Intercontinental Hotel Group, Term Paper Example

Intercontinental Hotel Group, “having over 4300 hotels in nearly 100 countries” (“IHG at a Glance” 1), is considered nowadays one of the top hotel chains with the greatest worldwide coverage, spreading over North, Central and South America, Europe, Asia, Middle East and Africa (Cunill 180). “The IHG owns a portfolio of seven hotel brands and manager’s the world’s largest hotel loyalty program with 44 million members worldwide” (“IHG at a Glance” 1). With accordance to the IHG 2008 “Annual Report and Financial Statement”, the Group’s profit totaled $262 million, which is considerably less compared to the 2007’s $463 million. For this reason, the aim of this report is, by means of the balance sheet and asset mix analysis, to put forward a number of recommendations concerning the increase of the IHG owners’ wealth as well as Group’s stocks value along with investing possibilities.

To begin with, let us consider the potential increase of the owners’ wealth first. At this point it is important to underline the fact that the Group’s overall financial recession is inseparably connected with the 2007-2008 world financial crises, which consequences are still to be overcome in the upcoming years. The overall stock market failure and banking system crises accompanied by worldwide decrease in the customers’ demand for the hotel service usage due to individual financial difficulties and shortcuts are among the top identifiers of the Group’s financial recession. The clear perspective at this point is that as soon as the financial stability in banking and economic fields is recovered, the IHG owners will inevitably witness the increase in their profit levels. However, under the current financial situations, one of the most possible ways of increasing owners’ wealth will be giving out the part of the Group’s $2624 million of retained profit as dividend payments. Though this particular initiative may seem unsuitable under the crisis conditions because it lowers the potential investment possibilities as well as contingency payments, it is still one of the most reasonable ways of increasing owners’ wealth, which helps to avoid taking money out of the on-going production and operation processes. Another way of increasing owners’ wealth can be achieved by means of either increasing the current assets or decreasing liabilities. Both scenarios could have been considered prospective under the stable economic conditions, but as to nowadays, they are unlikely to be achieved. 85% of the Group’s generated profit comes from the predominantly franchised and managed hotels (“IHG at a Glance” 2). For this reason, I find it essentially important for the Group to keep up with already established cost leadership strategies, which, according to different conducted studies, enable the overall increase in both market share and profit levels (Cunill 191), and diversity tactics of the hotel chain enlargement that incorporate IHG offering the services, ranging from high-class InterContinental® Hotels & Resorts aimed at the discerning business and leisure traveler to Express Hotels® by Holiday, “directed at the cheapest end of the market, which, with limited services and facilities, are reasonably priced and less expensive than the Group’s Holiday Inn® Hotels and Resorts” (Cunill 12), which together in a long term, with the financial world recovery, will gradually generate annually increasing profits for the owners.

When analyzing the IHG asset mix, presented in the Group’s Balance Sheet from the 2008 “Annual Report and Financial Statement”, it is essential to point out that under the influence of the world financial crises IHG Net Assets went from $98 million in 2007 down to $1 million in 2008. The above described situation can be attributed to the fact that the Group’s total assets and liabilities decreased sufficiently during 2008 crisis. With that in mind, it is vitally important to rebalance the asset mix by means of “continually reallocating the money from the most recent better-performing investments to the relative underperformers” (Gibson 314). In case of the IHG, I would recommend using the active asset allocation. For the most part the choice of the approach was influenced by the fact that IHG has already announced a number of confirmed development pipelines to be opened over the next few years that will be in need of strong and stable investments as, for example, a “development pipeline of 31 hotels across major metros and secondary cities across India with the growth momentum to be driven by IHG’s three brands – InterContinental® Hotels & Resorts, Crowne Plaza® Hotels & Resorts, and Holiday Inn® Hotels and Resorts” (“IHG continues strategic expansion and growth momentum in India with 31 hotels in the pipeline”). As the Group’s revenues have recently declined, “it will be easier for the active asset allocation strategy to produce needed returns inferior to those available from the passive asset allocation approach” (Gibson 316). This basically means that the IHG will have to use “sell low, buy high” strategy, establishing minimum and maximum allocations for each asset class. Such limits will ensure “some minimum level of portfolio diversification and reduce the potential for problems associated with the over commitment by any single asset class” (Gibson 316). Later on, when stability is recovered in the market, the IHG portfolio managers will have once again to estimate the existing market conditions and financial statements for the different asset classes’ returns to determine the right mix of asset classes, either by holding a very high percentage of bonds or investing primarily in small-cap equities.

Having reviewed IHG 2008 Balance sheet and accompanying notes, one can say that IHG financial assets from investment activity decreased by almost 55%. In the existing financial circumstances, Intercontinental Hotel Group can focus on debt investments at this period of time, as those can be used as leverage for higher risk investments in IHG portfolio. “Since debt securities are backed up by big corporations, they assure a determined level of income for a determined period of time” (“Debt and Equity Securities – Are You Ready for Them?”). This can be very useful for planning the future cash flow of any investor. Moreover, debt investments assure a steady income, when equity investments are more of the financial instruments that are correlated with the ongoing activity in the stock markets, which, nowadays, seems far from favorable. To my mind, the initiative of the debt investment can be used until the times the financial world gains stability and strength. And then it will be up to the IHG financial executives to decide whether to continue such kind of strategy or to focus more on the already established equity investment approach.

