Unlisted hotel acquisitions more profitable, Cornell study says

ITHACA, NEW YORK Unlisted hotel acquisitions create more value over time than do acquisitions of listed hotel assets, according to a new study released by Cornell University’s School of Hotel Administration.

“Based on a large sample of acquisitions in the lodging industry from 1981 to 2006, where both listed and unlisted lodging assets are involved in the transactions, our results strongly suggest that acquisitions of unlisted lodging assets create more value to the acquiring shareholders,” says the study, conducted by Qingzhong Ma and Athena Wei Zhang. “Further, among the acquisitions of unlisted assets, more value is created when stock is used as payment, when deal is relatively large and when competitive bidding is avoided in the transaction.”

Most studies regarding acquisitions in the lodging industry have focused almost exclusively on acquisitions of publicly traded targets, but the reality is that most acquisition deals in the lodging industry—about 92%—involve unlisted targets.

Economists believe that asset acquisitions tend to be overvalued due to “managerial hubris,” wherein managers are overly optimistic about their ability to manage acquisitions. “In acquisitions of publicly traded targets, acquiring shareholders on average at best achieve breakeven, and in some cases have seen big losses,” the report says.

By contrast, unlisted acquisitions tend to outperform because investors often enjoy a liquidity discount due to the more common dynamic of the motivated seller, the authors speculate.

The full study, “The Hospitality Investment Decision,” can be accessed for free from the Cornell website. Qingzhong is an assistant professor of finance in the Hotel School, while Wei Zhang is an assistant professor of finance in the School of Business at Ithaca College.