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The development of hotel companies in the UK, 1980-2003

Paper submitted to 8th European Business History Association conference 16-18 September 2004 Barcelona, Spain

This is work in progress, please do not cite. Criticism and comments will be appreciated.

Abstract

This paper is part of a PhD thesis and the purpose is to discuss the initial findings on the subject. It attempts to discuss the patterns emerging from an initial study of four hotel companies in the UK, through their development since the 1980s. Secondary data were collected from public sources such as newspapers, books, scholarly articles, market reports and company annual reports. From this preliminary research, a few patterns are observed concerning the development of hotel companies. For example, merger and acquisition activity (M&A) is a popular tool for growth; hotel companies are moving towards big business and there are a few hotel industry-specific motives in M&A activities such as consolidating, branding and technology. These patterns are linked to the unique nature of the hotel industry, that is its needs to be physically present at a location in order to deliver the goods and services. Thus, it is both time-consuming and involves high capital investment to build new hotels. Consequently, M&A activity becomes an essential tool for expansion as it enables a quicker and less expensive way to expand in general. Other patterns observed are the changes in financing methods for M&A activity, which led to the increase of hotel management companies. In addition, leading brewery companies are seen to exit their original businesses to focus on the ‘growing’ hotel industry. The limitations of this paper are identified as time constraint and reliability of secondary data. The next stage of investigations will involve primary data collection as a form of validating and enhancing the findings and analysis of this subject.

Mary Quek Business School Department of Hospitality, Leisure and Tourism Management Oxford Brookes University Email: [email protected] The author is grateful to Judy Slinn for her comments and is responsible for all errors in this paper.

- 1 - The development of hotel companies in the UK, 1980-2003

Introduction

In the second half of the twentieth century in the United Kingdom (UK), the service sector emerged as a major source of employment whilst the manufacturing industry dwindled. There has been extensive research into the evolution of service companies and sectors, including railways, shipping, airlines and banking. For the hotel industry, published research illustrates the development, ranging from A.D. 43 to the early 21st century. Borer (1972) provided the account of the different types of accommodation evolving from the A.D. 43, when the first Inn started, until the 1970s. Taylor and Bush (1974) highlighted the evolution of the hotel industry through the story of several hoteliers and major events from the mid 19th century to 1974. Medlik and Airey (1978) provided an overview of the evolution of the hotel and catering industry from the early Britain days to 1975 through a multilevel discussion comprising of the firms, industry and institutions. Nickson (1987) explored the growth of hotel companies by reviewing the autobiographies and biographies of several famous hospitality entrepreneurs. Stewart (1991) narrated the growth and development of Trust Houses and Forte Holdings by tracing its past. Stewart (1995) conducted a study of the development of 12 hotel companies in the UK between 1945- 1989. From his analysis, he identified the reason for growth amongst the major firms to the duality of industry as property and retail operations. Price (1996) gave a general view of the brand definition and its value in the hotel industry. Pope (2000) examined the fortunes of three hotel groups in the 1920s and 1930s, and the development of railway resort hotels (2001). Sangster (2000b) investigated the concentration of hotel brands in the different European countries and concluded that most brands are grown domestically before expanding overseas. Taylor (2003) illustrated the history of the British hotel industry from 1837 to 1987. It includes the story of some extraordinary hoteliers and events that shape the industry.

The variety and quality of research conducted on the hotel industry is increasing and no doubt will continue to attract more scholarly research because of its rapid growth. This paper is an attempt to discuss the patterns emerging from an initial study of four hotel companies through their development since the 1980s. It endeavours to extend the research in the area of the growth of hotel industry since several hotel firms had emerged

- 2 - to become ‘big business’ in the 21st century. The prominent pattern observed is the use of mergers and acquisitions (M&A) as a growth mechanism. In 2004, a survey conducted by MKG consultant revealed that the ten largest hotel groups in the world were managing 75% of the world’s 4.6 million rooms (HNR, 2004). This is particularly the case in the UK, where the hotel industry has become an important economic sector, which generated a turnover of approximately £10 billion in 2001, a 60% increase as compared to £6,030 million a decade ago (HCIMA, 2002; KN, 2003; Price, 2000). Moreover, several hotel groups have grown from small firms to diversify into international hotel groups. For example, the InterContinental Hotels Group1 (IHG) and Hilton International have been ranked the largest and the 10th largest hotel group in the world respectively (HNR, 2004).

The ultimate motive of M&A rests on the desire to grow. In this paper, to grow means to become big in terms of volume, i.e. number of hotels, rooms and locations and profits, i.e. shareholder value. The unique nature of the hotel industry is its need to be physically present at a location in order to deliver the goods and services. Thus, it is both time- consuming and involves high capital investment to build new hotels. Consequently, M&A activity becomes an essential tool for expansion as it enables a quicker and less expensive way to expand in general. This study endeavours to enhance insights of the conditions and factors affecting M&A activities; in turn, to provide an overview of the development of the hotel industry via M&A activities. Additionally, it is hoped that it will add to the knowledge of business history and business management studies through an analytical approach.

Approach This paper traces the development of major UK hotel companies over more than two decades through empirical evidence collected from secondary sources. The framework is centred on M&A as a growth mechanism to delve further into the motives for and consequences of the growth of hotel companies and the hotel industry. This is an exploratory study based on a number of case studies, focusing primarily on the period from the 1980s to 2003. The sample selected was based on the ranking of top hotel companies in the UK by the Hotel and Catering International Management Association in 2002 (HCIMA, 2002).

1 IHG was previously known as Six Continental Hotels in 2003 and Bass Hotels and Resorts before 2000.

- 3 - Four of the top hotel companies have initially been selected, InterContinental Hotels Group (IHG), Hilton International (Hilton), Whitbread plc (Whitbread) and Travelodge & Little Chef (Forte). These are four interesting companies in the UK due to the different nature of their original businesses. IHG is the product of the de-merger of Bass, who was originally a brewery company that ventured into the hotel industry in the 1970s. Whitbread was also originally a brewery company, but exited the pubs and bars business of more than 100 years in order to focus on the hotel industry in 2000. In 1987, Ladbroke whose original business was in the gaming industry acquired Hilton International. Travelodge is presently a subsidiary of Permira Investment and is included in this research because of its interesting link to the Forte Group whose original business was operating milk bars, and which was once one of the biggest hotel companies in the UK.

