MARRIOTT DIVIDES, CONQUERS.

Byline: Edwin McDowell The New York Times

If the experience of the Marriott hotel empire is any guide, the best way for a company to prosper may be to break itself apart.

Marriott has thrived ever since it split in two three years ago. But unlike most of the other Fortune 500 companies caught up in a recent tidal wave of corporate breakups and spinoffs, Marriott was not unloading a problem division or ridding itself of secondary activities that distracted it from its ``core business.'' Instead, the hotel empire orchestrated the breakup as a way of bringing greater focus to its operations.

And so, while Westinghouse heaves a sigh of relief over its divestiture of its industrial enterprises, and AT&T slices off a computer maker that bled it of billions of dollars, the new Marriott International property-management company and Host Marriott hotel chain, both independent entities of the now defunct Marriott Corp., couldn't be chummier.

Despite a revolt by bondholders over the original breakup plan, the strategy has paid off, largely silencing its critics - and perhaps exceeding the wildest expectations of its authors.

Independence has bestowed a new nimbleness on the two Marriotts in pursuing their separate interests without diminishing their ability to pool resources in pursuing common goals. Indeed, these days questions about the companies - which share a headquarters building, some staff members and the overarching guidance of the Marriott family - center on whether their relationship is too cozy, and how they will behave when the interests of their shareholders do not coincide.

Having jettisoned most of its debt, which had been the old Marriott's big stumbling block to expansion, Marriott International Inc. has roared ahead, buying 49 percent of the luxury Ritz-Carlton chain, franchising the Marriott name at home and abroad and signing many lucrative contracts to manage properties.

The Host Marriott Corp., meanwhile, has sold off dozens of limited-service hotels and now owns 77 full-service hotels, most of them bought at bargain prices - and most of them managed by Marriott International. Today, Host Marriott is one of the nation's biggest property owners, with assets of more than $4.4 billion.

``We think Host Marriott is the best vehicle available to investors looking to put their money into first-class and luxury hotels in major markets,'' said Mark Mutkoski, senior lodging analyst at BT Securities, ``and that's the sector we think will remain insulated from significant new competition.'' Mutkoski added that Host Marriott did ``an incredible job buying high-quality assets at lower prices than its competition.''

The breakup of Marriott worked so well that Host Marriott could not resist a repeat performance last year, spinning off the Host Marriott Services Corp., which operates and supplies hundreds of food and gift shops at airports, travel plazas and stadiums.

Investors who have stayed the course have reaped a bonanza. Michael Stein, Marriott International's chief financial officer, estimates that stock in the old Marriott Corporation that sold for $8 to $9 in 1990 is now worth more than $70 in the form of shares in the three new companies. Similarly, the stock-market capitalization of the three Marriotts now exceeds $10 billion - with Marriott International accounting for more than $7 billion of the total - compared with about $2 billion before the split-up.

``That performance is nothing short of extraordinary,'' said Bjorn Hanson, the chairman of hospitality services for Coopers & Lybrand. He added, though, that the success of the breakup resulted more from the recovery of real estate prices ``than anything unique about the way it was restructured.''

If anything, the prospects for the Marriotts are brightening. Joyce Minor, vice president for equity research at Lehman Brothers, recently raised her 1996 earnings-per-share estimate for Marriott International to $2.23, from $1.87 in 1995. For Host Marriott, Minor predicted an increase in earnings before interest expense, taxes, depreciation and amortization - an important measure for any company with a heavy debt load - to $425 million from $311 million.

The biggest beneficiary of the stock surge has been the Marriott family, which controls the empire through its ownership of roughly one-fifth of the shares of the three companies, holdings worth about $2 billion and spread among more than two dozen descendants of the empire's founder, J. Willard Marriott. Power in the organizations is wielded by his two sons. J. Willard Jr., known as Bill, the first among equals, is the chairman of Marriott International and also serves on the boards of Host Marriott and Host Marriott Services; his younger brother, Richard, is the chairman of Host Marriott and also serves on the other two companies' boards.

The family connections and functional overlap assure a unity of purpose at Marriott that is largely absent in other corporate divorces.

Committees from Marriott International and Host Marriott discuss possible acquisitions at weekly meetings, and Marriott International manages most of the Host Marriott hotels.

The two companies have made joint investments in several big properties, including a 600-room Marriott hotel at the Mexico City airport and a 300-room Marriott hotel in downtown Mexico City. Also, Marriott International agreed to set up a $225 million line of credit to Host Marriott and to lend it $109 million for the purchase of the Philadelphia Marriott Hotel, which opened last year.

And after Marriott International bought the stake in the 31-hotel Ritz-Carlton chain last year (acquiring the rights to manage the properties and use the Ritz-Carlton name, but not any physical property), Host Marriott bought three Ritz-Carlton hotels.

In some ways, Marriott International and Host Marriott are more efficient as independent entities than they were when they operated under the same management. Stein, the Marriott International financial officer, said the Marriott Corp. lacked the flexibility of its successor companies because its real estate side was often at cross-purposes with its hotel management side.

``The Marriott Corp. had always aspired to be the leader in managing and franchising, and its real estate ownership was incidental to that goal,'' he said. ``When the real estate market collapsed, we ended up with great assets in a difficult market.''

Moreover, he added, investors in real estate are not necessarily interested in investing in a management and franchising company, and vice versa. If the two sides are part of one company, he said, ``it's a tougher sell when trying to raise capital.''

For all their overlapping activities, officials of the two Marriott pillars consistently have stressed their independence. And analysts say they have been scrupulous in living up to their fiduciary responsibilities and in abiding by federal conflict-of-interest statutes.

``They go right up to the limit, but they don't ever go over it,'' said one analyst, who insisted on anonymity. ``The loans and terms of the deals between the two companies are very carefully constructed so no one can say they're unfair or unreasonable.''

Nevertheless, analysts privately continue to raise ``what-if'' questions about the companies. What if another management company appeared to be a better choice than Marriott International to run a future acquisition of Host Marriott? Which would Host Marriott choose? What if Host Marriott received an unusually generous offer for a hotel it would just as soon sell - from a company that was likely to cancel or not renew Marriott International's management contract?

More broadly, what if other management companies approached Host Marriott with more favorable contract proposals than it received from its corporate partner? And what if Host Marriott decided to buy some of Marriott International's retirement communities, as it has indicated it might? Would it play hardball in negotiating for the lowest possible price?

``We have a strategic alliance with Marriott International, and from investors' point of view we've always represented ourselves as having that strategy,'' said Terrence Golden, the chief executive of Host Marriott. ``Why would we go to another brand when there's a premium in occupancy and room rates being allied with Marriott International?''

Golden added that only two members of Host Marriott's seven-member board are in the Marriott family, that Host Marriott and Marriott International have ``a separate set of shareholders almost entirely,'' and that the compensation of Host Marriott management is tied into the performance of the company.

``If it made more economic sense to go to another brand,'' he said, ``we would be the first to do so.''

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Photo

Photo: J. Willard Marriott Jr. oversees Marriott International since its breakoff, along with Host Marriott, from the now defunct Marriott Corp in 1993.

The New York Times