ACQUISITIONS AND DISPOSITIONS

Acquisition

On September 23, 2016 (the “Merger Date”), we completed the Starwood Combination. Starwood is a leading hospitality company. The combination of our brands creates a more comprehensive portfolio, enhances our global market distribution, and provides opportunities for cost efficiencies. Our combined company now operates or franchises nearly 6,000 properties with over 1.1 million rooms, representing 30 leading brands from the moderate-tier to luxury in 120 countries and territories.

Shareholders of Starwood received 0.80 shares of our Class A Common Stock and $21.00 in cash for each share of Starwood common stock. The following table presents the fair value of each class of consideration transferred.



(in millions, except per share amounts)
Equivalent shares of Marriott common stock issued in exchange for Starwood outstanding shares	134.4
Marriott common stock price as of Merger Date	$	68.44
Fair value of Marriott common stock issued in exchange for Starwood outstanding shares	9,198
Cash consideration to Starwood shareholders, net of cash acquired of $1,116	2,412
Fair value of Marriott equity-based awards issued in exchange for vested Starwood equity-based awards	88
Total consideration transferred, net of cash acquired	$	11,698

Preliminary Fair Values of Assets Acquired and Liabilities Assumed

The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed. Our preliminary estimates are based on the information that was available as of the Merger Date, and we are continuing to evaluate the underlying inputs and assumptions used in our valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger Date.



($ in millions)
Working capital	$	(115	)
Property and equipment	2,045
Identified intangible assets	8,573
Equity and cost method investments	648
Other noncurrent assets	207
Deferred income taxes, net	(1,845		)
Guest loyalty program	(1,647		)
Debt	(1,876		)
Other noncurrent liabilities	(518		)
Net assets acquired	5,472
Goodwill ⁽¹⁾	6,226
	$	11,698


(1)	Goodwill is calculated as total consideration transferred, net of cash acquired, less identified net assets acquired, and it primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations. We have not completed the assignment of goodwill to our reporting units as of the date of this report, and it is not deductible for tax purposes.

Property and Equipment

We acquired property and equipment, which primarily consists of 15 owned hotels. We provisionally estimated the value of the properties using a combination of the income, cost, and market approaches, which are primarily based on significant Level 2 and Level 3 assumptions, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the hotels. We are continuing to assess the marketplace assumptions and property conditions, which could result in changes to these provisional values.

Identified Intangible Assets

The following table presents our preliminary estimates of the fair values of Starwood’s identified intangible assets and their related estimated useful lives.



	Estimated Fair Value (in millions)		Estimated Useful Life (in years)
Brands	$	6,400	indefinite
Management and Operating Lease Agreements	1,394		20-30
Franchise Agreements	729		20-80
Loyalty Program Marketing Rights	50		25-30
	$	8,573

We provisionally estimated the value of Starwood’s brands using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We estimated the value of management, franchise, and lease agreements using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. These valuation approaches utilize Level 3 inputs, and we continue to review Starwood’s contracts and historical performance in addition to evaluating the inputs, including the discount rates and growth assumptions, which could result in changes to these provisional values.

Franchise agreements include an exclusive, 80-year global license agreement with Vistana Signature Experiences, Inc. (“Vistana”), Starwood’s former vacation ownership business that is now part of Interval Leisure Group, Inc. (“ILG”), for the use of the Westin and Sheraton brands in vacation ownership. In addition, ILG has the non-exclusive license for the existing St. Regis and The Luxury Collection vacation ownership properties. Under this agreement, we will receive a fixed annual license fee, adjusted for inflation, of $30 million plus certain variable fees based on sales volumes.

Investments

Our provisional estimate of the fair value of the equity method investments that we acquired was $647 million. This value exceeded our share of the book value of the investees' net assets by $501 million, primarily due to the value that we assigned to land and buildings owned by the investees. We provisionally estimated the value of the investees’ real estate using the same methods as for property and equipment described above. Excluding the amount attributable to land, we amortize the difference on a straight-line basis over the underlying assets' estimated useful lives when calculating equity method earnings attributable to us. We are continuing to review the terms of the partnership and joint venture agreements, assess the conditions of the properties, and evaluate the discount rates, any discounts for lack of marketability and control as appropriate, and growth assumptions used in valuing these investments, which could result in changes to our provisional values.

Deferred Income Taxes

Deferred income taxes primarily relate to the fair value of noncurrent assets and liabilities acquired from Starwood, including property and equipment, intangible assets, equity and cost method investments, and long-term debt. We provisionally estimated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired noncurrent assets and liabilities are recorded. We are continuing to assess the tax rates used, and we will update our estimate of deferred income taxes based on changes to our provisional valuations of the related assets and liabilities and refinement of the effective tax rates, which could result in changes to these provisional values.

Guest Loyalty Program

The Starwood Preferred Guest (SPG) program is Starwood’s frequent traveler, customer loyalty, and multi-brand marketing program. Members can earn and redeem points for room stays, room upgrades, and airline flights. As of the Merger Date, we assumed the fair value of this liability equals Starwood’s historical book value in establishing a provisional estimate for this liability. We are in the process of obtaining an actuarial valuation of the future redemption obligations, which could result in changes to these provisional values.

Debt and Lease Obligations

We primarily valued debt using quoted market prices, which are considered Level 1 inputs as they are observable in the market. For more information on Starwood debt, see Footnote No. 8 “Long-Term Debt.”

The following table presents the future minimum lease obligations that we assumed and for which we are the primary obligor as of September 30, 2016:



($ in millions)	Operating Leases		Capital Leases
2016, remaining	$	16	$	3
2017	64		11
2018	61		12
2019	57		12
2020	55		12
Thereafter	630		203
Total minimum lease payments	$	883	$	253
Less: amount representing interest			(86		)
Present value of minimum lease payments			$	167

Most leases have initial terms of up to 20 years, contain one or more renewals at our option, generally for five- or 10-year periods, and generally contain fixed and variable components. The variable components of leases of land or building facilities are primarily based on operating performance of the leased property.

Pro Forma Results of Operations

The following unaudited pro forma information presents the combined results of operations of Marriott and Starwood as if we had completed the Starwood Combination on January 1, 2015, but using our preliminary fair values of assets and liabilities as of the Merger Date. As required by GAAP, these unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Starwood Combination had occurred at the beginning of the period presented, nor are they indicative of future results of operations.



	Nine Months Ended
($ in millions)	September 30, 2016		September 30, 2015
Revenues	$	15,038	$	14,373
Net income	$	853	$	675

The unaudited pro forma results include $54 million of integration costs for the nine months ended September 30, 2016 and $320 million of transaction and employee termination costs for the nine months ended September 30, 2015.

Starwood Results of Operations

The following table presents the results of Starwood operations included in our Income Statements for the eight days from the Merger Date through the end of the 2016 third quarter.



($ in millions)	September 23, 2016 - September 30, 2016
Revenue	$	168
Net loss	$	(131	)

Dispositions and Planned Dispositions

At the end of the 2016 third quarter, we held $741 million of assets classified as “Assets held for sale” and $37 million of liabilities recorded under “Accrued expenses and other” on our Balance Sheets, both related to hotels that we acquired through the Starwood Combination.

In addition, at the end of the 2016 third quarter, we held $30 million of assets related to the remaining Miami Beach EDITION residences classified as “Assets held for sale” and $3 million of liabilities associated with those assets, which we recorded under “Accrued expenses and other” on our Balance Sheets.

In the 2016 second quarter, we sold a North American Limited-Service segment plot of land and received $46 million in cash.