In the view of the current economic recession, the value of the IHG stocks has decreased sufficiently. But, to my mind, it is not only the stock market failure that has to be taken in consideration in this case. IHG is a highly acknowledged and worldwide branded company. However, the potential attractiveness of its stocks is being questioned nowadays. On the one hand, it can be attributed to the progressively failing brand power of Holiday Inn® Hotels and Resorts. According to “Intercontinental Hotels Group Morningstar Analysis and Rating”, “many Holiday Inns need serious renovations and repairs”. On the other hand, ING aims to increase its base of management contracts through international opportunities and expanding new and existing non-Holiday-Inn brands such as Hotel Indigo, Candlewood Suites, and InterContinental. However, Hotel Indigo and Candlewood Suites “are failing to gain traction against aggressive competitors” (“Intercontinental Hotels Group Morningstar Analysis and Rating”). On a whole, as far as I can judge, IHG, in order to increase the stocks’ value and their attractiveness, has to put in a certain amount of effort and financing into the renovation of the already existing, but slowly fading, brands like Holiday Inn® Hotels and Resorts, while meanwhile, conducting market research to better inform and shape brand development of Hotel Indigo and Candlewood Suites. These successfully combined efforts will inevitably bring their benefits in terms of profit generation and stocks’ value increase. Furthermore, a prospectively profitable idea can be to invest in or acquire a low cost airline, taking in consideration the rising popularity of such kind of travel services. In this case, IHG will be able to provide the customers with both travelling services and room reservations, making it more preferably for those to choose IHG among the rest of the competitors in the market. Taking in consideration the profitability of the low cost travelling and the existing popularity of the IHG, it is evident that the possible future revenues will way overweigh the needed expenditures, generating bigger profits for the IHG owners, meanwhile increasing the stock attractiveness by means of supplying the clients with comforting travelling services to the places of already confirmed hotel reservations.

All in all, after having reviewed the Intercontinental Hotel Group 2008 Annual Report and Financial Statement, I find it important to point out that, to my mind, IHG has to make a number of corrections and innovations in their business strategy in order to keep up with the highly ambitious competitors in the industry as well as to financially advance. When considering the possible increase of the owners’ wealth, a reasonable approach will be paying out half of the Groups’ retained earnings as dividend payments. Later, I would recommend rebalancing the asset mix with a help of active asset allocation approach for the purpose of rapid return production, as financial incomes are among the top priorities of the companies in crisis situation. Another perspective idea would be to focus right now on the debt investment rather than via equity because of the constant amount of income it will generate. As previously mentioned, I would also recommend focusing on the needs of the existing brands. Owning a portfolio of seven brands, IHG expects to gain annually increasing profit levels, but for such tendency to occur certain measures have to be taken. Holiday Inn® brand hotels have to be renovated and renewed in the view of the rapid loss of their popularity. Serious marketing steps should be taken in order to win an appropriate market share for highly prospective Hotel Indigo and Candlewood Suites brands. On the other hand, a sufficient investment in airline industry, especially in lost cost one with the future acquisition prospective, will not only increase Group’s long term profits, but will raise attractiveness of the IHG stocks as well as attract new clients and prospective investors. The above mentioned financial solutions can be considered helpful in the current economic situations, however, it is important to estimate and rethink them in the view of potential business climate changes.

Works Cited

“Annual Report and Financial Statement 2008”. IHG Investors. Retrieved Sept 11, 2009, from http://www.ihgplc.com/files/reports/ar2008/

Cunill, Onofre Martorell. The Growth Strategies of Hotel Chains: Best Business Practices by Leading Companies. Routledge, 2006.

“Debt and Equity Securities – Are You Ready for Them?” Retrieved Sept 13, 2009, from http://www.ilikeinvesting.com/general-investment-articles/debt-securities.php

Gibson, Robert C. Asset Allocation: Balancing Financial Risk. Ed. 4. McGraw-Hill Professional, 2007.

“IHG at a Glance”. IHG Corporate Information. Retrieved Sept 11, 2009, from http://www.ihgplc.com/files/pdf/factsheets/ihg_at_a_glance.pdf

“IHG continues strategic expansion and growth momentum in India with 31 hotels in the pipeline” (02/04/2009). Retrieved Sept 12, 2009, from http://www.immo-news.net/IHG-continues-strategic-expansion-and-growth-momentum-in-India-with-31-hotels-in-the-pipeline_a5972.html

“Intercontinental Hotels Group Morningstar Analysis and Rating”. Retrieved Sept 12, 2009, from http://quicktake.morningstar.com/syndication/MorningstarAnalysis.aspx?cn=QT&symbol=IHG