Capitol Forum Marriott Starwood

Marriott/Starwood: Profile of New Mergers III AD Peter Richman; Concerns from Meeting Planners Will Be Key to Second Request Decision

February 25, 2016

Mergers III Staff Update

On February 16, Marriott filed an amended SEC Form S-4 that provided an update on the HSR timeline for the Marriott/Starwood merger. The parties previously withdrew their initial HSR Notification and Report Form prior to the expiration of the (original) initial 30-day waiting period, which would have expired on January 28. According to the February 16 filing, the parties refiled HSR on January 29. Accordingly, the new 30-day waiting period will expire on Monday, February 29.

The reviewing FTC Division, Mergers III, is newly headed by 25 year FTC veteran Peter Richman, who served as Deputy Assistant Director (DAD) of Mergers III for several years before assuming his current role as Assistant Director (AD) in February 2016. According to two attorneys who have worked with Richman at the FTC, Richman is both inquisitive and thorough, and above all “very committed to working at the FTC,” notes one of the attorneys. Not only does Richman have “pretty good litigation experience,” but he is “unafraid to recommend a complaint,” says the attorney. In fact, Richman is lauded for his work on what many would consider a risky, but ultimately successful, case for the Commission, when he recommended a challenge to the consummated Aspen Technology/Hyprotech merger in 2003.

Unlike many ADs, Richman has a doctorate in economics in addition to his law degree. The attorney who worked with Richman notes that his understanding of the economic analysis often motivates him to take a critical look at recommendations from the Bureau of Economics, which are typically merger-friendly. For example, Richman is known to question staff economists whose findings demonstrate that a merger will not result in unilateral effects. “[Richman] will say, tell me what you did, which data you used, which regressions you ran, and I’ll make the decision myself,” according to the attorney. The attorney added that although Richman recognizes the benefits of supporting unilateral effects theories with data, he does not rely on it when deciding the merits of a merger challenge. That Richman is not afraid to litigate and is comfortable questioning economic analysis suggest that in a close call to issue a second request - which is what we see in the Marriott/Starwood case - he is likely to err on the side of requesting additional information from the parties.

We believe meeting planner issues will be central to an FTC decision about whether or not a second request will be issued in the Marriott/Starwood merger, especially in light of recent communications from Starwood to employees, hotel owners, and B2B customers about potential changes to Starwood’s sales staff and infrastructure. To get a sense of what these changes to Starwood’s sales structure could mean for meeting planners, we spoke to several industry experts in the meeting planning space, including several planners who are the founders of their own meeting planning companies, as well as the Chief Content Director for trade publication Meetings Today.

In Depth Profile: Peter Richman and Mergers III

According to a source who previously worked with Richman in Mergers III, Richman is a long time, dedicated veteran of the agency, who has been with Mergers III for at least 15 years. As Mergers III traditionally held responsibility for overseeing oil and gasoline mergers, Richman “has an encyclopedic knowledge of those industries  – a level of knowledge that was really quite impressive,” said the source. “Ever since Peter joined Mergers III, he has been involved in every major investigation that the shop has been involved in for at least the past 15 years.”

While much of the shop’s work has focused on oil and gas, the source noted that Mergers III has jumped in from time to time with other industries, as “there are many smart lawyers in Mergers III who are very capable of doing things outside of those traditional industries,” the source explained. Another source who has also worked with Richman agreed that Richman is more than capable of leading the division, whatever the particulars of the industry in question. In particular, the source made note of Richman’s PhD in economics, in addition to his law degree. “He really understands the economics, so economists like working with him,” said the source.

Richman’s adept understanding of economics may come into play in his role as head of Mergers III, as, according to the source, Richman is not afraid to push back on the economists’ econometric models. “Sometimes, the economists go off and do their own thing, and they’ll come back to report that their model shows no unilateral effects. Some ADs will just take their word and say, ‘okay, if there’s nothing there, we’ll just close the investigation,’” the source explained. “Peter, on the other hand, will ask the economists to tell them what they did, what data they used, what regressions they ran, and so will analyze the model and make a decision himself,” the source told us. “He’ll push back on econometrics, since it’s a topic he really understands and can decide for himself.” Perhaps due in part to his economics background, according to the source, Richman prefers to show effects with data, where such data can be found, and may be relatively more skeptical of a coordination or structural case.

The direction and management of Mergers III is unlikely to deviate significantly from how it was run under Phill Broyles (the previous AD), according to our source formerly at Mergers III. “It’s not likely that we’ll see a lot of change in how the shop is operated, given that Peter has been involved in the management decisions in that shop for almost ten years,” said the source. “Peter and Phill worked very closely together, for many years, and I don’t think there was a management decision that Peter was not a part of since becoming DAD in 2006.” The source also added that a smooth transition under Richman is all the more likely since the other DAD, Patricia Galvan, will be continuing in that position. “I’ve heard that the Commission is not going to be filling the other DAD position any time soon, so other than Phill being gone, the shop will be running under a very similar management team,” said the source.

Mergers III staff has traditionally been fairly aggressive in investigating proposed mergers, even despite having fewer staff than the other Divisions, Mergers I, II, and IV. In the last high-profile case headed by Mergers III – Zillow/Trulia – the shop conducted a six-month investigation, compiling a deep understanding of the real estate industry and online portals for real estate information. Mergers III staff was known to have taken a big interest in the merger, although a challenge to the deal was reportedly shot down at the Bureau Director level. Although the hotel industry is a whole new realm for the Division, Richman’s economic expertise and willingness to bring risky cases could work against the parties in this case.

