Interstate Hotels & Resorts Inc.

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Interstate Hotels & Resorts Inc.

4501 North Fairfax Drive
Arlington, Virginia 22203
U.S.A.
Telephone: (703) 387-3100
Fax: (703) 387-3101
Web site: http://www.ihrco.com

Public Company
Incorporated: 1962 as Interstate Hotel Company
Employees: 32,000
Sales: $107.1 million (2002)
Stock Exchanges: New York
Ticker Symbol: IHR
NAIC: 721110 Hotels (Except Casino Hotels) and Motels

Interstate Hotels & Resorts Inc. was formed in August 2002 as a result of the merger of MeriStar Hotels & Resorts Inc. and Interstate Hotel Corporation. It is the nation’s largest independent hotel management company, meaning it lacks a signature brand hotel. Interstate manages more than 400 hotels in 45 states and Canada, 109 of these for MeriStar Hospitality Corporation through an inter-company agreement called a paper-clip real estate investment trust (REIT). Interstate also provides hotel management services for other real estate investment trusts, institutional real estate owners, non-institutional ownership groups, and privately held companies.

Interstate: Beginnings to 2001

Interstate Hotel Company was founded in 1961 by Pittsburgh attorneys Milton Fine and Ed Perlow, who together purchased the Capri Motel in Erie, Pennsylvania. Fine and Perlow kept a low profile, but Interstate incorporated in 1962 and expanded throughout the next decade by purchasing several Howard Johnson motels along the Pennsylvania Turnpike. In the 1970s, the company began developing Marriotts and managing hotels for other owners.

By 1990, Interstate had 30 hotel management contracts. The following year, it earned a net income of $1.9 million. By 1995, it had 150 management contracts with Marriott and other hotel brands and net income of $15.8 million on double the revenue of its closest competitor, Carnival Resorts and Hotels. Throughout the remainder of the 1990s, the total number of hotels Interstate managed under brand names, such as DoubleTree, Embassy Suites, Hilton, Marriott, Radisson, Sheraton, and Westin, decreased slightly, yet the company’s revenues continued to grow.

In the last years of the 1990s, Interstate executives began to explore a change in focus for the company, which continued to operate as a private entity until June 1996, when it went public to raise the capital to become the majority owner in some of the properties it managed. Interstate executives also had plans of expanding through purchasing other hotel management companies. According to the company’s chief financial officer, quoted in the Pittsburgh Business Times in 1997, it was “hard to survive … as just a management company. You ha[d] to be able to invest, in acquiring hotels or buying other management companies.” After its public offering, Interstate purchased close to 30 more hotels with its earnings and with another $100 million it solicited from banks. In December 1996, it held its second public offering and brought in another $100 million.

In 1998, Patriot American Hospitality (later Wyndham International) purchased Interstate. Five months later, in 1999, after Marriott Hotels International fought the acquisition, saying the deal violated its franchise agreement with Interstate, Patriot spun the management end of the company off as Interstate Hotel Corporation. Patriot retained ownership of Interstate’s approximately 40 own hotels. Thomas Hewitt became the new chief executive office of Interstate, and the company became independently traded again with 168 hotels under management contract. Following the spin off, Interstate entered into a joint venture with a private affiliate of Lehman Brothers Inc. in 2000 to acquire at least $300 million of existing hotels. That same year, Interstate also ranked twentieth in Hotel & Motel Management’s hotel companies listing.

In 2001, shortly before the terrorist attack on the World Trade Center buildings and the Pentagon, Interstate Hotels Corporation entered into conversation with MeriStar Hotels & Resorts Inc. to explore a merger of the two companies. These talks ended in September 2001 but resumed the following year, and in July 2002 MeriStar shareholders approved the merger of their company with Interstate Hotels. The deal, valued at $68 million, created a new company, the 11th-largest hotel management company in the world. This new entity, Interstate Hotels & Resorts Inc., had 400 hotels representing more than 30 franchise brands in five countries in North America and Europe and more than 40,000 employees. John Emery, 38 years old, became president of the new company.

MeriStar: 1987–2001

MeriStar was the latest incarnation of a company that had begun business in 1987 as LCP Hotels, a company that specialized in managing distressed hotels—that is, hotels not profitable enough to make payments on the loans used to build them. LCP doubled in size by 1991, and in 1992 Paul W. Whetsell, one of LCP’s founders, went on to engineer the merger of his company with Pace Management Company and formed Cap-Star Hotel Co., one of the nation’s top 20 non-franchise hotel management companies. Whetsell had gained his experience in the hotel and motel industry as vice-president of franchise for Choice Hotels International Inc. (the Quality Inns) and as a hotel developer in Dallas, Texas. CapStar progressed steadily, and, in 1996, went public as a combined real estate and management company, raising about $240 million; at the time, it owned 12 hotels and managed another 40. From this point onward, CapStar’s assets grew rapidly, and, within a few years, it managed 140 hotels, most of which were its own.

In 1998, CapStar joined with American General Hospitality Corporation, an owner and operator of hotels headquartered in Dallas, Texas. The arrangement split CapStar in two, creating a real estate investment trust and spinning off a management company, MeriStar Hotels & Resorts Inc. The real estate investment trust, merged with American General Hospitality to form MeriStar Hospitality Corporation, a tax-free reorganization, more than doubled MeriStar’s holdings. The merger resulted in the nation’s second-largest hotel management company and the third-largest real estate investment trust specializing in hotels, making Meristar the largest independent owner of Hiltons, Sheratons, and Westins.

