Marriott Split Could Hurt University

Harvard's endowment, which is heavily invested in the preferred stock of the Marriott Corporation, could absorb a severe financial loss as a result of a decision last week by a Delaware Chancery Court judge to let the hospitality industry giant split into two companies.

The University had asked William T. Allen, the chancellor of the Delaware's equity court, for a restraining order delaying Marriot's annual meeting on July 23, when the company is likely to approve the split.

Last Thursday, however, Allen denied the motion, effectively letting the split proceed. Attorneys representing Harvard have argued that the plan to divide Marriott in two will hurt the rate of return on the University endowment of more than $5 billion.

Under a plan announced last fall, Marriott will divide into Marriott International, a hotel operation: and Host Marriott, a real estate, airport and toll road concessions business that will carry most of the company's $2.9 billion in debt.

According to the terms of the split, Harvard will no longer receive a dividend on its preferred stock, and those shares will be convertible only into shares of the highly leveraged Host Marriott.

The University owns 480,300--or 12 percent--of Marriott's four million preferred shares, an investment which, as of yesterday, is worth more than $35 million.

David, L. Renauld, a Wilmington, Del. attorney who represented Harvard and three other preferred share-holders in the case, said the University would pursue a lawsuit seeking compensation.

But Allen's decision on Harvard's motion for an injunction portended little success for that suit.

In essence, Allen said in his decision that if the University was so concerned about the split, it should not have invested so heavily in Marriott. The judge wrote that Harvard continued to purchase preferred stock in Marriott even after March 15, when the company first announced there would be no dividends.

Allen also dismissed a charge made by Harvard's lawyers that the split was rigged to keep three Marriott family members on the company's board of directors. The judge called that suggestion "dark" and "Machiavellian."

Allen suggested that Harvard participated in a concerted effort to shield itself from financial risk by buying up preferred stock even as it sold common stock at less than market value.

Investors sometimes "short" common stock in this way when they think its value will decrease. If the stock's value does, in fact, fall, they buy back the stock at a lower price, effectively making a profit.

In fact, Harvard lost money on its sale of Marriott common stock because the stock's value went up instead of down. But it also made a profit of $4.1 million on the preferred stock it owns. Overall, Harvard's net profit on its investment in Marriott, as of June 4, was $485,200, according to Allen's ruling.

Terry Souers, a spokesperson for Marriott, praised the judge's decision and charged that Harvard's action constituted financial "greenmail" to prevent a necessary restructuring of the company.

"We're not amongst widows and orphans here." Souers said of the investors of the University's endowment. "These people were trying to do a sophisticated financial maneuver. It's financial greenmail for the '90s."

But Renauld, the attorney representing Harvard, said the University's method of investing in preferred stocks while it shorts common stock is a common practice.

"Our clients engaged in a normal and expected trading pattern," Renauld said. "That tactic is called hedging and is quite a normal occurence in the investment field."

Renauld said he thought Harvard's trading tactic was particularly appropriate for a University investing its endowment. When one is investing endowment, the lawyer said, it is wise to take steps to avoid risks.

Harvard Management Company, which is responsible for investing the University's money, has been the target of criticism in recent years from some alumni for its performance, excessive risk taking and its employees' high salaries.

In fiscal 1992, Harvard's endowment was outperformed by 71 percent of the nation's college and universities.

Vice President for Finance Robert H. Soott yesterday referred questions on Marriott to Harvard Management Company President Jack R. Meyer, who is in charge of investing Harvard's endowment. Meyer refused to comment

In fact, Harvard lost money on its sale of Marriott common stock because the stock's value went up instead of down. But it also made a profit of $4.1 million on the preferred stock it owns. Overall, Harvard's net profit on its investment in Marriott, as of June 4, was $485,200, according to Allen's ruling.

Terry Souers, a spokesperson for Marriott, praised the judge's decision and charged that Harvard's action constituted financial "greenmail" to prevent a necessary restructuring of the company.

"We're not amongst widows and orphans here." Souers said of the investors of the University's endowment. "These people were trying to do a sophisticated financial maneuver. It's financial greenmail for the '90s."

But Renauld, the attorney representing Harvard, said the University's method of investing in preferred stocks while it shorts common stock is a common practice.

"Our clients engaged in a normal and expected trading pattern," Renauld said. "That tactic is called hedging and is quite a normal occurence in the investment field."

Renauld said he thought Harvard's trading tactic was particularly appropriate for a University investing its endowment. When one is investing endowment, the lawyer said, it is wise to take steps to avoid risks.

Harvard Management Company, which is responsible for investing the University's money, has been the target of criticism in recent years from some alumni for its performance, excessive risk taking and its employees' high salaries.

In fiscal 1992, Harvard's endowment was outperformed by 71 percent of the nation's college and universities.

Vice President for Finance Robert H. Soott yesterday referred questions on Marriott to Harvard Management Company President Jack R. Meyer, who is in charge of investing Harvard's endowment. Meyer refused to comment