Part 6. Crisis and overconfidence

Sometime toward the end of the 1980s—probably late 1988 or early 1989—I attended a big awards banquet at our Camelback Inn in Scottsdale, Arizona. The purpose of the evening was to honor the real estate developers who had secured the greatest number of sites for new Courtyard, Fairfield Inn, and Residence Inn hotels during the previous twelve months. At the time, we were opening about 100 hotels annually and had plenty of others in various stages of design and construction. Our development pipeline was going full steam, in large part due to the work of the people we were honoring.

The evening was a perfect symbol of the fast-paced, no-holds-barred days of American business in the 1980s. Deal making had been raised to an art during the decade, and deal makers had become the new stars, capturing daily headlines with the scale and scope of their financial wizardry. Billions of dollars were spent and made on friendly mergers and not-so-friendly acquisitions. The stock exchanges here and abroad had a field day.

In the lodging industry, the atmosphere and pace of expansion had likewise become supercharged, fueled in part by new provisions in the federal tax code that encouraged individuals to invest in real estate. About 690,000 rooms were added to the U.S. lodging system during the 198ps, the rate of growth accelerating as the decade wore on. Before long, there seemed to be a hotel on every corner. So many, in fact, and all so filled with guests, that it looked like everyone in America was leaving his or her home and taking up residence in hotels.

As I watched the awards being handed out that night, I found myself thinking about the market explosion that had led all of us to that banquet room. I realized that I was very uncomfortable with what I was seeing and hearing. My intuition told me: "Hey, we'd better look at this...." But everyone else in the room seemed to be so bullish and positive about our business that I set my worry aside and joined in the celebration. After all, all signs at the time were positive. Our hotels were filling up as fast as they could be finished, and capital was plentiful. Why not just keep going?

***

In 1990, the wave of hotel expansion that Marriott had been riding suddenly crashed—thanks to an abrupt tailspin of the U.S. real estate market, the rising tensions in the Middle East, and a recession, together with failing to act on my own deep, but not strongly expressed, concerns about overbuilding. The final straw for Marriott was when the Japanese withdrew as large-scale investors in American real estate after Japan's Nikkei index took a nosedive between January and October 1990.

The price we paid when things went sour was dramatic. We took a major hit on our stock price, had to lay off two entire departments of hard-working people, endured a brief takeover scare, and had the dubious pleasure of reading premature Marriott obituaries in the business media. It was not fun.

Once the smoke cleared, we had another big problem: a backlog of lodging properties that our development team had been dutifully churning out before the real estate market went south. As long as we had been able to sell hotels quickly—never a problem in the 1980s—our develop-build-sell-take-back-a-management-contract growth strategy had worked like a charm. We had sold more than $6 billion in lodging properties in the 1980s. But faced with no buyers for our hotels, we suddenly had a billion dollars' worth of unsold property sitting on our books.

No one was more upset about our fix than I was. After years of listening to my father harp on the evils of debt, I felt like I had single-handedly let him and the company down by allowing us to get so caught up in the gross overbuilding of the business. I could almost hear my late father up above saying, "I told you so."

Our most pressing need in the fall of 1990 was to preserve cash. Our team pulled together and soon found money in many obvious places inside Marriott—places we had ignored when capital was available for the asking. The cash sweep resulted in a reduction of our working capital by more than $100 million in just a few months.

To get the company moving again, we also had to do something about our debt level. But we were determined to avoid dealing with it by doing what many of our competitors who faced similar problems were willing to do: sell good sites and hotels at fire-sale prices. In spite of the fevered pace at which we had snapped up locations in the 1980s, our selections by and large had been fine choices. When the real estate market perked up again, we knew we would be glad we had not let those sites go for a song.

Simply sitting on our hands and waiting for the market to come around again wasn't an option, though. Treading water has never been our style. Besides, the real estate crash had kicked up opportunities that we couldn't ignore. Many competitors' lodging properties were in the hands of banks, the federal Resolution Trust Corporation, and other institutions who knew nothing about hotel management... and didn't want to learn. Opportunities abounded for Marriott to pick up management contracts. But to do so, we needed to have our own house in order.

In January 1992, Bill Shaw took over as president of the Marriott Service Group, the nonlodging half of the company. Bill had spent the previous two years in the role of chief financial officer, shepherding us through the worst of our cash-flow problems. To fill the empty slot left by Bill's promotion, we hired Steve Bollenbach. Steve was just finishing up a long-term assignment helping Donald Trump restructure his finances.

This was Steve's second tour of duty with us. He had been Marriott's treasurer for several years in the early 1980s. Steve had the advantage of looking at our debt problem from the unique vantage point of a two-time insider and recent outsider. After studying us for a few months, he came up with an idea both natural and radical: Why not split the company in two?

