Hilton vs Marriott | Wake-Up Call | 3

0:00A note to listeners, this episode contains depictions of a catastrophic event.

0:14Stephen Bolenbach listens quietly as Marriott's senior executives sit around the boardroom table and paint a gloomy picture. It's March 1992, and Bolenbach's just rejoined Marriott after six years away. He's a stout 49-year-old Californian with graying hair and a reputation as a financial fix-it man. After leaving Marriott, he saved Holiday Inn from a takeover attempt by real estate mogul Donald Trump. Bullenbach's defense proved so effective that Trump then hired him to rescue the Trump Organization from bankruptcy. Now, Marriott's brought him back as chief financial officer to try and save it from the mess it's now in.

0:58One executive rattles off the failures. It's not like it was when you were last here, Stephen. Things got so desperate, we even begged Coca-Cola for$50 million. Another executive interjects. Yeah, and they said no after all the decades we backed them. Thankfully, Pepsi came through with the money. That's why we sell Pepsi now. Don't forget the takeover attempts. I've lost count of them all. There was Bass, that Malaysian casino operator. Yeah, bottom line, Stephen. It's real bad. You shouldn't have come back. We're broke. Totally broke. The executives look aghast as Bolenbach laughs. Oh, jeez, you guys are a fun company.

1:39Woe is me. Look how crappy my stock options are now. Look, I just came from sorting out the Trump Organization. I know what real financial problems are. This isn't that. One of the executives scowls. Oh, yeah? And how are you going to fix this? I don't know yet, but I do know we start by changing our story. Right now, we're telling investors our real estate is a drag on our earnings and we need to sell it fast. That's why analysts are calling day and night wanting to know if we've sold anything today. We need to change the conversation. Well, how? We say we're not selling our hotels. Huh? We tell Wall Street that our hotels are great hotels, so we're not selling them in a fire sale.

2:27Instead, we're going to wait it out and sell when the price reflects their true value. We show we believe in our product instead of acting like super weenies. But that won't make the debt go away. No, it won't. And there's a lot to do there. But we'll be better able to address that if people think our assets are worth having. Bolenbach knows a new upbeat narrative won't buy a lot of time. Not when Marriott's nearly$3 billion in debt. But debt's not the only reason he needs to move quick. Because after sleepwalking through the 80s, Hilton Hotels emerges in better financial shape and is out to exploit Marriott's vulnerability.

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5:26From Wondery, I'm David Brown, and this is Business Wars.

5:54On the last episode, Hilton sold its international operations. Marriott used a barrage of innovations to conquer the hotel industry. and Hilton hotels got distracted with lawsuits and casinos. But now the go-go 1980s are over. The economy's wrecked. Hotel rooms sit empty. Marriott's getting crushed by its multi-billion dollar debts and its new finance chief is short on time to save it. A heavy debt load is one thing, but what he and Marriott don't know is that a catastrophe is on its way. And when it strikes, it will shake America and the entire travel industry to its very foundations. This is Episode 3, Wake Up Call.

6:49Finance Chief Stephen Bolenbach enters Bill Marriott's corner office and shuts the door behind him. It's a Monday morning in May 1992, and Bill's only just arrived at Marriott Corporation's head office in Bethesda, Maryland. Bill gestures for Bolenbach to sit. Okay, Stephen, what's this idea and why is its origin? Bolenbach hesitates. He spent the weekend stress testing his plan, and he's totally sure it's right. But he wouldn't be surprised if Bill fires him on the spot for suggesting it. Bill, I've figured out how to make the debts go away. Bill leans forward. The past two years have been a nightmare of mass layoffs, furious investors, and last-minute bank bailouts.

7:33But$3 billion of debt doesn't just vanish like that. I hope you're not going to ask me to declare the company bankrupt. No, no, never. My plan is we split Marriott in two. Bill is tempted to reject the idea, but instead he bites his tongue. He hired Bolenbach to fix the finances. He decides he should hear him out before making a call. Okay, how? Why? Relieved that Bill's willing to listen, Bolenbach lays out the plan. Marriott Corporation will split into two separate businesses. One will be a hotel management company called Marriott International, that runs and markets hotels on behalf of property owners.

