M&A vs. Organic: What’s the Winning Strategy for Hotel Chains in 2018?

In today’s hospitality industry, strategy will determine the winners and losers.

I have had the unique privilege of reporting directly to 4 hospitality industry CEOs (both public and private) and been a former head of strategy and corporate development as well as a Partner in a consulting firm advising hotel CEOs and co-founded an international hotel brand in Asia.

Since Good to Great, it’s become folklore that corporate strategy is less important than management and that getting the right people in the rights seats is where CEO’s should focus their efforts. That lesson is said to apply across industries at every time and space. Sorry but I beg to differ. Hospitality has always been an intensely strategic industry. And in todays’ turbulent technology and real estate markets marked by geo-political uncertainty, strategy matters more than ever. In today’s hospitality industry, strategy will determine the winners and losers.

The boards of our industry know these are times where it matters to have strategists in charge. That’s why the CEO’s of Hilton, Marriott, Hyatt, Starwood Capital and Accor Group are finance, private equity and real estate people. The only exceptions are Wyndham and IHG.

That the hotel industry is run by “deal guys” is not new or unusual. But look a little deeper and we will find contrarian competing strategies at work even among those with deal driven DNA. Accor and Marriott are on an M&A spree and their management teams are absorbed in expensive, high risk integrations. Even small brands like Red lion are on an M&A spree as its primary growth strategy.

In contrast, Hilton, Choice and to a lesser extent IHG are chiefly focused on organic growth. They are launching new brands and launching internal innovations.

On the surface it appears the stock market is not rewarding the M&A pathway: while the M&A driven Accor’s EBITDA/EV multiple is 25; Marriott’s is 16, and Red Lion’s is 11 while the more organic growth players, Hilton’s EBITDA/EV is 17 and IHG’s is 15, Wyndham is 11 and Choice hotels is 19. If one excludes the relatively asset heavy Hyatt, an outlier due to its unique structure and heavy balance sheet, at 7, we have good evidence to analyze since 2009.

So, what’s the take-away?

It’s clear the market is saying that Accor is achieving a transformational breakthrough of sorts by acquiring scale in North America and high-end product segments. And otherwise, in general that M&A is risky and less preferable to relatively stable, long term organic growth. The market is willing to support hotel chain valuations for those who consistently invest in organic growth and R&D. On the contrary, the management teams that spending the bulk of their time making acquisitions, integrating them and dealing with owner relations issues and managing unforeseen problems, offset much of their perceived gains. Their abstract arguments about loyalty database growth, cost synergies and overnight shelf space are often offset by management turnover, inheriting undeveloped brands and weak management and franchise contracts.

Bottom-line is the data suggests hotel management is better off focusing on developing a strong distribution platform, focusing on customer service and internal innovation to address Airbnb and other disruptions versus M&A. Back to “Good to Great”, building a flywheel is a winning strategy and M&A can be a distraction and is more likely than not, to fail. In general, unless consolidation is transformational and strategic, it does not create relative value for shareholders. Management teams should step back from the herd mentality. It’s time to consider the alternatives and chart a sustainable growth strategy that builds an enduring organizational capability.

And otherwise, in general that M&A is risky and less preferable to relatively stable, long term organic growth.
2019-02-26T19:57:57-07:00