A few terms will be defined in the following in order to enable a consistent comparative analysis. They are the terms ‘UK’, ‘hotel’ and ‘merger and acquisition activity’ (M&A).

United Kingdom (UK) The UK comprises Great Britain (England, Scotland and Wales) and Northern Ireland. In this paper, the term UK refers to the geographical areas covered as mentioned above.

Hotel The word ‘hotel’ was used after 1760 in England (Medlik and Airey, 1978). It refers to large houses consisting of apartments for let by the day, week or month. According to Harrison and Johnson (1992), the rental activity is usually supported by the provision of food and drink and other related services. Today, hotels are generally categorised into 1- Star, 2-Star, 3-Star, 4-Star and 5-Star. In addition, hotels can also be categorised into budget, resorts, family, all-inclusive, extended-stay, etc. The hotel companies in this study own, manage, franchise or have a joint-venture deal in a range of different category of hotels that fall into some or all of the above categories. Therefore, in this paper, ‘hotel’ refers to any or all of the above categories.

Merger and Acquisition activity (M&A) Acquisitions are deemed as investment decisions by the acquiring firm (Halpern, 1983). According to Schoenberg (2003, pp. 96), acquisitions are often referred to as takeovers because ‘the bidding company controls all of the assets, both tangible and intangible, of the

- 4 - target entity’ when an acquisition is completed. Gaughan (1999) posited that the term ‘takeover’ is fuzzy because it can refer to various types of transactions including both friendly and unfriendly mergers. This view accords with Harshbarger (1987) who considered a takeover as a situation when a company disagreed with the conditions offered in an acquisition. On the other hand, it is deemed an acquisition when ‘the conditions are more friendly’ (pp. 339). To compound the understanding of the definition of ‘acquisition’ and ‘takeover’, merger is sometimes used as a replacement of both. Merger is being viewed as an amalgamation of two separate organisations that are of approximately similar size, that combine all their assets rather than the acquisition of one by the other (Schoenberg, 2003). According to Gaughan (1999), the term merger has been widely used for the union of firms that involve firms of both different and similar sizes. It could also be a ‘political reason’ due to company’s preference to be viewed as a merger instead of a takeover. Schoenberg (2003) argued that the term ‘acquisitions’ and ‘mergers’ have precise meanings in certain context such as their legal structures. However, they generally consist of similar intents and factors for success and therefore the term are often used interchangeable in practice. In order to facilitate a compatible research, the term merger and acquisition activity (M&A) will be used to replace the terms ‘acquisitions’, ‘mergers’ and ‘takeovers’ throughout the discussion.

General motives for M&A activity Ansoff (1957) proposed four basic growth alternatives that are available to a business. They are to increase market penetration, to develop new market, to develop new product and to diversify. Schoenberg (2003, p. 98) proposed an additional motive to the above, which is ‘to enter a new geographical territory’. Vermeulen and Barkema (2001) argued that M&A activity enables the firm to gain greater market power, overcome barriers to entry, and acquire new knowledge and resources. Jemison and Sitkin (1986a) suggested that the purchase of a company facilitates for the buyer faster and safer access to markets, products, technologies, resources and management talent. It is also deemed a useful tool to redirect and reshape corporate strategy. Cosh, Hughes and Singh (1980) and Ingham, Kran and Lovestam (1992), argued that risk spreading is one of the motives while Dewey (in Hannah and Kay, 1977) and Halpern (1983) suggested that M&A activity is related to preventing and reducing the cost of bankruptcy respectively. Operational and financial gains are also posited by several authors such as Berkovitch and Narayanan, 1993; Hannah and Kay, 1977; Smalter and Lancey, 1966; Uhlenbruck and De Castro, 1998. Generally,

- 5 - M&A is recognised to possess the essence of speed in a company’s growth strategy (Fikri, 1972; Ingham et al, 1992; Jemison and Sitkin, 1986a; Jemison and Sitkin, 1986b; Kitching, 1974; Kwansa, 1994; Schoenberg, 2003; Stallworthy and Kharbanda, 1988; Vermeulen and Barkema, 2001).

Several motives have been suggested, each of which is not exclusive but overlapping. By utilising a simple content analysis method, the author has evaluated the several reasons proposed by academics and specialists (see Appendix I and II). The results can be broadly categorised into strategic, financial and managerial motives, which were adapted from Schoenberg (2003). However, due to time constraint, only the operational and financial motives will be discussed in this paper. It is observed that there is less research conducted on the managerial motives. This is because the research on managerial motives is more recent as compared to the operational and financial motives. Moreover, it is more difficult to obtain data for the analysis of managerial motives because managers would not reveal their true intention, especially if it is related to self-interest (Schoenberg, 2003).

Hotel industry in the UK The development of hotel companies is tied closely to the history of transport. At the close of the Middle Ages, the boom of English raw wool and the emergence of new merchant and their needs to travel led to the increase in the number of inns (Medlik and Airey, 1978). By the middle of the 19th century, the development of the railway became the impetus for the growth of hotels and sea resorts. The railway age was also responsible for the influence of the size and character of the resorts and the location of hotels and other facilities (Medlik and Airey, 1978). According to Borer (1972), the invention of private cars during the early twentieth century boosted the building of roadside motels while foreign visitors arriving by air increased the demand for airport hotels.

In the past, hotel or some form of accommodation is a basic need that business travellers and workers required while working away from home (Homer, 1990). In the 1960s, there was a severe shortage of quality hotel rooms (Taylor and Bush, 1974). One of the reasons for the shortage was the extraordinary rise in the number of cars on the roads (Borer, 1972). Moreover, the habit of taking more and longer holidays developed as a result of an increase in the average length of paid holidays, a decrease in the length of average working week and higher wages (Borer, 1972; Taylor and Bush, 1974). Additionally, cheaper air

- 6 - travel and ‘package’ tours added to the pull of foreign tourists and the devaluation of the pound sterling in 1966 had made Britain one of the relatively cheaper countries in Europe for overseas visitors (Borer, 1972). In addition, real incomes and living standards had increased among the lower income groups (Medlik and Airey, 1978) while both the value of the American dollar and the numbers of American tourists were rising (HCIUK, 1987).

