The new hilton had 1900 hotels with brands from

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Unformatted text preview: Red Lion chains. The new Hilton had 1,900 hotels, with brands from budget to luxury to fit the pocketbooks of all travelers. Plagued by problems resulting from its own merger with Doubletree Hotels, Promus needed Hilton’s financial strength to support its premium hotel brands. The two companies had discussed a merger in 1997 but couldn’t agree on price. In mid-1999, Hilton again approached Promus, and they struck a deal based on a value for Promus of about eight times projected 2000 earnings before interest, taxes, depreciation, and amortization. The $4-billion deal priced Promus shares at $38.50—a nearly 45 percent premium above the share price in late August 1999. Some lodging industry analysts believed the higher price was fair, citing Hilton’s ability to consolidate the two companies, achieve economies of scale, and increase market share. Once the merger was approved and financed, the work of integrating the operations of two very different companies began. By looking for ways to improve synergy among the chains, Hilton achieved cost savings of $72 million, 30 percent more than anticipated, in the first year. Hilton expanded its Honors guest rewards program to another 1,400 hotels and developed e-business solutions to improve cross-selling. With its new system, reservations agents can access multiple hotel chains from one screen and find another room at a sister hotel when a customer’s first choice is full. Successful horizontal mergers (mergers of firms in the same line of business) such as that of Hilton and Promus require careful evaluation of the target firm and a clear understanding of the motives involved on both sides. Not all mergers turn out as well, and disappointing outcomes may call for other actions. This chapter looks at several types of corporate restructuring—mergers, leveraged buyouts, and divestitures—as well as at restructuring that results from business failure. F 711 712 PART 6 LG1 Special Topics in Managerial Finance 17.1 Merger Fundamentals Firms sometimes use mergers to expand externally by acquiring control of another firm. Whereas the overriding objective for a merger should be to improve the firm’s share value, a number of more immediate motivations such as diversification, tax considerations, and increasing owner liquidity frequently exist. Sometimes mergers are pursued to acquire needed assets rather than the going concern. Here we discuss merger fundamentals—terminology, motives, and types. In the following sections, we will describe the related topics of leveraged buyouts and divestitures and will review the procedures used to analyze and negotiate mergers. Basic Terminology corporate restructuring The activities involving expansion or contraction of a firm’s operations or changes in its asset or financial (ownership) structure. merger The combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger. consolidation The combination of two or more firms...
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This document was uploaded on 01/19/2014.

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