8:21It will be debt-free and allow the Marriott brand to start over with a clean slate. The other business will be a hotel owner and developer called Host Marriott. Host Marriott will get all of Marriott's properties and construction projects and all its debt. It'll be the weaker offshoot, but Bolenbach's theory is that once the real estate market rebounds, Its problems will fade away. Bullenbach looks at Bill. So, what do you think? Bill's already sold. He's ready to grab any life raft that'll get Marriott out of this mess. I don't understand all the financial and legal implications, but assuming that all of that's okay, let's do it.

9:09It takes a year of work to prepare for the split, but in October 1993, Marriott Corporation cleaves in two. Bullenbach will run the property-owning Host Marriott, and Bill will take the helm of hotel management business Marriott International. In one fell swoop, Host Marriott has swallowed the debt, leaving Marriott International a blank slate and ready to take on the resurgent Hilton.

9:43In Mesa, California, 52-year-old James Williams opens his front door and is immediately puzzled. On the doorstep is a smiling man in a Hilton Hotels uniform. Mr. Williams? Uh, yeah, who are you? Good afternoon. I'm from Hilton Hotels and I've come on behalf of the company to say thank you for your loyalty. You've stayed in more of our hotels than anybody else last year. Mr. Williams stares at the Hilton man, uncomprehending. The cheerful visitor presses on. So, we're inducting you into the Hilton Frequent Traveler Hall of Fame and giving you this. The Hilton employee hands over a set of car keys and steps aside.

10:26William's jaw drops. Whoa, that's mine? Sitting in his driveway is a bright white Pontiac Sunbird convertible. The Hilton employee nods. We will be paying the lease on it for the next year. Williams walks towards the car like it's a mirage. But Williams isn't the only guest benefiting from Hilton's generosity. After years of letting competitors gain ground, Hilton's back on the attack, and its weapon of choice is its loyalty program, Hilton Honors, or H. Honors.

11:10It's October 1994, and on a U.S. air flight to Pittsburgh, a young auditor in the aisle seat flags down the passing flight attendant. Excuse me, ma 'am, I'm a Marriott honored guest member. I'm weighing up whether to earn points or flyer miles for my hotel stays now that Marriott's offering me a choice. So I'm trying to work it out, you know. Now, what's the best option, take the miles or stick with the hotel points? The attendant looks mystified. I don't know, but we should have some information about that. I'll go check. As the man settles back into his seat, the guy next to him leans over. You don't have that headache with H.

11:50Honors. You don't? No. Every stay I earn hotel points and flyer miles. No way! I read that every hotel chain had gotten rid of double dipping. Not Hilton. They'll still give you miles and points. In fact, last week they introduced swaps. You can exchange your points for miles or your miles per points. Way more flexibility. Okay, okay, that sounds great. But you know, what's the catch? There's got to be one, right? How many points do you earn per stay with Hilton? Ten points per dollar spent. Per dollar? Alright, let me get out my calculator. We've got to figure this out before we land. Hilton's point system wins over America's road warriors, many of whom choose to bed down at Hilton's instead of Marriott's.

12:37In 1994, Hilton Honors membership soars 30%. In 1995, H. Honors tops Marriott's program in Inside Flyer magazine's annual poll of super-frequent flyers. The year after, H. Honors passes the million-member milestone. It's still far behind the 5 million enrolled in Marriott's scheme. But Hilton is booking it. Hilton's not stopping with loyalty programs. It's also pushing its way into mid-priced hotels with the launch of Hilton Garden Inn, a new brand designed to compete with Marriott's Courtyard. But while Hilton's pushing down market, Marriott's looking up.

13:27The head office of Thayer Capital in Washington, D.C. Jim Sullivan reminisces about his former boss, KFC founder Harlan Sanders. Yeah, he was a crotchety old so-and-so, but I love working for him. Sullivan is Marriott International's dealmaker-in-chief. He's a motor mouth in his early 50s who wears round spectacles. He's here for his regular get-together with Thayer founder Fred Malick. Malick's a fitness freak and a former Marriott man. He's also advised Presidents Richard Nixon and George H.W. Bush. These days, he buys and sells hotels. Sullivan glances at his watch. Is that the time? I better get going.

14:09Sullivan keeps talking as he stands, heads to the coat rack and gets his coat from the peg. But Malick doesn't move. This is the moment he's been waiting for. He interrupts Sullivan's chatter. By the way, Jim, you wouldn't be interested in buying Ritz-Carlton, would you? Sullivan stops putting his coat on and slowly turns to look at Malik. Then he removes his coat and sits back down. We've tried to buy Ritz-Carlton once or twice, but Bill Johnson wouldn't even talk to me. Johnson is the Waffle House franchisee who owns the Ritz-Carlton Hotel Company. Well, it's different now. He needs financial help.