Steve did not invent splits, but his reasoning in our case was novel. The original Marriott Corporation— today called Host Marriott—would be able to retain the company's unsold real estate; the new company— today called Marriott International—would become a pure management company.

The concept of splitting Marriott into two pieces was natural in the sense that spin-offs were coming into vogue in the early 1990s. A lot of companies were slimming down in an effort to get back to focusing on their core businesses.

The split was radical in that companies customarily spin off their debt. Steve's idea was to allow the original sixty-five-year-old Marriott company to keep the real estate—including the debt associated with it—and spin off most of its management services into a new company. The new Marriott International would be virtually debt-free, giving it more flexibility to go after management contracts and get the blood moving again throughout the Marriott enterprise.

Under the split scenario devised by Steve, the two companies would continue to share headquarters, but maintain separate boards of directors, hold separate annual meetings, etc. I would serve as chairman, president, and CEO of Marriott International, while my younger brother, Dick, would become chairman and president of Host Marriott. Steve would serve as Host's CEO. Marriott International would manage Host Marriott's properties under long-term agreements.

From a practical viewpoint, the idea made good sense. In one bold move, Marriott could take care of both of its most important immediate goals. Our real estate investments would be managed by one company, the sole business of which was real estate, while our hotel and contract services management skills could be marketed aggressively by the other company.

Important as the plan's practical aspects were, there was another dimension to the split that reached more deeply into the heart of our problems. Splitting the company into two separate entities would fix something fundamental that had gone askew during the heady days just before the 1990 crash. In the aggressive atmosphere of the 1980s, we had let ourselves get pulled too far away from who we really were. Steve's plan would get us back to our core identity: Marriott was (and is) not about debt, real estate ownership, and deals; we're about management and service.

Marriott needs to make some deals, of course. Our recent acquisition of the Renaissance Hotel Group is a good example. But we're definitely at our best and most comfortable when we're up to our ears in operations and feel like we're really building something, not just moving assets around on a balance sheet. Where Marriott had gone off-track in the 1980s was in letting development drive the organization rather than support it. In the change-order dynamic, Marriott had lost the critical balance between the two.

Looking back now at the split, there's a delicious irony in having Steve, one of the best deal-makers of our time, craft a state-of-the-art deal designed to move us away from our lopsided tilt toward deal-making and back toward our real identity. But perhaps it's appropriate, too. Sometimes it takes an old friend who knows you well and has seen you in good moments and bad to remind you of who you really are.

When Chariot—the code name for the split—was announced in October 1992, I was prepared for the novelty of the plan to raise some eyebrows. I was not ready for an intensely negative reaction in certain quarters. The main charge we faced was that of acting in bad faith toward our bondholders.

The criticism was pretty upsetting, largely because I didn't think it was well founded. While Marriott has never been a pushover, we're not a bully either; we value our reputation as a "white hat" kind of company. Steve and our legal department (headed by Sterling Colton, our general counsel and son of my father's original partner, Hugh Colton) had been fastidious about crafting the plan for the split to adhere to the law. Even so, we had to face inevitable lawsuits, eventually settling them to all parties' satisfaction.

In the midst of the fireworks I remained convinced that the decision to split was the right one. Our shareholders agreed, voting at our annual meeting in July 1993 to accept the plan by an 85 percent margin.

Three months later, the two companies became official. Just two years after that, Host Marriott split into Host Marriott and Host Marriott Services. The reasoning again was to enhance the ability of the two entities to distinguish missions and goals. Host Marriott remains a real estate company; Host Marriott Services handles food and concession services at airports, shopping centers, toll roads, and sports facilities. Interestingly enough, the second split barely raised an eyebrow. The novelty—and controversy—of splitting had worn off. Since then, all three Marriott companies have been thriving, each doing what it does best.

Now that the dust has long since settled, it's much easier to look back at that topsy-turvy period and appreciate some of its less dramatic aspects. Among other things, we had learned a basic truth, one that Rick Deane, a banker and Marriott director, was fond of pointing out at board meetings. "No tree grows to the sky," he used to say, a warning that even the healthiest growth can't go on forever. Nor can it continue at the fast pace that marks a sapling's first few years. But by splitting the company into pieces—pruning and transplanting, if you will—we had given ourselves new room to grow.

There's one other thing that stands out in my mind from that period. In the midst of the trauma of splitting and rediscovering ourselves, we instituted a small change at headquarters that, on the surface, doesn't look like much—certainly not compared to the headline-making split—but it best captures what we learned from our all-out growth days.

In 1993, we changed the name of Marriott's main decision-making group from the finance committee to the corporate growth committee.

