Consequences of M&A activity in the hospitality industry are increasingly making headlines, fuelled by a greater complexity of owning and operating structures and an ever-larger number of international stakeholders. It begs the question: What are the best practices to protect oneself from unwanted consequences?
Earlier in the year, third party owners and franchisees raised their voices about the Starwood-Marriott merger, challenging the firms on the potential violation of their exclusivity agreements (prohibiting the brand-partner to own, manage, operate or franchise other hotels within a certain geographic parameter). M&A activity will not be phased by such temporary “set-backs” as evident by the continued consolidation that the industry is witnessing. Yet, there will always be parties that feel they “drew the short straw.” Merger challenge litigation is thus likely to increase, so what is the board of directors to do to protect their businesses and shareholder value?
The “case files”
In the recent past, the hospitality industry has witnessed very public shareholder disagreements concerning M&A activity involving global players in the sector. Let’s look at some “case files”:
Morton’s Restaurant Group: In 2013, the firm’s ownership was looking to sell the business. Following the appropriate time and due diligence process, Morton’s ended up merging with a subsidiary of Landry’s Inc. While most would consider the transaction to have been a successful one, generating solid returns for investors, some shareholders raised concerns and sued. The case evolved around a controlling stakeholder reportedly acting in self-interest and a potential related party conflict of interest arisen by the actions of a financial advisory firm.
AccorHotels: In 2016, Accor finalized its US$2.9 billion acquisition of FRHI. One might say that this transaction went off without a glitch – yet, Accor is reportedly having to “fight” at another front. Jin Jiang, which currently holds approximately 16% in Accor, is reportedly courting fellow shareholders Colony Capital and Eurazeo to buy their stake in the business. To “protect” itself, Accor is reportedly eying HNA Group to try and diversify its shareholder base. Problem is, ownership by both HNA and Jin Jiang comes with “strings attached,” creating a potential conflict of interest based on strong (ownership) ties to Accor competitors.
NH Hotels: The firm has, up until recently, been spearheaded by Federico Gonzalez Tejera, who was able to increase profitability and improve the cost base. Yet, he was ousted earlier in the year by NH shareholders who saw a potential conflict of interest for HNA ownership representatives as HNA also announced plans in April to acquire NH rival Carlson Hotels. In response, HNA questioned the actions of some other shareholders such as Oceanwood, claiming these investment firms would act in self-interest, which ultimately destabilized the firm. It also highlighted the necessity for representatives of Oceanwood to recuse themselves when it came to refinancing discussions to avoid a potential conflict of interest (the firm holds unsecured convertible bonds and senior secured high yield notes).
Protective actions by the board
The world is an increasingly smaller place to conduct business in – hospitality organizations are (becoming) global players and their development and investment partners are continuing to geographically diversify their interests. It is, therefore, not surprising that there is a greater number of potential conflicts of interest to arise. Yet, the at times Hollywood-esque and very public “shareholder fights” certainly do no good to any party involved in a take-over or potential merger situation. It is the board’s responsibility to ensure a “smooth transition” from a corporate governance point of view – one should make sure to have those boxes checked.
A reminder on sound corporate governance best practices and appropriate board structures can be found here.
The below bullet points highlight some of the obvious but often forgotten facts to:
Avoid conflicts of interest. This means the company always come first – one should not interfere with the performance or interests of the business, one must take decision based purely on the best interests of the business and one must avoid personal interests or gains interfering with the business. That means that one must also not have an interest in a transaction that involves a competitor, customer or supplier and that one must not direct business elsewhere. There should thus be a solid “Code of Ethics” or comparable policies in place governing this (e.g competition or antitrust law, trading/insider information, etc.). It is hereby important to remember that the appearance of a conflict of interest can be as damaging to the company as an actual breach of it. Early disclosure is thus key and highlights the importance of a firm’s general counsel, independent director(s), secretary and committees.
Be in control of your message. Be Transparent. Once shareholders reach a certain ownership threshold, they are obliged to declare their intentions. This will help to avoid confusion or for any appearance of a conflict of interest to arise. Communicating loud and clearly one’s intent and strategy will provide a clear view of everyone’s respective role pre- and post- the transaction. IHG’s acquisition of Kimpton in 2015 is a positive example of this: CEO Richard Solomons made a clear statement of IHG’s intention to keep Kimpton as a separate entity and to maintain its autonomy, keeping its own CEO Mike DeFrino.
Avoid engaging in a “public fight” as those create uncertainty and might destabilize the firm and/or decrease shareholder value. Rumours about takeovers or mergers typically also impact a firm’s share price – for the better or worse. This is not to say that shareholders should stay quiet – on the contrary, they should not be afraid to ask tough questions and hold the board and management team accountable. Yet, if proper contractual due diligence and risk assessments are done, and if the individual strengths and weaknesses of each party involved are known, then there should be no need for “airing one’s dirty laundry in public.”
Proactively manage relationships as, if all goes well, you will still need to work together post-signature to integrate the different business units and corporate cultures. Yet, certain relationships are best kept at arms-length. For example, while it is good to engage in an open dialogue pre-merger in order to identify potential synergies one also needs to be careful in not disclosing too much information upfront or providing access to strategy if the negotiating partner has conflicting ownership interests with a competitor. Furthermore, post-merger, board interlocks (“you sit on my board and I sit on yours”) are to be avoided as they may “cloud” objectivity and negatively affect the efficiency of the board. Lastly, the Morton’s case highlights that relationships with external third parties will equally need to be managed in the right way.
Contributed by Thomas Mielke and Andrew Hazelton, Aethos Consulting Group, London