Lessons in Corporate Finance, 2nd Edition

CHAPTER 7Capital Structure Decisions (Marriott Corporation and Gary Wilson)

This chapter illustrates how firms should think about their financial policies, in particular their capital structure. Our setting is the Marriott Corporation in 1980 and its exceptional CFO, Gary Wilson.

The Marriott Corporation began as an A&W Root Beer stand in 1927, two years before the Great Depression. In 1937, the firm began providing in-flight catering at Hoover Field, an airfield in Arlington, VA, which is now the site of the Pentagon. Marriott went public with a share price of $10.53 in 1953 and opened its first “motor lodge” hotel in 1957. By the late 1950s, the Marriott Corporation was at the forefront of both airline food and the motel industry. By 1979, the firm had grown substantially and was diversified into Hotels (35% of sales), Contract Food Services (32% of sales), Restaurants (25% of sales), and Theme Parks and Cruise Ships (8% of sales); the firm's total sales topped $1.5 billion. The firm remained family controlled (holding 6.5 million of the approximately 36.2 million shares outstanding), and family members occupied four of the eight seats on the board of directors. At a time when there were few women or minorities on boards, the firm was also proud to be one of the few Fortune 500 firms with a woman on its board—Mom.

In the late 1970s, Marriott implemented a major policy change in its product market operations. Marriott went from owning its hotel properties to managing them. That ...