In the late 1960s, as the shortage of accommodation became more severe, the Hotel Development Incentives Scheme (HDIS) was established to encourage the building of more hotel rooms (Stewart, 1991; Taylor and Bush, 1974). Under the Development of Tourism Act 1969, government grants of up to £1000 per bedroom were made available for new projects that commenced before April 1971 and were completed before March / April 1973 (Borer, 1972, Stewart, 1991; Taylor and Bush, 1974). The development of the hotel industry stalled after 1973, because of the two oil crises in the world, the miners’ strike, electricity shortages, three-day week2, a large fall in the exchange rate, the panic acts of government and a loan from IMF obtained after tense negotiation (Anon, 1979; Dow, 1998).

Four top hotel companies in the UK

Forte Group plc Trust House Forte (THF) evolved from a merger of Forte Holding Ltd (Forte) with Trust Houses plc in 1970 (Stewart, 1991). Over the years, THF expanded mainly through the acquisitions of existing hotels and remained the leading hotel group in the UK. Major acquisitions in the 1970s included the US-based Travelodge properties and a group of 35 hotels owned by J. Lyons (CHK, 1978). In the 1980s, THF expanded through the acquisitions of Anchor Hotels from Imperial Hotels and Catering, Kennedy Brookes’ groups of hotels and Crest Hotels from Bass (HCIUK, 1987; HCIUK, 1991). After the acquisition of Crest Hotels, THF further consolidated their position as the largest operator of hotel with 300 hotels in the UK (HCIUK, 1990). During the early 1990s, several events took place within the company, which led to some restructuring such as reducing the corporate employee headcount from 3000 to 1000 and selling off the catering arm Gardner Merchant (Slattery and Johnson, 1993; Waller, 1992). In 1991, THF changed its name to

2 Three-day week: ‘The coal strike reduced coal supplies to the power stations, and industry had to be restricted to a three-day working week’ (Dow, 1998, pp. 247).

- 7 - Forte Group plc after a market research, which revealed that the name ‘Forte’ has a wider appeal (CHK, 1996; Harrison and Johnson, 1992). In the same year, Forte expanded through a joint-venture to manage 18 of AGIP’s hotel in Italy (Skapinker, 1994; Slattery and Johnson, 1993) and closed another deal with Aer Lingus to build a number of Forte Travelodge in the Republic of Ireland (Harrison and Johnson, 1992). The founder, Lord Forte retired as chairman, and his son Rocco Forte took over in 1992 (CHK, 1996). In 1994, Forte acquired the Le Meridien hotel group from Air France, which expanded Forte’s portfolio in the international market. After the acquisition of Le Meridien, Forte reshuffled its hotel portfolio and placed 80 hotels for sale or for a joint venture partner (Skapinker, 1994). However, Forte’s profit had been stagnant or declining since the end of the 1990s (KN, 1995), and the group was acquired by Granada Group plc (Granada) in a hostile takeover bid. After acquiring Forte Group, between 1996 and 2000, Granada sold off the Welcome Break chain to Investcorp, the White Hart chain to Regal Hotel Group and the 50% of shares back to Italian Oil and Gas Company ENI (Blackwell, 1997; Price, 1997). In 2000, Granada and Compass Group plc (Compass) merged and formed the Granada Compass plc with an agreement between the two companies to de-merge the hospitality and media business after the merger (CG, 2000b). This agreement in part led to the sale of the hotel sector in order to enhance shareholder value (CG, 2000a). Travelodge which was the last of Forte’s hotel chains was disposed off in 2003 when Compass Group decided to focus on its core businesses: contract foodservice, vending and on selected foodservice concessions (CG, 2002).

Hilton International Founded in 1886 as a gaming company, it was not until 1967 that the Ladbroke Group plc (Ladbroke) was formed and floated. The company entered the hotel industry in 1973 with three moderately priced hotels (Grant, 1998). Ladbroke expanded aggressively in their hotel sector through acquisitions in the 1980s. These included Mercury Hotels and Comfort Hotels (Goymour, 1985; Slattery and Johnson, 1990) and Rodeway brand from Vantage Company of Dallas, Texas (Jakle, Sculle and Rogers, 1990). In 1986, Ladbroke restructured its company to concentrate on four core businesses, which were hotel, racing, DIY retailing and property (Slattery and Johnson, 1990). The big break for Ladbroke arrived when it acquired the Hilton International chain (4- and 5-Star) from Allegis Corporation in 1987 (Grant, 1998). Subsequently, Ladbroke upgraded and renamed most of its original hotels in the UK to the Hilton brand and continued its expansion in the hotel

- 8 - division by selling hotels and equity to raise capital for further expansion around the world (Grant, 1998). In the 1990s, the company was restructured and a few senior management positions were reduced in a drive to decentralise its structure and decrease cost (CHK, 1996). Significantly, hotel properties were sold so that management could concentrate on running the hotels. The change of top management also led to the divestment of its commercial property and retail in order to refocus on hotels and gaming in 1994 (Slattery, Feehely and Savage, 1995). In 1999, Ladbroke acquired Stakis plc, the first major acquisition for Ladbroke since 1987. This event took Hilton International to be the second largest hotel group, after Granada (Robinson, 1999a). Subsequently, the company name was changed from Ladbroke Group plc to Hilton Group plc to reflect the increasingly importance of the Hilton name in the same year. In November 2000, Hilton International continued to expand its hotel sector through a joint-venture with Hilton Hotel Corporation to lead a worldwide expansion of the luxury Conrad brand (Batchelor, 2000). The following year, Hilton Group acquired Scandic Hotels from Scandic Hotels AB, a leading operator of hotels in the Nordic region and further consolidated their presence in the North Europe (HOL, 2003).