14:49Ritz-Carlton's got$60 million of loans coming due, and it's still hurting from the recession. The long and short of it is he needs a buyer. You interested? Sullivan doesn't need to think twice. Marriott's eager to break into the luxury hotel segment. Luxury hotels command premium room rates and are usually packed with high-paying guests. But Marriott's homegrown luxury brand, J.W. Marriott, just doesn't have the upper-crust cachet of Ritz-Carlton's 31 hotels. Fred, we're extremely interested. Great, great, but it's got to be quick because they're about to default on their debt. Then let's get moving.

15:32In the days that follow, Sullivan, Marriott CEO Bill Marriott, and an army of advisors descend on Ritz-Carlton's offices in Atlanta to hammer out a deal. Marriott pays$200 million for 49 % of Ritz-Carlton and the right to buy a majority stake in three years' time. The buyout gives Marriott a major presence in yet another segment of the market. It's now got 10 hotel brands from economy-priced Fairfield Inns all the way up to top-tier Ritz-Carlton's. And that leaves Hilton at a major disadvantage. Hilton's got just three brands under its flag, Standard Hilton's, the mid-priced Hilton Garden Inns, and its overseas luxury chain, Conrad.

16:19But Marriott's not the only rival buying up brands. The hotel industry is consolidating fast, and as the buyouts mount, Hilton Hotel CEO and Chairman Baron Hilton realizes he's not the gunslinger Hilton needs right now. So he replaces himself with someone who can ensure Hilton emerges victorious from the mergers and acquisition frenzy. Someone with a proven ability to transform the fortunes of ailing businesses. And it turns out that certain someone is the same guy who saved Marriott's bacon just a couple of years ago. Yes, Stephen Bolenbach is back. This time, he'll be gunning for Marriott. And his opening gambit will be to fix an error that's hobbled Hilton for decades.

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19:21Hilton Hotel Stout CEO Stephen Bollenbach looks triumphant standing on the stone steps of the Swish Langham Hilton in central London. A press photographer shouts out to him. Stephen, can you shake hands with Peter? Bolenbach shakes the hand of the thin, balding Englishman standing next to him. He's Peter George, the boss of British betting giant Ladbrook, the current owner of Hilton International. It's August 1996, and six months since Bolenbach became Hilton Hotel's CEO. When he started, it was 1967, just after Conrad Hilton went behind his son Nicky's back and sold his overseas hotels. Since then, relations between the two Hilton operations have been territorial and litigious.

20:12But this deal once again unites the two Hilton's marketing, branding, advertising, and reservation systems. Hilton International's 161 hotels will also join the H Honors Loyalty Program. They'll even have the option to invest in each other's new hotels and share the profits. And they're still in the hotel management business. A journalist hollers a question. What savings will this alliance deliver? George cedes to Bollenbach. Tens of millions, but the true upside is hard to calculate. Who's to say how many management contracts we lost out on because we were separate? So it was a mistake to sell Hilton International?

20:54Well, hindsight says so. That's why one of the first phone calls I made on my first day at Hilton Hotels was to Peter George. But this reunion only goes so far. A full merger isn't in the cards. At least not yet. Bolenbach knows that getting the two Hiltons back in sync isn't enough. not when it's still behind competitors like Marriott and Sheraton owner ITT. And that makes Hilton vulnerable. It's time to take some risks. Hotels are becoming a buy-or-get-bought industry. To avoid becoming prey, Hilton has to bulk up fast. And the only way to do that is to swallow a rival whole.

21:45It's a Monday afternoon in January 1997, and inside the Manhattan headquarters of ITT, it's battle stations. This morning, Hilton launched a$6.5 billion takeover strike worth$55 a share, and it's anything but welcome. In the boardroom, ITT's 65-year-old CEO, Rand Ariskog, channels the Army officers who once schooled him at West Point as he rallies his top executives. Hilton is coming for us. We've been here before with those corporate raiders, but we left them all hobbling off the battlefield, and I'm telling you, this will be no different. Hilton's been sniffing around ITT for months. Bolenbach's math is simple.

