Why Buyers Pay a Premium for Hotels

Abstract

This exploratory study focuses on explaining the price premium paid in hotel mergers and acquisitions by examining the operating structures of the buyers as well as other financial and market characteristics of both the buyers and target hotels. It considers 22 hotel-sale transactions from 1995 to 1999 in which both the buyer and the target are publicly held companies. Statistical tests found that the price-to-earnings ratio of the target and the size of the acquirer relative to that of the target each are significant factors in explaining the premium paid. That is, as the price-to-earnings ratio of the target hotel or as the size of the buyer relative to that of the target increases, the premium paid also increases. The following factors were not statistically significant in predicting premiums paid: the ownership structure of the buyer, the profitability of the target hotel or hotel firm, or the relative market value of the buyer. The strategic intent of the buyer or the anticipation that post-purchase cooperation can increase profitability may exert more influence on paying a premium than did some of the financial variables studied, although the evidence for that proposition is inconclusive.