How crucial are M&A in the hotel industry?

  • M&A, a popular way to expand business in a short span of time
  • Key factors driving M&A in the hotel industry
  • Main risks involved
  • Long-term benefits vs. short-term gains


In the present world, Mergers and Acquisitions (M&A) is a popular mean to expand business in a short period across sectors (acquiring/merging already existing business opportunities) as compared to the organic growth (use of one’s energy and resources to create a new business opportunity). M&A benefit firms in terms of scale, synergies of cost, low taxes, product expansion and low cost of capital, etc. But can also result in a potential harm to companies as a result of overpayments, the slow pace of integration and poor strategy, etc. 


Globally, there is an unquenchable thirst for a rapid growth in the hotel industry (valued over $550 billion, 2016; source: Statista), where hotels are increasing their portfolio size in lesser time through brand acquisition. The overtaking of Starwood by Marriott Hotel Group, Accor’s acquisition of luxury brands like Raffles, Fairmont and Swisstel, etc., Intercontinental (IHG) procurement of Kimpton hotel and Hilton Worldwide’ s acquisition of Blackstone are among few of the large-scale mergers in the hotel industry.

There were more than 13,800 deals in the hotel and lodging industry since 1985, with the total value of $809.7 billion, including some large-scale mergers that significantly impacted the industry. On an average, each year for the past 15 years, the industry witnessed over 235 M&A deals with a total value of more than $27 billion (as indicated in the above chart).

The major reasons for the M&A spree in the hotel industry:

1. The hotel and lodging sector were saturated and new concept development was a costly affair, the companies entered into M&A for growth and in order to retain the market share, which allowed these firms to turn bigger. This large-scale expansion further enhanced their purchasing, room distribution costs and customer loyalty rewards programs.

2. Global hotel and lodging sector are highly fragmented, the large players only command one-third of the market, while the rest is dominated by the local players. Furthermore, there are campsites, hostels and micro bed-and-breakfasts that also offer competition. This provides immense opportunities to consolidate.

3. The recent uptrend for mega acquisitions (Marriott International’s acquisition of Starwood Hotels and Resorts [Sep. 2016] created the largest hotel company in the world with ~5,948 hotels across 100 countries and Accor Hotels acquisition of Fairmont Raffles Hotels International [July 2016] increased its presence in the international luxury hotel segment).

4. The advent of sharing economy (Airbnb, Onefinestay, etc.) has created more opportunities, where a spare room can potentially be a hotel room. Thus, to compete with these players, the hotel and lodging companies follow an asset-light strategy (selling off their owned properties, focusing on their managed and franchised operations and brand expansion). For instance, Accor sold its property subsidiary, the HotelInvest valued at ~€6.6bn (estimated completion 1H2017). This allowed it an opportunity to invest the released capital in either hotel service or plan another mega-acquisition in the sector.

5. The benefit of consolidation was compelling for the asset-light hotel companies (in the past, when hotels owned their assets, it was extremely difficult and costly to gain scale) as it provided a fast route for growth as well as scale and helped these in dealing with big online travel agents ([OTA], [provided cost savings in commissions charged by these online travel agencies]).

In the past decade, takeovers have accelerated the rate of growth. The speedy development of travel and tourism has further boosted the growth and operational efficiency in the hotel industry as is reflected in the improved occupancy rates of hotel properties.

The hotel sector may experience a continued uptrend in terms of operating and financial performance in 2018 with growth in occupancy, average daily rate (ADR) and profits. In Q1 2018, more than 30 deals were announced which are pending for finalisation apart from the 28 deals which were completed since Jan. 2018. Moreover, companies are aggressively adopting the inorganic growth route, which provides benefits like cost savings from economies of scale, large market share, broader customer base and few competitors. On the other hand, large transactions such as the 2016 landmark Marriott-Starwood deal is still to deliver full synergies. Additionally, new projects and hotel opening will undoubtedly impact the current players and may lower their growth prospects over the time.

Although, many deals took place in the last decade and several are on the radar, but whether these will benefit the industry in long-term or the players are rushing towards short-term gains such as cost synergies, improved brand offerings, increase in market share, etc.

However, what comes next is of significance as a part of any takeover deal, for instance, putting everything together (integration of properties, management systems and human resources) and lead well in the future for a generation of continuous gain. This was reiterated by Mr Sorenson, CEO of the Marriott Group when he commented that the integration of Marriott and Starwood will take some time. Hence, mere completion of acquisition over regulatory portal is not enough for a deal to be successful. In conclusion, it can be stated that size does matter in the hotel industry, which is attracting mergers in the sector. But the post-deal integration of the entire system remains a crucial part of the activity.



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