by Maurice Robinson, Principal, KPMG Peat Marwick LLP
Summer, 1997
Patriot-American acquires Wyndham. or is it Carnival, or is it another REIT? Wait a minute - it's all three!
Westin was acquired not too long ago by Starwood Capital and Goldman Sachs, but now they are rumored to be on the sales block once again.
It's getting pretty difficult to tell the hospitality industry players apart with-out a scorecard anymore. Is this the beginning of a new era, or the end of one as we know it?
Several trends are converging at once in the hospitality industry. Not one of those trends is new, but the twist this time is they are all happening at the same time. What is new is the unprece-dented amount of capital that is flood-ing into the industry. Money in search of returns. without a concomitant surge in supply growth. It is this deluge of money - primarily fueled by Wall Street that is magnifying the speed, size, and impact of the consolidation trends. It may seem to some as though there is no place for hospitality companies to spend it except on each other. So, let the mergers and acquisitions begin! And let the prices skyrocket!
Think of the hospitality industry as a consumer product industry for a minute - Iike cars, toothpaste, or soup. Does the world really need dozens of different brand names, all searching for product in the same key cities? Not really.
Does the industry need hundreds of different companies to operate the product? No.
The hospitality industry is a mature industry where the top brands have been fighting for market share for years. Segmentation. or 'nichemanship' is mostly the result of the battle for "shelf space." Consolidation, or cannibalization, is the growth strategy most often utilized in these mature industries, once the growth in demand for the product levels off.
Additionally, the hospitality industry is a capital-intensive business
(particularly the real estate portion), so there
can be distinct and powerful advantage in having economies of size
and greater access to capital than your competitors. Many mergers and acquisitions
have as their main goals the reduction of over-head expenses and a lower
cost of capital and these goals are being achieved.
Where Will It End?
If, as I believe, the cycle has reached its peak. the following scenario is likely. Capital will begin to recede. Prices will fall - both prices of the stocks of the public companies and REITs, and prices of non-prime property. Stock prices of high-flying public companies will take a tumble, as the growth expectations that have been fueled by the plethora of capital are ratcheted downward. Lower price/earnings multiples translate into less purchasing power and fewer buyers for hotels will cause less upward pressure on hotel prices. Once the capital market spigot is turned down or off and the surplus of buyers dries up individual hotel prices will level off or fall slightly. Such is the cycle of mature, capital-intensive industries.
But at the corporate level, mergers and acquisitions may still make economic sense should the industry enter into a downward cycle. Once corporate-level infrastructure is established, it is like a factory: the more throughput, the more efficient the factory is likely to be. From recent reports, one can conclude that HFS. for example, might be a good example of a company driving the cost of services down through size. With their huge investment in information-handling technology; they have expanded the capability of their franchise "factory" and can handle reservations efficiently, and provide franchisee support services and benefits more cheaply. Their success allows them to grow and their growth gives them purchasing power and access to more capital - which they use to grow some more! A company like HFS is well-positioned then, to seize the value opportunities present before the next upward trend.
In light of a possible lodging down-turn in the U.S. sometime in the next five years, U.S. hotel companies may begin to look abroad for merger and acquisition opportunities to both diversify and to mitigate business-cycle risks. This may have been Marriott's strategy in acquiring Renaissance Hotels which although based in the U.S., has a heavy concentration of hotel properties in Asia and Europe.
Look for the Consolidation Trend to Intensify
A large number of merger and acqui-sition transactions are likely to be announced over the next couple of years, including mergers of companies which recently became publicly owned. The slowed pace of internal growth through normal business development processes - that many hotel companies are beginning to experience - may be a driving force to accelerate the consolidation trend. The intensity of the current cycle of consolidation will make an interesting case study to be read about by future business school students. But will it be referred to as "The Golden Age," or "All Fall Down?"
The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1997 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.
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