MeriStar’s structure, known as a “paper-clip real estate investment trust,” provided a number of advantages. The companies, although fully separate, shared a management team. This structure, the first of its sort in the hotel industry, promoted each company’s growth objectives and provided investors with the flexibility of buying stock in one or both companies. Investors also benefited from MeriStar Hospitality’s tax-free status. According to the Washington Post in a 2002 article, investors found the companies more attractive as separate entities in part because the real estate investment trust paid out dividends to shareholders.

Following the split, Whetsell became chief executive officer of MeriStar Hotels & Resorts Inc., while Steven Jorns of American General Hospitality became vice-chairman and chief operating officer of MeriStar Hospitality. Whetsell set his company’s sites on going beyond managing hotels owned solely by MeriStar Hospitality and embarked on a series of mergers and acquisitions.

The move toward acquisition followed a trend in the hospitality industry whereby companies were getting bigger in order to survive. With the number of full-service hotels running low, MeriStar Hospitality turned its attention to resorts, specifically vacation destinations for the baby-boomer generation. Unfortunately, the company initially experienced bad luck in realizing its growth-related goals. Soon after the new companies were created, the stock market tanked, sending their paper value into a tailspin. Then, in 2000, MeriStar executives aborted plans to purchase American Skiing Co. when they became concerned that the company would have too much debt. A month later, FelCor Lodging Trust Inc., a Texas real estate investment trust, announced its intention to buy out MeriStar Hospitality for $2.7 billion in cash and stocks, but after September 11, 2001, the companies called off the deal.

The Merger of MeriStar and Interstate: 2002

The 2002 merger of MeriStar with Pittsburgh-based Interstate Hotels made great sense to MeriStar, whose hotels had experienced sharp profit declines due to the slowed economy prior to 2001. According to one industry analyst, who was quoted in the Washington Post in December 2002, the biggest boon came from enabling MeriStar to eliminate its biggest competitor, Interstate. The merger also gave MeriStar its longawaited opportunity to branch off into hotel ownership. The new company assumed the name Interstate Hotels & Resorts Inc., and MeriStar’s two top executives—chairman and chief executive officer Paul Whetsell and chief operating officer John Emery—took control of the combined entity. MeriStar Hospitality became the investment company and Interstate Hotels Corporation its management arm. The two companies shared a combined board of directors.

Following the merger, Whetsell set about paying down the high debt of MeriStar Hospitality Corporation, one of the most heavily indebted real estate investment trusts in the industry. Emery held parties at each of Interstate’s 400 hotels to “make people think ‘hotels’ when they hear ‘Interstate.’ “Interstate Hotels & Resorts (the hotel management end of the company) relocated its headquarters from Washington, D.C., to Arlington County, Virginia, and reduced the combined companies’ number of shared positions.

Company Perspectives

With more than 400 hotels, Interstate is able to obtain economies of scale that help lower overall operating costs and improve the bottom line performance of its managed hotels.

In March 2002, MeriStar Hospitality contracted with VisualFrenzy media to produce and distribute “streaming marketing videos” for online booking. Also in July 2002, it increased its focus on online communication through its IT subsidiary, NetEffect, which it had launched in May 2002 to provide technology consulting, project management, hardware acquisition, e-marketing, and other Internet-based services to its management clients. It introduced E-Brochure and Rapid Comment, both designed to help hotels conduct marketing campaigns and measure guest satisfaction.

In the summer of 2003, Interstate moved MeriStar’s 230 employees from Georgetown to Arlington. Interstate planned to continue to mine the advantages of the paper-clip real estate investment trust for the foreseeable future, taking the best of both companies and combining them into one. “We believe that consolidation in the industry will continue,” Whetsell said in a June 2002 Hotel & Motel Management article, “and this merger gives us the platform to grow.”

Principal Subsidiaries

BridgeStreet Corporate Housing Worldwide Inc.; Continental Design; Flagstone Hospitality Management LLC; NetEffect Alliance.

Principal Competitors

Intercontinental Hotels Group plc; Prime Hospitality Corporation; Choice Hotels International Inc.; Carnival Corporation; Starwood Hotels & Resorts Worldwide, Inc.

Key Dates

1961:: Milton Fine and Ed Perlow found Interstate Hotel Co.
1987:: Paul W. Whetsell founds LCP Hotels.
1992:: LCP merges with Pace Management Company to form CapStar Hotel Co.
1996:: CapStar goes public as a combined real estate and management company; Interstate holds its initial and second public offerings.
1998:: Patriot American Hospitality (later Wyndham International) purchases Interstate; CapStar merges with American General Hospitality Company and splits in two, creating MeriStar Hospitality and MeriStar Hotels & Resorts Inc.
1999:: Patriot spins off the management end of the company as Interstate Hotel Corporation.
2000:: Interstate enters into a joint venture with a private affiliate of Lehman Brothers Inc.
2002:: Interstate merges with MeriStar to create Interstate Hotels & Resorts.