InterContinental Hotels Group The Bass brewery business (originally established in 1777) expanded in the second half of the 20th century via several mergers, the most notable being the merger with Charrington in London in 1967. That led to a decision to establish a separate management for the hotel division and to rename all the hotels to Crest Hotels (Stewart, 1995). In the 1970s, Bass Group plc (Bass) continued to develop Crest Hotel through the chain acquisitions of Esso Motor Hotels, Centre Hotels and Dutch Clingendael Group (CHK, 1978; Stewart, 1995). In the 1980s, Bass continued its expansion in the hotel sector through the acquisition of Holiday Inns in Europe and the US. By 1990, Bass had acquired the rights to the brand Holiday Inn in the UK and elsewhere in the world outside of North America, Canada and Mexico (Harrison and Johnson, 1992). The acquisition of the Holiday Inn brand was followed by a rationalisation, which led to the sale of 43 Crest Hotels to Forte (Harrison and Johnson, 1992). In the 1990s, three other portfolios were created, which were the Holiday Inn Express (a limited service segment), the Crowne Plaza (an upscale market) and the Staybridge suites by Holiday Inn (an extended stay market) (Anon, 2003; IHG, 2004). Bass’s next break was the acquisition in 1998 of the Intercontinental Hotel chain from Seibu Saison, which provided Bass with a chain of luxury hotels and international

- 9 - exposure (Daneshkhu, 1999a). The subsequent acquisitions of Southern Pacific Hotels Corporation (SPHC) in Australia and Bristol Hotels & Resorts Inc., a US based hotel management company further extended Bass’s present portfolio and increased their geographical presence in the other continents (Daneshkhu, 1999c; Sangster, 2000a). The year 2000 was a watershed year for Bass as they sold their brewery business in order to concentrate on the growth area, which was the hotel sector, and changed their name to Six Continents to present a global image of the group’s business (CHK, 2003). In April 2001, Six Continents continued to consolidate its position through the acquisition of the Posthouse chain from Granada for its strategic locations and to convert them to the Holiday Inn brand (CHK, 2003). The year 2002 saw a major restructuring in the company with the de-merger of hotel and pub and restaurant business, which was followed by another name change for the group. The hotel business adopted the name InterContinental Hotels Group plc (IHG) while the drink business was named Mitchells & Butlers plc (CHK, 2003).

Whitbread plc Whitbread plc (Whitbread) started their brewery business in 1742 and entered the hotel business in the early 1970s (WH, 2003). Whitbread commenced its hotel venture through the purchase of Severnside Hotels from Trust Houses and entered a joint venture with J. Lyons to form the Whitly Inns (Ritchie, 1992). The 1980s was a decade of growing commitment to the hotels by Whitbread. Country Club Hotels chain was created to target the business and conference and short break market whilst Whitbread Coaching Inns emerged from a collection of all the Whitbread pub estate (Slattery, 1988; WH, 2003). In 1987, Travel Inn arrived via adding bedrooms to Beefeater restaurants (Slattery, 1988) and Whitbread Coaching Inns were relaunched as Lansbury hotels in 1989 (Slattery and Johnson, 1990). Entering the 1990s, Whitbread continued to commit to establishing the hotel division through several structural changes. Firstly, the hotel division was named Country Club Hotel Group via integrating the three brands, which were Travel Inn, Country Club Hotel and Lansbury in 1991 (CHK, 1994). Secondly, Whitbread rationalised their assets and decided to sell off 29 small Lansbury properties to concentrate on a core of 40-60 room properties in 1993. In the same year, Whitbread replaced the rest of the Lansbury brand by the name ‘Country Club Hotels’ while keeping 50-budget Travel Inn (Hyde, 1994). The big break for Whitbread came in 1995 when they acquired 16 hotels from Scotts’ Hospitality Canada and secured most of the UK rights to franchise the Marriott brand (Buckley, 1995). After the acquisition, Country Club Hotel Group was

- 10 - promoted to the third position in the UK hotel chart (CCHG, 1995). Whitbread renamed its hotel sector to Whitbread Hotel Company in 1996 (CHK, 1996) and the hotel structure changed to consist of four brands: Marriott, Courtyard by Marriott, Travel Inn and Country Club Hotels. In that same year, Whitbread converted some of the 4-star brands to Marriott flagship and sold the rest of the Country Club Hotels (Anon, 1995; Daneshkhu, 1997). The next major acquisition took place in 1999, when Whitbread acquired 38 hotels from Swallow Group (Sangster, 1999). The watershed in the Whitbread’s history was the sale of its breweries and its exit from the pubs and bars business (WH, 2000). The decision was taken because Whitbread wanted to focus on double digit growth, which was in the areas of hotels, restaurants and health and fitness centres (Osborne, 2003). Over the last two decades, Travel Inn’s brand and then more recently Marriott brand’s right have transformed Whitbread into one of the market leaders in the hotel sector.

Discussion The discussion is presented with reference to the two motives identified and the general patterns that emerged from this initial exploration of M&A activity in the hotel industry. Consolidations, brands and technology are found to be the common motives that are interdependent within the four top hotel companies in the UK. In addition, the changing financial methods, the implications of the movement towards big business in the hotel industry and the interesting fact that two of the top hotel companies were related to the brewing industry will be briefly discussed.

M&A and the operational motives The operational motives have been commonly recognised as a means of growth to increase the penetration of an existing product market, to enter a new product, to enter a new geographical territory, to diversify away from the company’s core business, to spread risks, to consolidate resources, to exploit economies of scale, to increase market power, to acquire new knowledge, facilities, technology and distribution systems (Berkovitch and Narayanan, 1993; Cosh et al, 1980; Fikri, 1972; Gaughan, 1999; Hopkins, 1991); Schoenberg, 2003; Stallworthy and Kharbanda, 1988; Vermeulen and Barkema, 2001; Yagil, 1996). (see Appendix I) Speed has the highest frequency in terms of the number of times it was suggested in M&A related articles. To enter a new market, to develop new product, to penetrate the same market and product and to diversify from core business are the next frequently seen reasons for M&A activities. To obtain complementary capacities,

- 11 - new knowledge and resources and to pool resources such as R&D and technology could be considered similar to the consolidation and rationalisation motives. However, majority of these researches were conducted with the manufacturing industry that possesses a different business nature as compared to the hotel industry. For example, the frequency in the motive ‘to enlarge a market geographically’ is low, but would be considered an important factor in the hotel industry.

