot Corporation have been issued in the form of secured and unsecured bond notes. Project Chariot does little to address the impact of the organizational restructuring on bondholders. While management seems confident that the emerging HMC firm will sustain enough financial strength to make all payments to bondholders, the negative net revenues are likely to result in a reassessment by the bond rating agencies. It appears likely that the ratings for existing bonds will be lowered to below investment grade due to the increased investment risk which will require some institutional creditors to sell their holdings. In conclusion Project Chariot should be implemented at MarriottCorporation after careful consideration of Bond Risk. The management can consider distributing the debt in MII and HMC a little more fairly so as the overall debt burden do not affect the bond rating subsequently. MC has been for years a very successful business and impressed not only its shareholders, but also the public interest with positive business doing. Changes aredefinitely needed in the company due to its high debt due to systematic risks, as economic breakdown in the real estate market as well as several different Tax Acts that threw MC back for a bit, but not as much so that they will have to stop continuing business. Diversifying its product line, if one can say so, meaning by implementing MI and HMC, will make the MC just more competitive in their field and it will help them get up the economic ladder faster.

Quantitative Data
1.The following table provides a break-down of some critical information comparing the value of the existing firm MC and the two firms proposed, HMC and MII, proposed by Project Chariot: MC Number of Employees Equity Debt Value 202,000 679M 2.979B 3.658B HMC 23,000 600M 2B 2.6B MII 182,000 800M 400M 1.2B

Analysis 2
MARRIOTT RESTRUCTURING 5, 1992, Marriott Corporation announced their plan to restructure the company by splitting itself into two separate companies. The first of the two companies, Marriott International (MI), would manage and franchise over 700 hotels and motels. In addition, it would manage food and facilities for several thousand businesses, schools, retirement homes and health-care providers. On the other hand, Host Marriott (HM), which was the second of the two companies, was to own most of the hard assets. It would own 139 hotels or motels, 14 retirement communities, and nearly 100 restaurants/shops at airports and along toll roads. The key element in the restructuring plan was that Host Marriott was to keep the debt associated with its assets, rounding to about $2.9 billion. Marriott International would then only have modest debt after restructuring. Their respective risks as investments were reflected through their new security ratings, with HM being rated with a single B by Standard " Poor's, while MI received a rating of single A - both deviating from the pre-restructured company's rating of BBB. To help alleviate HM's position, MI was to provide a $630 million line of credit to HM, though the expiration date of the line was sooner than the maturities of many of the bond issues outstanding. On the part of the shareholders of the former company, one share of stock in each of the new companies was to be given to them for each share of stock they previously held. This announcement caused immediate and opposite price movements for Marriott Corporation's stocks and bonds. Stockholders were elated with the decision, while bondholders were angered, particularly investors who bought bonds just that April. Nonetheless, Marriott management tried to assure bondholders that interest and principal payments would be delivered on time.

Main Problem How should management, its stock and bondholders treat the situation?

Analysis of Data Marriott Corporation's proposed restructuring involves splitting the parent company into two separate entities based on two of its main activities - Marriott International would manage, while Host Marriott would own. Since most of Marriott Corporation's current debts were associated with its asset-purchasing activities, many of the former company's debt was now found in Host Marriott's accounts, leaving Marriott International virtually debt-free in comparison. The restructuring was technically a spin-off which meant that stockholders of the parent company would receive a share of stock in each of the new companies for each stock they

