Risks, Rewards in Global Hotel Deal Making

Considering the growth of global tourism and expanding middle classes in developing nations, hotel companies need to take a broad perspective when it comes to transacting, the panelists said. Despite that, global mergers and acquisitions on the hotel side are limited, said Benjamin Thomas Leahy, managing director and head of lodging group investment banking at Goldman Sachs & Company.

During 2012, just 5%, or $26 billion, of the total global M&A deal volume was related to hotels. “It’s actually quite small on a relative basis,” he said.

Raymond N. Bickson, managing director and CEO of the Indian Hotel Companies Limited, said hoteliers should be more active in transacting outside of their home markets. For example, he said India has 740 million domestic travelers and a growing number of outbound global travelers that hotel companies could serve if they expanded their global footprint in that country.

While M&A activity globally for hotels is a small percentage of the whole, Bickson did say he has seen a steady increase in the number of global hotel chains popping up in India.

“There’s that outbound market that’s there with money,” he said.

Challenges
Issues can arise, however, when companies look to complete deals outside of their home market, the panelists said.

For one, a brand company is often working with high-net-worth individuals or state governments that have little to no experience in the hotel sector, said Michael F. Glennie, president and COO of Fairmont Raffles Hotels International. These owners will try to force a luxury brand into a market that doesn’t make sense for the brand.

“We’re often asked, ‘What’s your best brand?’ Well, they’re like our kids, we like them all,” he said. “They want a 6-star Raffles. Well, the market can’t support a Raffles.”

Bickson added: “There’s a lot of ego that comes into play.”

The particular culture of a country can cause a company to rethink its strategy, too. Glennie said hoteliers frequently have to assess and adjust their food-and-beverage thinking when entering a foreign market. Some places, for instance, have a vegetarian culture.

“It’s a different mindset,” Glennie said. “You have to think it through.”

Companies also have to consider their marketing strategy. Be careful when promoting a romantic getaway package in Middle Eastern countries, Glennie said.

“Something could get lost in translation,” he said.

At Goldman Sachs, Leahy said the company had its employees go through a thorough training process before traveling overseas to help mitigate any cultural errors that might be made. While that can be helpful, he said hoteliers also should work with their local partners that are on the ground in the market that is being targeted. These partners have the best sense as to what will or won’t fly in that market.

“Ultimately, what’s most important, I find, is in the frenzy in trying to get ready for a deal, there’s nothing like talking to your local partners,” he said.

However, Leahy said the biggest danger regarding global dealing is in staying away from the negotiating table.

“The risk is not doing the deal,” he said.