The intents to gain a quick entry to new product, new market and new geographical area are found to be most common among the hotel companies. For example, Bass tried to bid for Starwood in 2000 (Anon, 2000a), Ladbroke Group lost their bid for Intercontinental Hotel chain to Bass in 1998 and Hilton International expressed their interest in acquiring Le Meridien to Granada in 2000. The acquisition of Starwood would have provided Bass with a quick entry to an upscale brand and increased exposure in North America. The acquisition of Intercontinental would also have provided Ladbroke and Bass a quick access to one of the world’s most well known brand and their customers while Le Meridien would have offered an upmarket brand and locations in the world top cities and resorts. The reason for such tendency towards these motives is due to the nature of the hotel business, which is its need to be physically present at a location in order to deliver the goods and services. On the other hand, the desire to increase market share is also prominent as is evidenced by the acquisition of Hilton International by Ladbroke (DeLuca, 1987), Anchor Hotels by Forte (HCIUK, 1987) and Swallow Hotels by Whitbread (Green, 2000). Besides the above, operational motives such as consolidation to grow big, brands and technology are found to be industry specific to the hotel companies.

Consolidation, size and economies of scale ‘Consolidation is concerned with protecting and strengthening the organisation’s position in its current markets through its current products’ (Johnson and Scholes, 2002, pp. 363). Clive (1997) argued that consolidation is preferred for its ability to link business, to reduce costs and to expand distribution networks. According to Gaughan (1999), cost-reducing synergy is the main concern for operating synergies in M&A activity. Economies of scale may be achieved when the cost per-unit is reduced as the size of the operation unit increases. Although the term ‘economies of scale’ is generally applied to the manufacturing industry, it is also applicable to other industry, such as hotel. During the acquisition of Stakis Hotels, Ladbroke pointed out that, ‘A consolidation could yield big

- 12 - savings. Bigger hotel groups could also enjoy the benefits of larger reservation system, loyalty programmes and wider brand recognition … the proposed deal would give it a combined database of three million members of loyalty programme’ (Robinson, 1999b, pp 28). Whitbread also claimed that the acquisition of Marriott brand had provided them with the benefits of ‘innovative marketing programmes, customer loyalty schemes and MARSHA, its worldwide reservation system’ (CCHG, 1995). In this context, economies of scale is applicable to the hotel in terms of its ability to reduce the sales and marketing cost and in other cases, the cost of bulk purchasing for hotel supplies.

M&A activity in the hotel industry is usually followed by rationalisation. This is one way to maintain the quality of products and to increase market shares. Rationalisation generally leads to the sale of hotel units that did not fit the company’s criteria or were unsuitable for refurbishing. For example, after the acquisition of Le Meridien, Forte reshuffled its hotel portfolio and placed 80 properties, which were deemed unsuitable for conversion on the market for a buyer or joint-venture partner (Skapinker, 1994). Bass also adopted the same strategy by converting several Crest Hotels to the Holiday Inn brands and selling the rest (Harrison and Johnson, 1992). Following the acquisition of the rights of Marriott’s brand, Whitbread converted some existing Country Club Hotels to Marriott Resort Hotels (Buckley, 1995). In 1999, Ladbroke purchased Stakis Hotels and converted some hotel units to the Hilton brand while selling those that did not fit the Hilton brand’s criteria (Anon, 1999a). Therefore, rationalising of hotel units in M&A activity leads to the reduction of the number of hotel units in that same range of products, while re-branding of those available hotel units lead to an increase in size of that same range of products. Thus, size and brands are considered to be interdependent and are revolving in a virtuous cycle.

Brands ‘A brand name is a promise to the customer of a certain level of product quality and service execution’ (Muller, 1998, pp. 91). Cohen (1999) argued that investors might feel safer behind a brand name and an established company. Sangster (2000b) also argued that it is easier for owners and operators of branded hotel to gain access to capital markets and therefore are more capable of investing in reservations, technology, marketing, guest loyalty programmes and so forth. From these arguments, a brand name can be seen as a major influencing factor in customers’ choice of products and it can also be perceived as a selling point for the corporate image. The power of brand is widely recognised and is

- 13 - manifested both before and after M&A activities. Several corporate names change took place amongst the hotel companies after their M&A activities. For example, Bass purchased the Intercontinental Hotel chain and adopted the name InterContinental Hotels Group to utilise the more prestigious name of ‘Intercontinental’. Ladbroke plc acquired the Hilton brands for their international reputation and changed the company name to Hilton Group plc. Branding has also been widely used as a method of growth for a company through the extensions of products. According to Muller (1998), by endorsing a line of products under the same parent company’s name, the parent brand helps to project a positive picture to the entire range. In the hotel industry, the ‘endorsing of a range of product’ is common amongst the hotel companies. Taking the Holiday Inn brand as an example, the brand started as a mid-market hotel chain, but had extended their products into the limited service sector and the 4-Star brand through Holiday Inn by Express and Crowne Plaza Holiday Inn respectively. The company has further expanded their new Holiday Inn products by acquiring other hotel unit(s) suitable for conversion. Hilton International, which started its hotel business in the 4- and 5-Star markets have also extended its range of brand in the 3-Star Hilton Garden Inns and the mid-market All- inclusive Coral by Hilton. Besides the motives to grow big through consolidating fragmented hotel unit or other hotel groups, branding is seen as an impetus to the M&A activity. The other motive, which is technology, was found to be hotel industry specific and complement the virtuous cycle of size and brands.