22:31ITT owns Sheraton and Caesars Palace. ITT plus Hilton equals a hotel and casino superpower. Combined, they'd have 230 ,000 hotel rooms worldwide. Marriott would still be 100 ,000 rooms ahead, but the casino interests would give Hilton an edge that Marriott lacks. Today, Eris Cog's out to tear up Hilton's grand designs. So what have we got? What defenses can we hit them with? The ITT team spend hours assessing what weapons they can use, and nothing's off-limits. For Eraskog, this is war, and if Hilton doesn't back off, things will get ugly. Eraskog quickly rejects Hilton's offer and its request to talk.

23:20Then, he delays ITT's annual stockholder meeting indefinitely, so Hilton can't force a vote on its offer. He also threatens to turn the tables and launch a hostile bid for Hilton. Hilton fires back with a volley of lawsuits designed to force ITT to hold a stockholder vote and ups its offer to$70 a share. ITT responds with a scorched-earth defense designed to put Hilton off buying it. It sells non-core businesses to raise cash to buy its own stock and make itself more expensive. It fires 125 of its 200 head office employees to save money and signs hotel management contracts that would saddle Hilton with deals it doesn't want.

24:06But Hilton still won't retreat. So Eraskog announces he will break ITT into three separate companies before the stockholder vote on Hilton's offer can happen. The announcement boosts ITT's stock price and shreds the value of Hilton's cash and stock offer. Hilton files a lawsuit to stop the split. But as the chase drags, an acquisition spree rocks the whole hotel industry. Marriott buys Renaissance Hotels. Doubletree swallows Red Lion, only to get snapped away by Embassy Suites owner Promus. Patriot American grabs Wyndham Hotels. Starwood swoops in on Weston. One-by-one, Boland-Bach's alternative acquisition targets are being taken out.

24:54If it fails to get ITT, Hilton could be next on the menu. Then, on October 1, 1999, Eraskog's luck runs out. Hilton's lawyers persuade the federal court in Nevada to block ITT's plan to break itself up to escape a takeover. The court orders Eraskog to stop dodging the inevitable and give ITT stockholders an opportunity to vote on Hilton's offer. After an eight-month pursuit, it looks like ITT is finally within Hilton's reach.

25:36In his Manhattan apartment, Eraskog picks up the water jug on his dining room table and tops up his guest's glass. It's mid-October, and on November 12th, ITT stockholders are expected to back Hilton's takeover offer. But Eraskog has one last trick up his sleeve. Eraskog puts down the jug and looks at the man he's having lunch with, Barry Sternlicht, the 36-year-old chairman of the upstart hotel company Starwood. Three years ago, Sternlicht was just a guy in ripped jeans getting rich by buying distressed hotels on behalf of far wealthier investors. But then Sternlicht bought Hotel Investors Trust, a near-bankrupt real estate investment trust.

26:21The attraction was certainly not its hodgepodge of real estate holdings. It was a real estate investment trust, REIT for short. Congress created them back in 1960 so small investors could earn money from renting or selling property without paying federal income tax. But Hotel Investors Trust was no ordinary REIT. It was a relic, a hangover from another time where a very profitable legal loophole allowed REITs to pair up with standard companies. And these paired REITs can manage as well as sell or rent hotels without losing their juicy tax perks. He renamed the trust Starwood and used its special tax status to create the hotel industry's hottest stock.

27:06He's using its pumped-up stock to buy Westin hotels now. He wants ITT, too. Eraskog eyeballs the young upstart for a moment. He's not sure what to make of him. ITT is 15 times bigger than Starwood. This deal would be like a house cat swallowing a panda. But it's ITT's best shot at escaping Hilton. Thank you for coming to see me on such short notice. Sternlich smiles. He's delighted to be here. He's been hammering on ITT's door asking to enter talks ever since Hilton launched its takeover attempt. Well, I'm hoping my persistence will pay off. It has. I'm willing to sell you the company. Sternlake looks surprised.

27:53He thought it'd be harder than this. Really? Yes, for the right price, we'll do a friendly deal with you. Eraskog's rationale is simple. ITT and Hilton's hotels are a poor match. There's too much overlap. Starwood makes more sense. Well, we can't beat Hilton on cash, but if you're open to stock, we can blow them out of the water. Eraskog smiles. Stock will do just fine. The next day, Starwood offers$82 per share, valuing ITT at$9.8 billion. dollars. Hilton hikes its offer to$80, but that still leaves Starwood ahead. So Bollenbach launches a campaign to sow doubt about the value of Starwood's stock, and he's got backup from his old colleagues at Marriott.