A new suitor for Starwood? Here's what I think might be the outcome

The biggest news in the travel space in November last year was Marriott's acquisition of Starwood. We even evaluated on this blog, as to what could be some of the other consequences, with an Indian lens, of this merger. While that process is expected to complete later this year, someone's thrown a spanner in the works.

Earlier today, Starwood received a non-binding proposal from a consortium of companies led by the China-based Anbang Insurance Group, for an all-cash deal to acquire Starwood. Word is that Marriott has given Starwood a waiver, for Starwood to evaluate this bid. The waiver expires on 17 March 2016, which means Starwood has time till then to consider this new bid.

To be honest, the new deal, which prices Starwood's stock at $76 a pop, is well in excess of Marriott's deal (a cash-and-stock deal that would result in each Starwood share being exchanged for 0.92 Marriott shares plus $2, or a total value of $65.40 per Starwood share, but will eventually depend on the value of Marriott's stock on the transaction date).

St. Regis, Mumbai

A press release by Marriott has only stuck by its commitment to the original acquisition. I've not seen a similar release by Starwood, but for several reasons, they are likely to think on similar lines as Marriott...which may not augur well for Starwood fanboys who fear the withdrawal or dilution of their favourite hotel loyalty program.

Here's why I think the new deal is likely to be rejected by Starwood.

Firstly, an acquisition by Marriott is likely to result in several synergies to the combined group, which will benefit shareholders. I'm guessing that there's only a very small base of points and miles loyalists who are also Starwood shareholders, and I can tell from my modest experience working on deals, that in situations like these, shareholder requirements overwhelm customer needs. With its larger base in the hotel market, Marriott acquiring Starwood makes immensely good business sense. And in situations like this, remember The Godfather - it's not personal, it's business. Here's a reminder of the scale of this merger with Marriot.

Secondly, acquisition by a consortium comes with its own set of challenges as opposed to acquisition by a single entity. There will always be a multiplicity of requirements and it is often very difficult for the target entity to meet many of those. While there will be a lowest common factor, that is rarely likely to please most, if not all, of the consortium partners. Put differently, you're better off joining another individual than a gang!

Thirdly, the new suitor is interested in Starwood as an investment, not as a merger (unlike Marriott). Which means that if the price is right and the circumstances require it, they are likely not to hesitate to sell Starwood. Unless there's a commitment by them to Starwood to stay invested for a minimum period of time, Starwood will be treated like any other investment - ready to be sold at all times. While Chinese companies are on an acquisition spree lately, regulation is bound to catch up sooner than later. Starwood's board will likely take the long view.

Finally, Starwood has another two days to decide whether or not to pursue the new offer. I'd imagine that the Marriott deal took weeks (if not months) in the making, and it is going to be very difficult for Starwood's board to decide on the new offer in just 2-3 days, especially considering the first point above about value to shareholders.

A final, minor point. Starwood's 2015 annual net income was $489 million. While its 2016 net income is likely to be higher than that, cancelling the Marriott deal will cost Starwood $400 million in termination costs. That will be a significant portion of its 2016 net income, which Starwood can ill afford. There are also likely to be backlashes if Starwood cancels its deal with Marriott and something goes wrong with the new deal. That would be too much of a reputation hit for Starwood's board.

Conclusion

While the new offer sounds rather good, I believe the Starwood board should take the long view here, and go with the existing offer with Marriott...much as that may not be welcomed by Starwood loyalists. There! I've said it! Now, to be proved wrong.

Readers - what's your view on the new offer for Starwood? Which way do you think Starwood's board should lean?