Technology In the early 1900s, technology in terms of mass production techniques was a partial explanation for the ‘tide of increased scale economies ebbs and flows in all industries at the same time’ (Hannah and Kay, 1977, pp. 93). Since the early 1990s, computer and Information Technology (IT) could be claimed as part of that ‘tide’. In the hotel industry, economies of scale among the hotel companies can be derived from the Internet and reservation system. Perret (2000) argued that the increasing use of the Internet was an outcome of the combination of a shift from a manufacturing economy to a service based economy and a change of lifestyle. The Internet represents a distribution channel to new customers, a means of diversifying revenue streams and a way to provide the economies of scale in marketing, sales and communications with customers (CCHG, 1995; Robinson, 1999b). As noted by Hilton Groups plc, Internet bookings have been growing and technology is becoming more important in the hotel industry because the website is able to

- 14 - provide extensive information and easy bookings of the full range of Hilton brands (HG, 2003). David Bland, Managing Director EMEA at Bass Hotels and Resorts also pointed out that ‘the strength of the Internet demanded strong brands and the Internet also provides an opportunity to obtain incremental sales through intermediaries such as Lastminute.com’ (Sangster, 2000c, pp13). The hotel industry is considered fragmented (Robinson, 1999b) and the means to grow and to enhance profit is to increase the physical presence at the locations of target market. This can be expedited by the acquisitions of brands or hotel units that can be converted into the acquiring company’s brands. As pointed out by Melvin Gold of Pannell Kerr Forster (PKF), ‘as the big groups get bigger, hotels which do not rely exclusively on their local market are going to have a look at branding and group reservations systems to reach a global market’ (Cohen, 1999, pp.9). These views shed light on the importance of brand and technology, which posed as part of the influencing factors on the size of a company and the management decision making process.

From the preliminary study, size, brands and technology are found to be interdependent and are more specific to the hotel industry in terms of exploiting the operational synergies. In the next section, financial motive, which is the other part of significant motivation for M&A activity will be discussed.

M&A and the financial motives Among the financial motives, it is generally believed that M&A activity could lead to increasing profits through one or some of these measures: reduced taxation cost in the short run; economies of scale; and gains in purchasing and selling of a company either in part or in whole (Berkovitch and Narayanan, 1993; Kitching, 1967; Lee and Alexander, 1998; Salter and Weinhold, 1978; Schoenberg, 2003; Smalter and Lancey, 1996; Stallworthy and Kharbanda, 1988; Uhlenbruck and De Castro, 1998; Yagil, 1996). (see Appendix II) The highest frequency among the motivating factors seems to relate more to the short-term gain, for example, tax advantage and gains from the purchase of undervalued assets. Lower exchange rates, lower overheads and higher discounts are linked to bulk supply and demand, which are derived from economies of scale. M&A activity is also deemed to enlarge a company and enables the company to obtain a larger debt capacity. Although these studies are related more to the manufacturing industry, the motives in financial term are also relevant to the hotel industry.

- 15 - The financial motive of acquiring a ‘star’ performer is prominent in the case of Le Meridien group. David Michels, Chief Executive of Hilton Group had expressed his interest in the purchase of Le Meridien chain because the chain had ‘proved a star within the former Forte hotels empire’ (Anon, 2000a, pp. 2). Tax benefits are generally reaped in the short-run and are pronounced in the case of the merger between Granada and Compass. According to Granada Compass, most Compass investors would have preferred to acquire Granada’s restaurants but decided to merge because of tax reason. This is because a merger could save Compass approximately £1.5billion in tax as opposed to acquiring the restaurant business only (Sangster, 2000d).

Holiday Inn had always depended more on franchising for growth because the company believes in brand as a company’s most important asset (Skapinker, 1993). Brand has increasingly become important as already discussed. In financial terms, branding had gained a value of its own on the balance sheet since the late 1970s3. In the hotel industry, Ladbroke had increased its assets value via ascribing a £277m to Hilton’s brand on the balance sheet in the annual report (CHK, 1989b). In 1996, Granada had targeted Forte because the latter was deemed to lack a strategic direction, and the management structure was top heavy (Anon, 1999b), plus the lack of profitability already discussed above. Six months after the acquisition, Granada justified its acquisitions of Forte from the 19% rise in total pre-tax profits contributed from the hotel sector (Blackwell and Snoddy, 1996).

The above presented some evidences of operational and financial motives in M&A activity amongst hotel companies in a microenvironment. On the other hand, the frenzy of M&A activities might well not have happened if they had not been facilitated by the dynamic macro-environment, such as the financing landscape in the economy.

Financing methods, M&A activity and hotel industry The methods of financing M&A activity in the hotel industry changed over the years, together with the environment. In the 1980s, using stock market as a financing method was deemed ‘a quick fix’ (Clive, 1997, pp. 2). In the 1990s, both stock market and sales- and-leaseback became the popular methods of financing M&A activity as companies

3 Brand accounting is a recent phenomenon, which could be date back to 1978, when Allied Breweries bid for J. Lyons at a price that was considerably high, but provided Allied the control to J. Lyon’s brands (Smith, 1996).

- 16 - started to believe in the ‘long-term relationships that breed trust’. In the 2000s, sales-and- leaseback mode became more and more widely used.

In the 1980s, corporate raiders and leveraged buyout firms emerged to seek for financial gain through restructuring and engineering (Clive, 1997). According to Pike and Neale (2003), the abolition of 100% of first year allowances in 1984 weakened the incentive to invest in new capacity compared to buying ‘off-the-peg’. Moreover, takeover boom often begin when market values are low in relation to the replacement cost of assets. The higher interest rates of the recession years (1973-1975) resulted in heavy discounting of future corporate earnings, so that many asset rich firms appear to be undervalued (Pike and Neale, 2003). In addition, the influx of American money in the early 1980s also persuaded more entrepreneurs to expand their hotel interest (HCIUK, 1987). Therefore, it seems to be cheaper to acquire than to build. In 1987, Ladbroke financed its purchase of Hilton International by a one for five rights issue of approximately 70.4 million new Ladbroke ordinary shares at US$6.27 per share to raise approximately US$420 million (DeLuca, 1987) and the rest to be funded by term bank facilities (Anon, 1987). Bass acquired Holiday Inn international and domestic assets for approximately US$454 million in cash and notes (Anon, 1988).