Why do I consider this semantic shift so important?

Like the decision to add "by Marriott" to Courtyard's name, the decision to drop the word "finance" represented a philosophical turning point for us. The term "finance" immediately calls to mind financial engineering and deal-making. The fact that our decision-making group was called by that name in the 1980s says a lot about our priorities and self-image at the time. In contrast, the term "growth" encompasses more than just money. Finance is not emphasized at the expense of other aspects of the business; it's just one of many factors. With that simple wording change, we got back to highlighting what really makes Marriott tick—growth in all its permutations, not merely as measured by lines of credit or old-fashioned ticker tape.

Overconfidence is such a destructive force for individuals and institutions. Companies big and small, new and old can all fall victim to it; the more successful, the more likely one is to suffer from it. As Marriott learned, there's a price to be paid for thinking too well of yourself.

A pointed reminder of our overconfidence in the 1980s came up recently in a conversation I was having with a colleague at another major hotel company. This fellow told me about a conference he had attended in 1989 at which the hot topic was concern about potential overbuilding in the lodging industry. At one point in the session, a senior Marriott executive announced to a crowd of recession-spooked hotel industry leaders that Marriott was "so powerful, we can build through any cycle."

The statement makes me wince today. I didn't attend the conference my colleague was referring to, but I'm not surprised that someone from Marriott at that point in time could have delivered such a cavalier pronouncement. We'd been riding high for more than a decade and had gotten quite accustomed to setting our own agenda and controlling our fate. Everything had been going so well for us; it appeared that we could do no wrong.

The word "appeared" is key. Tempting as it is, perception should never be confused with reality. Our success was not an illusion, but the attitude that the company might be immune to industry cycles certainly was. It's not only arrogant but foolhardy for any company to think that it will be the exception to the rule of market forces. We discovered that fact the hard way in 1990.

Overconfidence can cause you to misread signals about which you might normally worry. On one hand, the speed of the real estate market crash of 1990 and the outbreak of the Persian Gulf War early in 1991 took lots of people by surprise, not just Marriott. On the other hand, there were suggestions of potential trouble that we might have picked up on... and reacted to. The hotel industry media had been filled for months with worried discussions about overbuilding. The conference I just mentioned revolved around the same fears. All the while, our annual reports continued to express our confidence that we were so big and self-sufficient that an industry shakeout was not likely to affect us.

Danger signals weren't just flashing for smaller companies, though. They were flashing for the big ones, too. The unveiling of our first Fairfield Inn syndication in November 1989 was greeted unenthusiastically by a Wall Street that had always eagerly gobbled up earlier Marriott offerings. We sold the syndication, but not as quickly as previous deals.

Looking back almost ten years later with all the advantage of hindsight, I see now that we probably could have turned off the hotel development pipeline about a year earlier than we did and blunted some (but not all) of the troubles of 1990. But in the hard-charging atmosphere that had developed at Marriott—and the industry as a whole—in the 1980s, we truly believed that we were pursuing a virtually puncture-proof strategy for growth.

Most evidence pointed to that upbeat conclusion. Every week, we were holding opening parties for new hotels—hotels that filled up as soon as the doors opened. Our stock soared; our shareholders were thrilled. The latter years of the decade melded together into one big, 'round-the-clock’ celebration at Marriott. If a hardy soul had insisted on raining on our parade, we probably would have smothered both the message and the messenger in cake and champagne. Of course, I was the one leading the parade, and I was having almost as much fun as everyone else. The buck stopped with me.

When the party broke up in 1990, one comfort lay in knowing that business of any kind is always a risk. Whether you're in business for yourself or in partnership with others, no one can be 100 percent certain that things will turn out as planned. There are simply too many variables and uncontrollable forces at work. All you can do is calculate the risk as best you can, decide whether you're up to it, accept that no strategy is foolproof, and recover from mistakes as gracefully as possible.

In the aftermath of the 1990 crash, we've taken off the party hats, put away the noisemakers, and now listen more closely than ever to colleagues, industry reports, and a host of other indicators that together give us a realistic picture of what's going on. We also have, I hope, learned to keep our corporate ego in check.

One thing that was particularly painful to bear when we hit hard times was the negative press. The media's coverage of the company's problems in 1990 to 1991 and the controversial split into two companies in 1992 to 1993 made for pretty tough reading. The media had fed Marriott's ego in the late 1980s with glowing coverage of the company's growth; it was not surprising that the press was equally quick to be critical when the company stumbled. The episode was a good reminder that it's dangerous to read your own press clippings and take them seriously.

Ultimately, what saved us from a terminal case of arrogance was something I've talked about: our corporate culture. The company owes a debt of gratitude to the confidence—not overconfidence—of loyal Marriott associates who came together and worked hard to bring the company back from the brink to its better instincts.