previously held, thereby leaving stockholders with ownership in two firms instead of one while no cash was actually transferred. Furthermore, the Marriott family and all stockholders would still own the same percentage in the new companies as what they owned in the parent company. Unlike other forms of corporate restructuring, Marriott Corporation's own version of a spin-off allowed it to transfer most of its debts into one company, while leaving another free for unhampered expansion. Marriott achieved much of its growth by building hotels and then selling them to limited partnerships as tax shelters. Marriott made its profits from management fees and the sales of the hotels. However, when Congress eliminated these tax deductions, Marriott ended up with over 150 properties, built largely with borrowed funds, that it could not sell. The $250 million annual mortgage interest expense threw Marriott into a severe cash crunch. Then, in 1992, Marriott divided his company in two, spinning off its profitable management business from its debt-laden real-estate holdings. The new firm, Marriott International, was now free to accelerate its expansion. The creativity of the restructuring decision lies in the fact that Marriott Corporation was able to free itself from the limitations of being a company heavily laden with debt. Since the restructuring meant that only one company would now be held liable for most of the debt, it allowed the shareholders of Marriott Corporation to minimize their losses in the event that it defaults. Rather than watching the entire parent company suffer, it would be for the well being of the shareholders that a portion of Marriott Corporation, in the form of Marriott International, prospers. Furthermore, the companies would also receive the benefits of a conventional spin-off. Probably the most common reason for creating spin-offs is that they improve efficiency. Since the parent company is split into two separate companies with each having differing activities from one another, it allows for the management of each to concentrate on their main activity and deal with the problems solely associated with it. If each business must stand on its own feet, there is no risk that the funds will be siphoned off from one in order to support unprofitable investments in the other. Moreover, if the two parts of the business are independent, it is easy to see the value of each and to reward managers accordingly. The restructuring decision benefited the shareholders more than Marriott's bondholders. With stocks in two companies rather than one, Marriott's shareholders are able to diversify their portfolio without additional investment outlay. Whether or not Host Marriott defaults on its debt or not, shareholders are still secured with an alternative investment in Marriott International. The rise in the price of Marriott Corporation's stocks after the announcement simply reflected how other investors also saw the restructuring decision as an opportunity to take advantage off. The bondholders, on the other hand, are less fortunate. With most of the debt being linked with Host Marriott, the returns of these bondholders are now attached to a heavily indebted firm with massive leverage in comparison with its parent company. The debt, now greater in proportion in the smaller, spin-off firm, is riskier than previous, and has attained a lower security rating to show for it (from a BBB - Adequate capacity to pay for Marriott Corporation, to a single B - Greater vulnerability to default, but currently has capacity to pay for Host Marriott). When Marriott's bondholders paid for the safer BBB bonds, they expected BBB level risk and not single B

bonds, which are associated with a higher risk. With the bond prices plummeting after the announcement, bondholders, especially those who just bought Marriott bonds months before, could have bought the same bonds at a lower price if they had just waited for a few months for the announcement. More so, bondholders were never informed of such corporate restructuring plans before they bought bonds from Marriott when it is arguable that the corporation must have already been planning months before for such a major move. The central issue, whether or not it was purposeful or simply an effect of the restructuring, is that bondholders wealth was expropriated in favor of stockholders, and thus it is natural that the bondholders and stockholders act the way did. Recommendation

Despite the event risk posed by Marriott's restructuring decisions, we think that it is in bondholders' best interest to simply hold on to their bonds. Although Host Marriott would indeed have a greater difficulty in servicing all debts, especially since it now holds less assets and controls less revenue as before, it can still rely on the $630M credit line provided to them by Marriott International. The credit line, although expiring at a date sooner than the maturities of many of the bond issues outstanding, can help in paying of the annual interest expenses until the management of Host Marriott can adjust to its current situation. Simply selling off one's bonds could bring about undesirable losses on speculations not yet clearly ascertained. Furthermore, the price of the bonds three months after the announcement has been experiencing a steady increase to its previous amounts. Although we are quite doubtful that the market values of these bonds would return to its original rates, trends show that the drastic plunge experienced during the week after the announcement could be simply a shock set by market panic. When worse comes to worst, and Host Marriott does indeed default on its bond payments, then bondholders, having priority claim over Host Marriott's various hard assets, is still assured of getting back its investment. Probably the worst off are those bondholders who have bought Marriott's bonds in the interest of quickly selling it off again for a capital gain. For these individuals, they could simply cut their losses at the point when the bond prices stabilize or simply hold on to the bonds and claim the interest returns from it.Marriott management should put the fears of bondholders to rest by making sure that they do indeed manage to pay off the interest payments, and later on, the maturity amounts. Marriott International, in particular, should play an active part in helping Host Marriott service its debts and liabilities. Although the main purpose of a spinoff is to warrant different divisions in a solitary firm independent management control over itself, Host Marriott is still for the most part the responsibility of Marriott International, the debt-free older brother. Whatever happens to Host Marriott nonetheless affects the very same shareholders of Marriott International. In that sense, it is also a loss on the part of the owners of Marriott International if Host Marriott goes under. More so, it can also be reasonably ascertained that if Host Marriott falls, Marriott International's managing business would also be affected by the loss of Host Marriott's hard assets (hotels, motels, etc.). The credit line provided by Marriott International could be a powerful tool in helping Host Marriott get back on its feet. Since Marriott International is now rated single A under Standard and Poor's, it can easily borrow money at a cheaper rate. In turn, if it is legally possible,

Marriott International can extend a greater credit line with a later expiration date to Host Marriott, who himself will have a more difficult time in borrowing at a low interest rate. This "passing" of loan credibility can act as a giant loophole which could surge both Marriotts back into prosperity. In wrapping up, stockholders have control (through the managers) of decisions that affect the profitability and risk of the firm and it is in their own best interests that they also reassure existing bondholders of their creditworthiness despite the lowered security rating. In the end, when all sides of the company are satisfied, it is the stockholders themselves who will feel the most benefit.