In the 1990s, institutions - such as banks, which had lost a great deal of money in the recession between 1989-1992/3 - were tightening their lending requirements (Anon, 1999b). According to Clive (1997), it is the capital markets that were influencing the industry in the 1990s. The asset appreciations were slowing down and base rate were increasing during 1989 (Walsh and Goymour, 1989). Generally, hotel properties were undervalued around this period and Slattery argued that it was hard for investors to put a value on the hotel companies due to structural problem because companies usually owned multiple brands. Moreover, hotel units were spread across several countries and both the hotel companies and the hotel units they ran were too small (Anon, 1999b). In addition, the lack of industry wide statistics and precise definition for industry component such as ‘hotel’ further compounded the situation. In 1990, when THF acquired Crest Hotels from Bass for £300,000, they then adopted a sales-and-leaseback approach (Slattery and Johnson, 1990). On the other hand, M&A activity such as Granada’s acquisition of Forte and Hilton’s acquisition of Stakis Hotels were financed through both cash and share exchanges (Robinson, 1999a; Teare, Eccles, Costa, Ingram and Knowles, 1997).

- 17 - In the 2000s, several reasons were proposed for the popularity of the sales-and-leaseback mode. Sangster (2001b) suggested that M&A activities were constrained between 1997- 2001 because of the unfavourable equity and debt markets. Daneshkhu (1999b), noted that hotel stocks were out of favour partly because other sectors such as telecommunications and internet stocks were providing faster growth, coupled with rising interest rate. The increasing operator fees added an incentive to several hotel operators for exiting their real estate interests to pursue management opportunities (Sangster, 2001c). Bozec (2001) claimed that the 1990s dotcom boom had drawn away many investors, but the same investors had returned after realising the more tangible side of hotel business as opposed to the dotcom companies. According to David Gammage, Managing Director of Insignia Hotel Partners, investors are attracted by the structure of hotel building, which is basic to the hotel business. A hotel building is usually well maintained and will reap value after many years, as opposed to an office block. Hilton International had raised £312m with its sales-and-leaseback of 11 hotels while retaining their management contracts and Nomura had raised £1.25 billion through some of its Meridien and Principal properties in the UK and Ireland (Sangster, 2001c).

The change of the financing landscape in the hotel industry also brought about a change of components in the industry. Formerly dominated by hotel owners who ran their own properties, it is increasingly dominated by hotel management companies now.

M&A activity, big business and hotel industry Schmitz (1993) described the characteristic of big business as consisting of owning a huge capital assets and high headcounts. Big business usually embraced the integration of production and sales in a diverse number of products and/or geographic areas. As a consequence of the expansion, the financial burden increased and funds for development were generated through financial institutions and the stock markets. Subsequently, the salaried executives were organised in hierarchical forms, and divided by functional, regional or product lines. Most of the time, this resulted in a split between the ownership and control. Cassis argued that big business has a ‘wider concept’ (1997, pp. 19). This concept comprises of ‘large-scale operations, of money and power, whatever the type of activity or the forms of organisation’. During the 20th century, big business in Europe has extended into a number of service sectors such as publishing, advertising, cinema, and

- 18 - telecommunications (Cassis, 1997). In addition, big business is primarily a matter of power and it could include leading firms.

Table 1: Number of UK Hotel companies Year Number of companies 1980 16000 1986 14000 1988 14000 1990 14,410 1995 12,005 1997 10,935 1999 10,425 2000 10,250 2001 9,580 2002 9,215 2003 9,535 Source: Adapted from Key Note (2003) and CHK (1989a)

The evolution of the UK hotel industry fits in with the big business argument proposed by both Schmitz and Cassis. This phenomenon is pronounced with the decreasing number of hotel companies whilst the sizes of the surviving companies are increasing (Table 1). There was an estimate of 16,000 hotel companies recorded in 1980, and the number has dropped to an estimate of 10,250 in 2000 and 9,535 in 2003. In 1986 the five leading hotel companies in UK Hotels plc accounted for 44,517 rooms. In 1990 that has risen 52% to 67,841 and it has further risen to an estimate of 89,9644 rooms in 2002 (HCIMA, 2002, pp. 28; Slattery and Johnson, 1991, pp. 8).

Brewery and hotel industry In the UK, brewers were operators of motels and chain hotels in the 1960s (Taylor and Bush, 1974). Most brewers who owned pubs and restaurants were able to diversify into providing accommodation quickly by using land they already owned. For example, Whitbread was able to build accommodation alongside the Beefeater Restaurants and Pubs, which they own. However, both Bass and Whitbread once leading companies in the brewery industry were prepared to exit the brewery business in 1999. Two reasons for Bass’s exit were proposed (Willman, 1999a). Firstly, the British beer market had been shrinking since 1996, which had been affecting Bass’s market shares. According to Bass, 4 This figure is an estimate. It was derived via dividing the number of rooms of the top five hotel companies by the top nine hotel companies in 2002. Please note that the figure for the tenth hotel company is unavailable.

- 19 - the hotel division was accounting for 25% of the group sales but contributed 39% of operating profit (Daneshkhu, 1999c). Secondly, Bass’s corporate strategy during that period was to focus on the growth sector, which led to the decision to exit from the brewing industry. Bass executives claimed that they would not be tied down by ‘sentimental nostalgia’ for brewing because the main concern was shareholder value (Willman, 1999b, pp.12).

On the other hand, Whitbread’s exit was due to two factors (WH, 2003), which were similar to those of Bass. According to Whitbread, there was a need to focus on investment in the growth markets during that period. In addition, the Beer Orders of 1989 had restricted Whitbread and the other brewers as to the number of pubs they could own. Moreover, Whitbread’s attempt to acquire the Allied Domecq pub estate in 1999 was being given attention by the Office of Fair Trading. The lack of growing opportunity and the increasing pressure from the alcohol sales sector had driven Whitbread towards the exit from the brewery industry. However, the strategy to exit and re-focus of both companies’ had posed as a positive move. The sale of their breweries had enabled them to channel their funds into a number of M&A activities and to position themselves as two of the top hotel companies in the UK.

