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On Monday morning, Marriott International announced it was buying Starwood Hotels & Resorts for more than $12 billion in a mostly stock transaction. And while the merger will create the world's largest hotel company, both Jim Cramer and investors were confused by this transaction.
Starwood is the home of hotel brands such as Sheraton, Westin, St. Regis and Le Meridien, among others. It has been trying to sell itself for some time, and on Monday that deal was finally announced.
Typically in a takeover situation, Cramer would expect the target stock to go higher. That was not the case here; Starwood's stock lost 4 percent in Monday's session, which indicated that Wall Street did not warm to the deal. The terms of the deal stipulated that shareholders would receive 0.92 shares of Marriott, and $2 for each share of Starwood. Separately, Starwood shareholders would receive an additional $7.80 from the spin off of its timeshare business.
Given that Starwood's stock closed at $75 on Friday, Cramer worried that it was undervalued. Why would management accept such a deal?
To get the inside take on the benefits that the merger of these two companies could bring, Cramer spoke with Arne Sorenson, CEO of Marriott International, and Adam Aron, the interim CEO of Starwood.
"We think it's a tremendous deal because we can pull these two companies together. We can obviously get cross synergies; that will be the easy part," Sorenson said. (Tweet This)
Sorenson added that the combination of these two companies could also result in revenue synergies, deliver a margin of improvement for hotel owners and franchisees and create a more global company. That would allow it to dominate the lifestyle space and provide more money on things like technology, in order to compete in the industry.
"When we looked at the industry going forward, we think that size matters. And when we had the opportunity at Starwood to combine with Marriott … to be the biggest hotel company in the world by a wide margin, we knew that strategically this was a great fit. The industrial logic is superb," Aron added. (Tweet This)
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Aron noted that there was clear questioning about the share price that Starwood negotiated with Marriott. While the four components of the deal stipulate a share price of about $76 or $77 per share, Aron pointed out that the most important part of the deal is the fact that Starwood was sold for stock — not cash.
Ultimately, Starwood collectively will own 37 percent of the combined Marriott-Starwood entity. When Aron calculated the combined cost and revenue synergies of the deal, he thought it could be huge.
"This is by far the best way that we can not only grow our share price above where it was trading a few weeks ago, but where we were trading nine months ago and higher still," Aron said.
Cramer also asked if this deal was made because the current cycle in the hospitality industry is peaking, and the companies needed the deal to grow. He speculated that travel worldwide be slowing, thanks to China and competition from Airbnb.
"I think that's a misinterpretation. So, actually the biggest hesitation we had about doing this deal and the reason we were not very aggressive early in the process is things are really going well at Marriott," Sorenson said.