Hilton CEO's alliance paved way for merger.

Hilton Hotels Chief Executive Stephen Bollenbach admits that he waited nearly 10 years before consummating the $5.7 billion marriage of Hilton's U.S. chain with its international counterpart Hilton Group, a feat he was eager to pull off before his own retirement.

Bollenbach is best known for his mega-deal acquisitions of Capital Cities/ABC for Walt Disney Co. and of Bally Entertainment Corp. for Hilton. He has been on the losing end of several acrimonious bidding wars as well, notably for the former ITT Corp., owner of Caesar's Palace, which was snapped up by competitor Starwood Hotels and Resorts.

A finance whiz who grew up in Downey, the 63-year-old Bollenbach has demonstrated a willingness to take risks during his decade leading Hilton. After focusing initially on Hilton's gaming operations, only to have several big deals fall through, he quickly changed course. In 1998, Hilton got out of the gaming business entirely by spinning off its operations as Park Place Entertainment Corp., and Bollenbach focused exclusively on hotels.

And then he waited until international Hilton Group was prepared to sell. Favorable financing and a rebound in the European hotel business helped cinch the deal.

Although Bollenbach waited, he wanted to buy Hilton international almost from the day he stepped into the executive suite.

"When I joined Hilton, the first week I was here, we set up a meeting with executives of Hilton international and talked about how to put these companies back together," he said. "In that sense, it's been a very, very long process."

Bollenbach was able to forge a solid strategic alliance with London-based Hilton Group in 1999 that made it seem to consumers as though the two companies were aligned. That alliance ultimately paved the way for the merger.

"We were always confident that someday we would come together in a legal sense and it was really a process of working together and getting to know each well," he said, adding that the practice of forming alliances is far more common in Japan, where companies may work under alliances for years before merging.

Though shares of Hilton initially fell on reports of the deal last year, investors have warmed to it, sending shares up 26 percent to $24.14 a share, from a low of $19.07 a share in November, when rumors of the deal first emerged.

Jeffrey Donnelly, a senior analyst at Wachovia Capital Markets LLC, has an "outperform" rating on Hilton with a price target of between $28 a share to $30 a share. The deal makes Hilton the largest hotel company in the world with 2,750 hotels and 472,000 rooms in 80 countries.

Donnelly said Hilton is well positioned now because it had always traded at a substantial discount to its competitors Starwood and Marriott International Inc., as well as other hotel real estate investment trusts.

John Arabia, an analyst at Green Street Advisors in Newport Beach, said Hilton was precluded from expanding its category-leading brands including Doubletree, Embassy Suites, Hampton Inns and Hilton Garden Inn, outside North America because Hilton Group owned the international rights.

"We're traditionally fairly negative on synergies from mergers, because the values are typically eaten up by transaction costs," Arabia said. "But the value here is material because it unlocks the territorial restrictions."

From the viewpoint of business travelers, the initial changes will be seen in the increased use of the Conrad Hotel brand in the U.S., and of the mid-scale Hampton Inns and Hilton Garden Inn brands abroad. Investors are satisfied that the strategy of selling off hotel properties will continue overseas, particularly in Europe where hotels are garnering high valuations.

Marriott model

Donnelly said that over the long term, management "expects to finance the transaction primarily through sales of European hotels."

Bollenbach has emphasized that Hilton will continue to shed its real estate holdings--though it likely will always hold its flagship properties like the Waldorf Astoria and now the Hilton Park Lane and Metropole in London.

"If anything, we're going to move toward the business model of Marriott, which is more of a management franchise company, rather than Starwood, which is more a real estate company," he said. "Over time, we'll move into businesses that are fee-driven and not capital intensive by selling hotels and emphasizing management contracts."

While there is clearly some satisfaction for Bollenbach in leapfrogging over competitors Starwood and Marriott, his own personal stake in Hilton has diminished dramatically in the past two years.

Beginning in 2003, Bollenbach exercised 4.7 million options that netted him $45 million--and he is quick to note that he did not sell at the top of the market and that he has nowhere near the holdings of co-chairman Barton Hilton.

The sales have left him with just 40,000 shares--far short of the nearly 12 million shares he amassed in the past decade.

Brian Foley, managing director of Brian Foley & Co., a consultant on executive pay based in White Plains, N.Y., said Bollenbach's executive compensation is fairly unusual in that he received a significant amount of cash in both his salary and bonus, without getting any restricted stock from 2001 to 2004. Last year, Bollenbach received a salary of $1 million and a cash bonus of $2.2 million.

"He's been a fairly good performer because Hilton has done well compared to the Standard & Poor's index, so his pay is not out of line," Foley said.