Conclusions and further research From this preliminary research, a few hypotheses are suggested concerning the development of hotel companies. M&A activity is found to be a popular mechanism amongst the hotel companies because it provides quick access to new market, new product, and new geographical area. The nature of the hotel industry has formed a few industry- specific motives, such as consolidation, branding and technology. The M&A activity has also steered hotel companies towards big business as is evidenced by the reduction in the number of hotel companies whilst the size of the surviving companies were increasing. However, as stated in the beginning, this is part of the initial findings of the subject on the development of hotel companies in the UK. Therefore, further investigation will be conducted in order to produce a more rigorous research. The limitations of this paper are attributed to time constraint and the reliability of secondary data. The next stage of investigations will involve primary data collection as a form of validating and enhancing the findings and analysis of this subject.

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Appendices

Appendix I: Strategy motives and the potential influences Factor (outcome) Frequency Authors Timing (Speed) 10 Fikri, 1972; Hart, Utton and Walshe, 1973; Ingham, Kran and Lovestam, 1992; Jemison and

- 31 - Sitkin, 1986a; Jemison and Sitkin, 1986b; Kitching, 1974; Kwansa, 1994; Schoenberg, 2003; Stallworthy and Kharbanda, 1988; Vermeulen and Barkema, 2001 New market (enter/ develop) 9 Ansoff, 1957; Smalter and Lancey, 1966; Fikri, 1972; Jemison and Sitkin, 1986a; Schoenberg 2003; Uhlenbruck and De Castro, 1998; Vermeulen and Barkema, 2001; Weston and Weaver, 2001; Yagil, 1996 New product 8 Ansoff, 1957; Gaughan, 1999; Jemison and (enter/ develop) Sitkin, 1986a; Smalter and Lancey, 1966; Fikri, 1972; Schoenberg 2003; Weston and Weaver, 2001; Yagil, 1996 Market penetration 7 Ansoff, 1957; Fikri, 1972; Gaughan, 1999; Salter (increase) and Weinhold, 1978; Schoenberg 2003; Smalter and Lancey, 1966; Weston and Weaver, 2001 New product, New market 6 Ansoff, 1957; Fikri, 1972; Smalter and Lancey, (diversify from core 1966; Salter and Weinhold, 1978; Schoenberg, business) 2003; Weston and Weaver, 2001 Complementary capacities 6 Fikri, 1972; Gaughan, 1999; Hitt, Harrison, (gain) Ireland and Best, 1998; Uhlenbruck and De Castro, 1998; Weston and Weaver, 2001; Yagil, 1996 Pool resources (e.g. R&D, 5 Lee and Alexander, 1998; Salter and Weinhold, technology) 1978; Uhlenbruck and De Castro, 1998; Weston and Weaver, 2001; Yagil, 1996

Market control/ power/ 4 Hitt, Harrison, Ireland and Best, 1998; Ingham, share (increase) Kran and Lovestam, 1992; Vermeulen and Barkema, 2001; Yagil, 1996 Excess capacity 4 Fikri, 1972; Hart, Utton and Walshe, 1973; (utilise/eliminate) Weston and Weaver, 2001; Yagil, 1996

Rationalise industry 4 Fikri, 1972; Gaughan, 1999; Uhlenbruck and De (consolidate) Castro, 1998; Weston and Weaver, 2001 Size (grow big) 3 Fikri, 1972; Salter and Weinhold, 1978; Hitt, Harrison, Ireland and Best, 1998

- 32 - geographical market 3 Gaughan, 1999; Schoenberg, 2003; Weston and (enlarge) Weaver, 2001 Growth (enhance) 3 Hart, Utton and Walshe, 1973; Yagil, 1996; Salter and Weinhold, 1978 New knowledge and 3 Jemison and Sitkin, 1986a; Vermeulen and resources (obtain) Barkema, 2001; Weston and Weaver, 2001 Managerial (improve) 3 Jemison and Sitkin, 1986a; Weston and Weaver, 2001; Yagil, 1996 Foreign competitors 2 Fikri, 1972; Weston and Weaver, 2001 (combat) Barriers to entry (overcome) 2 Vermeulen and Barkema, 2001; Weston and Weaver, 2001 Competitors (prevent) 2 Schoenberg, 2003; Weston and Weaver, 2001 Spread risks 2 Cosh, Hughes and Singh, 1980; Ingham, Kran (reduce) and Lovestam, 1992 Growth market (enter) 1 Smalter and Lancey, 1966 Distribution systems 1 Weston and Weaver, 2001 (strengthen) Critical mass (obtain) 1 Weston and Weaver, 2001 Customers base (enlarge) 1 Weston and Weaver, 2001 Foreign market (presence) 1 Weston and Weaver, 2001

Domestic market 1 Weston and Weaver, 2001 (strengthen) Buy time 1 Smalter and Lancey, 1966 (overcome weakness) Supply of raw materials and 1 Weston and Weaver, 2001 labour (obtain) Corporate strategy (re-direct 1 Jemison and Sitkin, 1986a and re-shape)

Appendix II: Financial motives and the potential influences Factor (outcome) Frequency Authors Undervalued assets (gain 4 Fikri, 1972; Gaughan, 1999; Uhlenbruck and De profit) Castro, 1998; Weston and Weaver, 2001 Tax (credit gain) 4 Fikri, 1972; Schoenberg 2003; Uhlenbruck and De Castro, 1998; Yagil, 1996 Production/ overhead cost 3 Salter and Weinhold, 1978; Weston and Weaver,

- 33 - (lower) 2001; Yagil, 1996 Excess money (re-invest and 3 Fikri, 1972; Schoenberg 2003; Yagil, 1996 gain profit) Exchange rate (lower) 3 Salter and Weinhold, 1978; Uhlenbruck and De Castro, 1998; Weston and Weaver, 2001 Lending rate/ capital cost 2 Salter and Weinhold, 1978; Hitt, Harrison, (lower) Ireland and Best, 1998 Debt capacity 1 Yagil, 1996 (increase) Quantity (more discount) 1 Weston and Weaver, 2001

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