As if this year has not brought enough unexpected developments, the hospitality world has yet again been shaken by the alleged rumors of IHG and Accor joining forces. This consolidation would pronounce the creation of the world’s biggest hotel group, outperforming the current leader Marriott by about 200 000 rooms (1.6 million between IHG and Accor versus 1.4 million in the latter giant’s portfolio). While both companies have declined to comment on the matter, the markets do not stand still: following the reported merger interest, Accor’s shares went up by 1.9%, while IHG managed to outperform the falling FTSE-100 index, signaling a positive sentiment towards the speculated marriage.
Is it time to come together?
A popular question among the analysts and pundits alike is whether this deal would kick off the era of continuous consolidation in the hospitality industry. Such a turn of events may seem logical: a great deal of businesses is currently failing to fight the disastrous outcomes of covid-19 in the travel sector, desperately looking for solutions to drive their costs down, while at the same time trying not to give up on their market share. Given that times of adversity are traditionally (and rightfully) seen to be favorable for large-scale deal making, the financial advantages M&As might bring to the potential participants may become enough to attract more interested parties.
However, this is almost precisely what industry experts thought back in 2016, as we witnessed the marriage of Marriott and Starwood – yet, nothing like that happened. Might it be because the market conditions were different? Perhaps, yes, however, many hotel chains have favored organic growth over mergers and acquisitions both in the rebounding and distressed markets. For example, Hilton has not had an M&A in over 20 years now and still managed to become one of the four biggest industry players. This may be due to the fact that organic growth, especially in the regions with more fragmented markets and lots of independent brands available, is less costly than chain mergers, while the superior financial returns of the latter are not necessarily inevitable and depend greatly on various exogenous factors.
Souls that complement each other
When it comes specifically to IHG and Accor though, their marriage was first prophesied as far back as in 2014, with the only caveat of the different company in the driver’s seat: back then IHG was thought to be the initiator of the process, while it is now Accor that has supposedly expressed interest. Unlike Marriott and Starwood, whose combined presence lead to a denser network, IHG and Accor’s geographical spread seems to be more complementary, with the former having a strong grip on North American and Chinese markets and latter focusing more on Europe.
Perhaps surprisingly, complementarity in M&As has turned out to be a double-edged sword. On the one hand, a wider network could help the newly-formed giant reach out to the previously untapped markets and thus strengthen its position as a global leader. On the other hand, though, sparser presence means smaller market share in a specific destination, which subsequently leads to a much lower price-setting power, rendering the merger practically inefficient in the question of gaining a sharp competitive advantage, especially in the fragmented markets, where global chain presence is not sufficient at the first place.
The global pandemic and its strong grip on the travel world does not help either. Should the merger occur, it is not quite clear what the price tag would be, as price discovery mechanisms for hospitality assets are just too obscure at the moment, given the extreme uncertainty of the future markets’ performance, as well as geopolitical and healthcare issues. Buying management and franchise contracts (which is technically what an average M&A is usually about) at the times when a hotel with 30% occupancy is considered to be lucky is questionable at the very least.
It is also important to remember that both companies have yet to comment on the rumors and neither of them show much interest in doing so in the nearest future. Perhaps, we are all getting a bit ahead of ourselves and should pay closer attention to the issues at hand – after all, this merger is unlikely to change the game completely for the rest of the industry players, at least against the backdrop of the worldwide pandemic.