Why Marriott International's Acquisition of Starwood Hotels Is Bad for Consumers

Marriott International (MAR 0.60%) has agreed to buy Starwood Hotels & Resorts Worldwide (NYSE: HOT) for $12.2 billion, making this new consortium the largest luxury hotel chain in the world.

In this clip, The Motley Fool's Tim Hanson explains why the stocks have taken a dip since the deal was announced and spells out the impact the merger will have on the brands going forward. This deal might be good for investors ultimately, but it could be very bad for consumers, and might lead to an end of the golden age of cheap travel for consumers. 

A full transcript follows the video.

This podcast was recorded on 11/16/2015.

Chris Hill: Marriott International is buying Starwood Hotels for $12.2 billion in cash and stock, thus creating the largest hotel company in the world. 

Why are shares of Starwood falling? If this is such an awesome deal, why is Starwood, the company being bought out, why are their shares trading about 5% lower?

Tim Hanson: Well, Starwood has been up for sale for a couple weeks, if not months, now. So I think the market has been speculating that the take out would have been at a higher price than it is currently. Although, it is kind of a stock deal. So if you expect the synergies to play out, then how Starwood is performing isn't that relevant. That's why Starwood is falling, because people thought a deal was in the works and they just speculated it would come at a more expensive price tag.

Hill: Putting aside the price drop, it does seem on the surface like this is a deal that could work out pretty well, when you think about how Starwood and Starwood Properties have much more of an international footprint than Marriott does.

Hanson: Yeah. At a glance, it does make some sense. You can't say that about all mega mergers. No, I think they're gonna have about 15% share of the domestic US hotel market. It's funny, so much of the recent Internet and technology boom has been driven by entrepreneurs who come up with solutions to better distribute somebody else's products. So, all those travel websites, they don't actually own any hotel rooms, and so on and so forth. Uber doesn't own any cars. They're finding a way to help other people more efficiently use their assets.

But at some point, it seems to me, if you actually own assets, you should be able to come up with a better way to more efficiently use them. So, if Starwood and Marriot combined have all this hotel inventory, you could foresee a world where they've got their own app, or their own technology interface whereby you can book these rooms, and the properties communicate with each other, so you know where you're staying, where you're going, so on and so forth. So, it puts together a pretty valuable asset base, and, play it forward a few years, in potentially interesting ways.

Hill: Yeah, it really does seem like we have seen a lot of -- if not flat out merging, but certainly a lot of partnerships in the travel space. When you look at what's happened recently in China, with Ctrip and Qunar. It seems like with every passing month, Priceline and TripAdvisor get closer and closer together. I don't know, I'm not sure what to think about this, other than, as a consumer, I feel like, at some point, things get big enough that consumers are gonna get squeezed.

Hanson: Oh, sure. I mean, it's been a golden age for consumers in the travel space, in terms of being able to comparison shop different flights, different ways you can connect, different hotels, what the offers are, and so on and so forth.

But the economics of those businesses weren't that good. As consumers got more information, profit margins tended to go down. In China, all those online travel websites were losing money hand over fist. And in a world where there's only one Chinese online travel website, they're gonna make a lot of money, and the Chinese consumer won't see the prices decline as fast as they did. And take rates, even on airlines, they declined from paying 11% to paying 3% at Qunar. Or perhaps even less than that.

But this is how business flows. It ebbs and flows that way. And I think as businesses consolidate in this sector, it's one of the more mature online sectors, travel websites were among the first to really be consumer-facing. The economics for those businesses will get better, and I don't think prices will necessarily rise for consumers, but you'll stop seeing such a drastic savings year after year. 

But in the fintech space today, for example, with robo-advisors, you're seeing sort of the same dynamic play out, but at an earlier-stage level. So, Acorns, Wealthfront, Betterment. These companies are losing huge sums of money. But you foresee a time when they potentially do merge or consolidate or get acquired by a bigger player, and the bigger player takes some of the technology, obviously gets some of their users. But as there's fewer people to engage in a price war, the economics of the businesses will stabilize, and consumers probably will stop seeing prices drop as fast as they have.