In fact, the company's worst days brought out the best in the organization, even while putting our core values to the test. A long tradition of teamwork and a healthy track record of taking care of each other helped to keep us from falling apart, as could easily have been the case. Instead of jumping ship, thousands of people pulled together across the country and around the world to help us right ourselves.

In addition to helping we find ways to cut our working capital by $100 million, associates toughed out a salary freeze in 1991. Senior executives—approximately 1,100—had their pay frozen for the entire year. Some also sacrificed their annual bonuses. Middle managers—about 5,000 people—had their salaries frozen for six months. All other managers and our administrative/clerical associates endured a three-month freeze. Our hourly payroll associates were not affected.

Like their reaction to the layoff of the development and architectural and construction divisions, the attitude of associates toward our financial predicament was far more understanding than I think many companies would have enjoyed in the same situation. At headquarters and in the field, people signaled their belief that the decision to freeze salaries would not have been made if it had not been necessary. They also responded positively to the approach we used. The "weighting" of the freeze timetable put the biggest burden on those most able to bear it. Finally, there was general compassion for our problems and a recognition that we weren't the only company having troubles. Corporate America as a whole was having to suck it up a bit after a decade of wild growth.

Marriott is still staffed today by many associates who lived through those challenging days with us. Their experience and memories of the slim times are, for the moment, our most effective check against "arrogance creep." But we can't depend on those associates being around forever to make sure that we don't let future successes go to our heads. Other kinds of vigilance are needed as well.

Among other things, we must continue to build and maintain a corporate culture that values and celebrates success, but remains capable of critical self-analysis. We've already touched upon some of the elements that I personally think are important to our corporate culture: good listening skills, attention to detail, putting employees first, maintaining equilibrium between the forces of change and the status quo.

Perhaps the most important check against overconfidence in an institution is the quality that protects human beings from the same fate: a sense of humor.

Being able to laugh at yourself once in a while is a good thing.

When Chariot was picked as the code name for our plans to split the company in 1993, we didn't give much thought to the choice. Any major project that a business undertakes usually gets tagged with a convenient name until a permanent one, if needed, is dreamed up. The code names range from silly to serious. The fact that Chariot rhymed with Marriott was a nice touch, but essentially meaningless. The image of Roman warriors lent a note of nobility, but likewise didn't say a whole lot.

Linguistic Survey of Part 6:

1. Let’s have a drill on prepositions once again:

to sell sth _ a high price

_ the scenario devised by him

_ a practical viewpoint

to adhere _ the law

to split _ two pieces

to be fond _ sth

to continue _ the fast pace

to be compared _ sth

_ the expense of sb

to fall victim _ sth

to suffer _ sth

overconfidence _ sth

to refer _ sth

to be accustomed _ sth

to confuse sth _ sth

to be immune _ sth

to worry _ sth

to react _ sth

to point_sth

to insist_sth

the attitude of sb-sth

compassion_sb

to depend_sb

to be capable_sth

to touch_a problem

to be important_sb

to laugh_sb

to deal_sth

2. Explain the underlined phrases:

- Our team soon found money in many places we had ignored when capital was available for the asking.

- Our competitors were willing to sell hotels at fire-sale prices.

- It doesn’t look like much but it captures what we learned from our all-out growth days.

- We were so big and self-sufficient that a crisis was not likely to affect us.

- In the hard-charging atmosphere in the 1980s, we believed that we were pursuing a punctureproof strategy for growth.

3. Trace the idiomatic phrases in the text and find something similar in Russian:

To go full steam, to have a field day, to go sour, to go for a song, to sit on one’s hands, to get the blood moving, to be up to one’s ears in sth, to raise sb’s eyebrows, a white hat, to ride high, to jump ship. Didn’t they bring some colour to Mr. Marriott’s laconic style?

4. There are some words unlikely to be found in your dictionaries. Analyse them:

- to hype = to advertise often,

- a state-of-the-art deal = a perfect, well-considered deal (almost a piece of art),

- an industry shakeout = a trouble, a crisis, a breakdown (derived from “to shake sth out”),

- an upbeat conclusion = experienced, mature.

5. The special phrases below may come useful to you:

real estate developers

a provision in a treaty

market explosion

a backlog of products

to be (sit) on sb’s books

a spin-off (to spin off a service into another company)

a board of directors

acquisition of property

to thrive

to soar (about prices, stocks, ect.)

Tacks for Debate on Part 6:

1) Was the split of Marriott inevitable and indispensable?

2) Overconfidence in one’s own “bigness” is another risk, isn’t it?

3) What saved Marriott in hard times?