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

Paper submitted to 8th European Business History Association conference16-18 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This is work in progress, please do not cite.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: nhmquek@brookes.ac.uk

The author is grateful to Judy Slinn for her comments andis responsible for all errors in this paper.

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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

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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.

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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

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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,

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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

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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).

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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

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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

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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

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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,

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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

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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

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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

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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.

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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).

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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).

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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, 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 -

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,

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

- 20 -

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

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

(enter/ develop)

8 Ansoff, 1957; Gaughan, 1999; Jemison and

Sitkin, 1986a; Smalter and Lancey, 1966; Fikri,

1972; Schoenberg 2003; Weston and Weaver,

2001; Yagil, 1996

Market penetration

(increase)

7 Ansoff, 1957; Fikri, 1972; Gaughan, 1999; Salter

and Weinhold, 1978; Schoenberg 2003; Smalter

and Lancey, 1966; Weston and Weaver, 2001

New product, New market

(diversify from core

business)

6 Ansoff, 1957; Fikri, 1972; Smalter and Lancey,

1966; Salter and Weinhold, 1978; Schoenberg,

2003; Weston and Weaver, 2001

Complementary capacities

(gain)

6 Fikri, 1972; Gaughan, 1999; Hitt, Harrison,

Ireland and Best, 1998; Uhlenbruck and De

Castro, 1998; Weston and Weaver, 2001; Yagil,

1996

Pool resources (e.g. R&D,

technology)

5 Lee and Alexander, 1998; Salter and Weinhold,

1978; Uhlenbruck and De Castro, 1998; Weston

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and Weaver, 2001; Yagil, 1996

Market control/ power/

share (increase)

4 Hitt, Harrison, Ireland and Best, 1998; Ingham,

Kran and Lovestam, 1992; Vermeulen and

Barkema, 2001; Yagil, 1996

Excess capacity

(utilise/eliminate)

4 Fikri, 1972; Hart, Utton and Walshe, 1973;

Weston and Weaver, 2001; Yagil, 1996

Rationalise industry

(consolidate)

4 Fikri, 1972; Gaughan, 1999; Uhlenbruck and De

Castro, 1998; Weston and Weaver, 2001

Size (grow big) 3 Fikri, 1972; Salter and Weinhold, 1978; Hitt,

Harrison, Ireland and Best, 1998

geographical market

(enlarge)

3 Gaughan, 1999; Schoenberg, 2003; Weston and

Weaver, 2001

Growth (enhance) 3 Hart, Utton and Walshe, 1973; Yagil, 1996;

Salter and Weinhold, 1978

New knowledge and

resources (obtain)

3 Jemison and Sitkin, 1986a; Vermeulen and

Barkema, 2001; Weston and Weaver, 2001

Managerial (improve) 3 Jemison and Sitkin, 1986a; Weston and Weaver,

2001; Yagil, 1996

Foreign competitors

(combat)

2 Fikri, 1972; Weston and Weaver, 2001

Barriers to entry (overcome) 2 Vermeulen and Barkema, 2001; Weston and

Weaver, 2001

Competitors (prevent) 2 Schoenberg, 2003; Weston and Weaver, 2001

Spread risks

(reduce)

2 Cosh, Hughes and Singh, 1980; Ingham, Kran

and Lovestam, 1992 

Growth market (enter) 1 Smalter and Lancey, 1966

Distribution systems

(strengthen)

1 Weston and Weaver, 2001

Critical mass (obtain) 1 Weston and Weaver, 2001

Customers base (enlarge) 1 Weston and Weaver, 2001

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Foreign market (presence) 1 Weston and Weaver, 2001

Domestic market

(strengthen)

1 Weston and Weaver, 2001

Buy time

(overcome weakness)

1 Smalter and Lancey, 1966

Supply of raw materials and

labour (obtain)

1 Weston and Weaver, 2001

Corporate strategy (re-direct

and re-shape)

1 Jemison and Sitkin, 1986a

Appendix II: Financial motives and the potential influences

Factor (outcome) Frequency Authors

Undervalued assets (gain

profit)

4 Fikri, 1972; Gaughan, 1999; Uhlenbruck and De

Castro, 1998; Weston and Weaver, 2001

Tax (credit gain) 4 Fikri, 1972; Schoenberg 2003; Uhlenbruck and

De Castro, 1998; Yagil, 1996

Production/ overhead cost

(lower)

3 Salter and Weinhold, 1978; Weston and Weaver,

2001; Yagil, 1996

Excess money (re-invest and

gain profit)

3 Fikri, 1972; Schoenberg 2003; Yagil, 1996

Exchange rate (lower) 3 Salter and Weinhold, 1978; Uhlenbruck and De

Castro, 1998; Weston and Weaver, 2001

Lending rate/ capital cost

(lower)

2 Salter and Weinhold, 1978; Hitt, Harrison,

Ireland and Best, 1998

Debt capacity

(increase)

1 Yagil, 1996

Quantity (more discount) 1 Weston and Weaver, 2001

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