Fawlty Towers: when sweating assets make more sense than owning them

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Hotel gymnasiums are odd places for TV news but CBNC and Bloomberg TV are ubiquitous these days. On my frequent travels I see news screens in lounges, waiting rooms and the back of taxis and I am sure that it is only a matter of time before someone installs a flatscreen 24-hour news channel in a toilet cubicle.

Last April on a trip to New York, I was engaged in my morning workout when the gymnasium TV broke a news story about Starwood Hotels and Resorts selling its hotels. The idea intrigued me: Starwood had suffered badly as a result of the credit crunch, losing over 70% of its market value, and has been making a long journey back to health ever since (see chart below). As part of this strategy, the management decided to cease owning hotels and migrate the business model to that of a pure operator.

The business model for a hotel operator is essentially to build stable revenues around multi-year management contracts and focus on brand development, management and logistics. Starwood has managed to switch its revenues from 80/20 owner/operator to 20/80 during its restructuring journey, completing the largest outstanding element of this strategy with its agreement in November 2014 to sell the 1100 properties in its Louvre Hotels Group to a Chinese partner. Over the past three years, this strategy has resulted in an almost 60% increase in stock price.

So what has all this got to do with intellectual property? This edition’s article picks up on the theme explored last week in “The Great Economic Inversion.” Since 2009, Starwood has transformed itself from a fixed-asset heavy real estate business into an asset-light brand, logo, trademark and know-how business. The market capitalisation of the group now exceeds that seen before the crash, and in this respect Starwood is a poster child for the IP revolution that has been transforming the corporate landscape over the past decade. When we hear that "IP is 80% of market capitalisation," this is what that statistic refers to.

Starwood’s strategy for managing its assets is described in the following 2009 Form 10K filing:

"our primary business objective is to maximize earnings and cash flow by increasing the number of our hotel management contracts and franchise agreements; developing vacation ownership resorts and selling VOIs; and investing in real estate assets where there is a strategic rationale for doing so, which may include selectively acquiring interests in additional assets and disposing of non-core hotels (including hotels where the return on invested capital is not adequate) and 'trophy' assets that may be sold at significant premiums. We plan to meet these objectives by leveraging our global assets, broad customer base and other resources and by taking advantage of our scale to reduce costs.”

These are statements worthy of any business seeking to actively manage its strategic business assets (including intellectual property) for value. For a business built on brand value, the importance of IP protection is paramount and the 2012 Form 10K has plenty to say on this topic.

"Any Failure to Protect our Trademarks Could Have a Negative Impact on the Value of Our Brand Names and Adversely Affect Our Business. We believe our trademarks are an important component of our business. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. From time to time, we apply to have certain trademarks registered and there is no guarantee that such trademark registrations will be granted. Further, monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others.”

As in any business sector, industry and management-specific metrics contribute to the value of the Starwood Hotels group (for example, geographic diversification, its Starwood Preferred Guest customer loyalty programme and the pipeline of development for new sites). Notwithstanding these, for those seeking a pure-play IP investment, Starwood now presents itself as an unlikely but valid candidate. Its value is all about the brand, management know-how and royalty streams from long-term management contracts. 

In the mainstream press and on Capitol Hill, conversation about intellectual property often seems to get caught up in the technology world and focuses heavily on patents and patent litigation. Starwood is a healthy reminder that the transformative impact of intellectual property on corporate value is widespread and has an impact far beyond Silicon Valley.

Co-authored with Chris Donegan. Dr Donegan is CEO of EverEdgeIP UK. He is a partner at Azure Wealth LLP, a specialist wealth manager based in London, Geneva and Zurich, He holds BSc and PhD degrees in Biochemistry & Microbiology and Molecular Neurobiology from Leeds University and Imperial College, respectively.

Paul Adams is CEO of EverEdge IP.

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