What should international hotel companies do to mitigate the impact of M&A on hotel owners?

Mergers and acquisitions (M&A) by international hotel companies clearly affect hotel owners. Alongside the benefits they bring to hotel owners, M&A also brings challenges and attendant risks. What, then, should international hotel companies do to mitigate the negative impact of M&A on hotel owners?

An appropriate expansion strategy

In terms of expansion strategy, international hotel companies need a clear plan to secure long-term growth rather than focusing solely on shareholder interests. They should weigh the impact on all stakeholders, including hotel owners, to avoid risks that could erode the value of the M&A transaction. Financially, the pressure to grow drives hotel companies to expand their portfolios through the mainstream segments and to increase revenue per room in the higher segments (five-star, from luxury to ultra-luxury). Under the asset-light business model, international hotel companies earn revenue chiefly from franchise and management agreements, and are therefore heavily dependent on hotel owners.

However, if M&A does not deliver real value to hotel owners, they may end their partnership with international hotel companies. Service Properties Trust, for example, terminated its agreements with Marriott International and InterContinental Hotels Group in 2020 after revenue requirements were not met. This illustrates the risk that hotel companies face if they fail to ensure financial performance. In terms of risk exposure, companies focused on franchising face greater risk in the event of a dispute, as franchise agreements are more flexible and hotel owners can readily change brand. Management agreements, by contrast, are stricter and apply mainly to hotels in the luxury to ultra-luxury segments, making hotel owners less likely to switch given the high cost of conversion.

In short, a sound M&A strategy not only helps international hotel companies to grow sustainably but also reduces the risk of losing partners and protects the interests of all stakeholders.

Transparent communication

Transparency and communication are key to mitigating the negative impact of M&A on the reputational and perceived treatment value of international hotel companies. No legal constraint prevents hotel companies from expanding through M&A or signing new projects outside the restricted areas defined in specific agreements; nevertheless, they should share with hotel owners, honestly and transparently, any information on M&A activity or new projects that may concern them at certain stages. Transparent communication is far preferable to hotel owners learning of M&A through public channels.

In practice, most hotel owners learn of their hotel partner’s M&A activity rather late, through brief calls from members of the acquired company’s executive team, followed by emails announcing completion of the deal and general integration timelines. Communication of this kind can come as a shock to smaller hotel owners who lack the market knowledge to fully understand the impact of M&A on their assets.

Yet the sensitivity of M&A transactions is a reason to keep related information confidential, to avoid adverse effects on both acquirer and target, such as a fall in share price. The parties to an M&A transaction should therefore manage public relations jointly to ensure a consistent, transparent and clear message, minimising any negative impact on the company and its stakeholders.

Professional disclosure can help international hotel companies avoid litigation from aggrieved hotel owners, as in the case of the merger between Marriott International and Starwood Hotels & Resorts.

Thorough due diligence

Due diligence is critically important in any M&A transaction. M&A carries many potential risks, from corruption and cyberattacks to environmental pollution. These risks may be concealed intentionally, unintentionally or through negligence during the due diligence process. When they materialise, the financial and reputational damage can be considerable. Beyond professional and prudent due diligence, international hotel companies should therefore arrange appropriate insurance for insurable risks. In short, international hotel companies must weigh the risks carefully to ensure that M&A transactions ultimately succeed.

Effective integration

Completing a deal successfully is only one part of the M&A journey. A well-managed integration process is essential to ensuring that the original expectations are met efficiently. The negative effects on hotel owners and on the value delivered to them, set out in earlier sections, include but are not limited to brand dilution, internal competition, inconsistent personnel quality, cultural conflict, reduced attention and declining performance, all of which can be mitigated.

International hotel companies should maintain regular contact with hotel owners and provide greater support during periods of strain. Wherever operating standards are revised, the better version should be adopted. And because people are at the heart of hospitality, reassuring and retaining staff is vital. In short, international hotel companies must ensure that their integration plans are thoroughly researched and carefully executed.

Conclusion

A number of measures can mitigate the negative impact of M&A by international hotel groups on the value they deliver to hotel owners. These include a sound expansion strategy, thorough due diligence, transparent communication and effective integration management. First, international hotel groups need an appropriate M&A strategy to enable the combined company to achieve sustainable growth. They must consider the interests of hotel owners throughout the M&A process to ensure that potential risks such as brand dilution or internal competition are addressed from the outset, so that they do not undermine the true meaning of growth.

Second, thorough due diligence is essential to ensure that M&A transactions are beneficial and that related risks, such as corruption, cyberattacks and environmental pollution, are identified, so that appropriate mitigation strategies can be put in place. Third, transparent communication plays an important role in steering M&A activity along a controlled path, not only fostering public understanding but also reinforcing the trust of hotel owners.

Finally, effective integration management is the core principle for completing a successful M&A process and laying the foundation for sustainable development thereafter. Accordingly, high-probability risks such as inconsistent personnel quality or cultural conflict, which adversely affect the perceived treatment value and performance value delivered to hotel owners, must be identified and addressed appropriately. In short, M&A is a complex process that spans many years. Many issues can arise throughout, and the impact of M&A on hotel owners is far-reaching. International hotel groups must therefore ensure that every M&A plan is carefully considered and prudently executed, so as to minimise negative effects and maximise benefits for hotel owners.