Why Marriott can't win its battle with a Chinese rival

Things are not lot looking good for Marriott International in the takeover battle for Starwood Hotels.

On Monday, Starwood said Marriott's rival, a group of investors led by Chinese insurer Anbang, has made another counteroffer for the US hotel chain.

The offer already significantly tops Marriott's last bid, and Starwood told shareholders it is in the process of finalizing details.

There's a lot stacked against Marriott in this bidding war.

First here's a recap of events:

• Starwood Hotels & Resorts Worldwide, which owns brands including Westin, St. Regis, and Four Points, in November agreed to be bought by Marriott in a deal that valued it at $79.88 per share. That offer later declined in value, though, because it was based in part on Marriott's own stock price, which had dropped.
• On March 18, Starwood confirmed that it got an attractive takeover offer from a group of companies led by Anbang Insurance Groupo, which has been on a deal spree since buying the Waldorf Astoria 18 months ago.
• Anbang first offered $76 per share in cash, and then boosted that offer to $78.
• Marriott turned around on March 21 and boosted its bid for Starwood. The announcement, based on March 18 closing prices, valued Starwood at $79.53 per share.
• Now Anbang has boosted its offer to $82.75 in cash, and Starwood has said its likely that this offer will be a "Superior Proposal" (which is basically a counter bid that lets its break off the deal with Marriott).

Marriott's big disadvantage in this fight is that its offer is based primarily on stock, while Anbang's offer is all in cash. And investors have knocked the value of that stock back.

Last Monday, for example, Marriott's stock dropped after it made its higher counter-offer. By the close of business that day, its bid had dropped in value to about $78.85 per share. On Monday, the value of Marriott's offer hovered around $78.00 per share.

Because Marriott was counting on using shares to fund most of the deal (only about $3.6 billion of its $13.6 billion offer is in cash), the company is still not free, like Anbang is, to boost its offer without worrying about what its stock is doing.

With the backing of the Chinese government, companies like Anbang are usually able to take a longer-term view on value, and are less likely to have vocal shareholders banging on their door if they overpay. Brand names and goods can be sold across a giant domestic market after an acquisition, and Chinese bidders rarely compete with another.

Of course, Starwood could still choose Marriott, because of uncertainty surrounding an Anbang-led deal.

Deals with Chinese buyers tend to be more complicated, and there's always the chance that regulators will intervene. In 2014, 16% of deals that were scrutinized by the US Treasury involved Chinese acquirers.

In a statement on Monday, Marriott said: "Starwood stockholders should give serious consideration to the question of whether the Anbang-led consortium will be able to close the proposed transaction, with a particular focus on the certainty of the consortium's financing and the timing of any required regulatory approvals."

Also, the Marriott deal is possibly just weeks away from closing - with regulators having already approved the combination, and shareholder votes already scheduled.

But it is getting harder for Marriott to justify another another counter bid, largely because it has its existing shareholders to think about.

It pledged in its latest offer that the transaction would be "roughly neutral to adjusted earnings per share in 2017 and 2018." It's unlikely Marriott would be able to make another offer and maintain that promise, especially if its stock is dropping.