A Closer Look at Meeting Planners’ Concerns

Most meeting planners are unsure of what to expect following the merger, and may not be able to identify negative aspects of the merger until after closing.

The Capitol Forum spoke with Joan Eisenstodt, a Washington, DC-based planner who works with corporations, government-affiliated groups, associations, conference center companies, and convention and visitors bureaus, among other types of organizations. Eisenstodt believes that most planners will fail to realize the implications of such drastic hotel consolidation until after the Marriott/Starwood merger is already cleared, and the companies’ sales forces integrated. “How concerned different planners are depends on how savvy a meeting planner they are, and how long they’ve been around in the industry,” Eisenstodt explained. “But I think there will be much greater concern if this deal is approved and goes through, when planners begin to actually see the changes. At that point, I think there’s going to be an outcry, but it will be too late.”

According to Eisenstodt, the lack of concern on the part of meeting planners may have to do with the fact that many of them fail to keep track of the ownership, management, and branding of different hotel properties. Without realizing which brands and properties are associated with which hotel companies, it would be impossible to fully comprehend just how many meetings- and convention-focused hotels will be associated with Marriott after the merger.

“At a recent conference, I was leading a session on contracts for meeting planners,” Eisenstodt told us. “When I mentioned the issue of knowing who owns and manages the hotel, and which company owns which brands, the attendees – and these were really seasoned planners – looked at me like ‘really, I should know that?’” According to Eisenstodt, once Marriott and Starwood combine their brand portfolios, the picture will only get more complicated with respect to branding and ownership.

One industry expert we spoke to analogized the situation to the recent spate of mergers in the airline industry. “I’m not overly concerned about the Starwood/Marriott merger, yet,” said Charles Chan Massey, founder of SYNAXIS Meetings & Events, a third-party meeting planning company that works with both Marriott and Starwood. “But at the same time, I think about how I also wasn’t very concerned when I saw Continental and United merging. At first I just thought, ‘oh, this’ll be interesting’ – but then the merger happened and I realized they were changing service, peeling routes, and other things that essentially made my life harder as a planner,” he told us.

Chan Massey also noted that prices had increased following the airline mergers. “They always say that pricing won’t increase, but then somehow the pricing figures out a way of basically becoming what appears to be collusion,” says Chan Massey. “Similarly, here, I could imagine some scenarios where there will be opportunities for the big chains to basically get their prices more in line with each other.”

Meeting planners that work with Starwood or Marriott are likely to receive less personalized attention as a result of the merger, and smaller planners may be edged out altogether.

Tyler Davidson, Chief Content Director for trade publication Meetings Today, made note of Marriott’s somewhat controversial decision in 2008 to centralize its sales forces – an initiative which the company dubbed “Sales Force One.” Up until that point, Marriott, and most other major hotel companies, had in place sales teams that focused on representing individual properties. With the implementation of Sales Force One, each Marriott customer now generally works with one primary point of contact, who represents all Marriott brands and properties. The initiative also set up regional sales offices that focus on specific areas and accounts.

The goal of above-property, global sales is, of course, to achieve efficiencies and elevated levels of sales globally. “But at the time, planners reacted fairly negatively,” Davidson recalls. “The planners I talked to during that period were upset that they had less personalized attention, and had lost their relationships with the sales people they had worked with for years.” Eisenstodt agreed, adding that “because of the consolidation of how Marriott did their sales, we as planners didn’t have the same ability to negotiate and gain assurance that we had obtained the best possible deal. Before, we were working with people who knew our business, who were on top of what we did and understood my specific needs.”

Hotel owners reacted negatively as well, given that some were now losing business to other Marriott affiliated hotels in the same area, all while paying for the same sales team. Marriott, however, stood to benefit by eliminating the need for sales personnel and account managers at the individual property level, as well as ensuring that Marriott affiliated hotels in the same markets would not compete against one another for the same contracts.

A few years later, in 2011 and 2012, Starwood also changed its sales force structure, incorporating regional “metro market” teams to cover sales across all of its properties. In Atlanta, the first such “metro market sales cluster,” the company found that sales volume increased by 10 to 20 percent from large corporate accounts, with a slightly larger volume growth from smaller accounts. But in Starwood’s case, all on-property directors of sales were left in their positions, as well as many full on-property sales teams. The on-property sales personnel are to communicate with all sales managers and associates within the “metro market.”

Now, when Starwood’s properties are brought into Marriott’s portfolio, Marriott will likely reduce or eliminate property-level sales personnel at Starwood’s properties, in order to create efficiencies and to make the sales strategy more uniform across its newly expanded portfolio. While any such changes will apparently be held off until 2017, as communicated through Starwood’s letters to hotel owners and customers, meeting planners that previously worked and developed relationships with Starwood’s sales teams will be hard pressed to receive the same level of attention from Marriott’s centralized sales force. At the same time, planners working with Marriott are likely to feel the pinch as well, given the greater number of accounts that will need to be managed.

“If this goes through, Marriott’s sales people will have an even greater burden than they do now,” Eisenstodt said. “So for any planner who has a relationship with someone within either company, those relationships are now put into question. Marriott’s sales people might have even less time than they do now – maybe none at all – for people who do smaller meetings. So we should all be worried.”