ACQUISITIONS AND DISPOSITIONS

Starwood Combination

The following table presents the fair value of each class of consideration that we transferred in the Starwood Combination.



(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	71
Total consideration transferred, net of cash acquired	$	11,681

Preliminary Fair Values of Assets Acquired and Liabilities Assumed. Our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed 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. During the 2017 first half, we refined our valuation models related to certain acquired IT systems, our assumptions for capital expenditure needs of owned and leased hotels, certain assumptions related to operating lease agreements, and our assumptions related to certain brands and management and franchise agreements, including contract terms, tax rates, and royalty rates used in the relief-from-royalty valuation models.

The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed on the Merger Date as previously reported at year-end 2016 and at the end of the 2017 second quarter.



($ in millions)	September 23, 2016 (as reported at December 31, 2016)			Adjustments			September 23, 2016 (as adjusted at June 30, 2017)
Working capital	$	(180	)	$	(27	)	$	(207	)
Property and equipment, including assets held for sale	1,999			(79		)	1,920
Identified intangible assets	7,957			(659		)	7,298
Equity and cost method investments	579			(6		)	573
Other noncurrent assets	224			(24		)	200
Deferred income taxes, net	(1,516		)	(8		)	(1,524		)
Guest loyalty program	(1,631		)	(7		)	(1,638		)
Debt	(1,871		)	—			(1,871		)
Other noncurrent liabilities	(654		)	(60		)	(714		)
Net assets acquired	4,907			(870		)	4,037
Goodwill ⁽¹⁾	6,774			870			7,644
	$	11,681		$	—		$	11,681


⁽¹⁾	Goodwill primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations, and it is not deductible for tax purposes. See Footnote 11 “Business Segments” for our preliminary assignment of goodwill by reportable segment.

Property and Equipment. We provisionally estimated the value of the acquired land, building, and furniture and equipment 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	$	5,712	indefinite
Management agreements and lease contract intangibles	754		10 - 25
Franchise agreements	755		10 - 80
Loyalty program marketing rights	77		30
	$	7,298

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 and franchise 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. We valued the lease contract intangibles using an income approach. 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, growth assumptions, and contract terms, which could result in changes to these provisional values.

Equity Method Investments. Our equity method investments consist primarily of partnership and joint venture interests in entities that own hotel real estate. We provisionally estimated the value of the underlying real estate using the same methods as for property and equipment described above. We continue 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. We provisionally estimated deferred income taxes based on statutory tax rates in the jurisdictions of the legal entities where the acquired noncurrent assets and liabilities are taxed. We continue to assess the tax rates used, and we will continue to update our estimate of deferred income taxes based on any changes to our provisional valuations of the related assets and liabilities and refinement of the relevant tax rates, which could result in changes to these provisional values.

Guest Loyalty Program. 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 reviewing assumptions utilized in an actuarial valuation of the future redemption obligations, which could result in changes to the provisional value of the program liability.

Debt, Leases, and Other Contractual Obligations or Contingencies. We primarily valued debt using quoted market prices, which are considered Level 1 inputs as they are observable in the market.

We identified certain unfavorable provisions within a few of the acquired management and other agreements. We valued liabilities associated with these provisions using an income approach and Level 3 inputs, including cash flows, discount rates, and growth assumptions. In the 2017 second quarter, we settled with the owner of several North American Full-Service properties to resolve certain of these unfavorable provisions. The settlement includes a contingent purchase obligation, granting the owner a one-time right, exercisable in 2022, to require us to purchase the Sheraton Grand Chicago hotel for $300 million, and a guarantee to provide operating support up to a maximum funding amount of $65 million. We continue to review and evaluate Starwood’s agreements, historical hotel operating performance, capitalization rates, discount rates, and growth assumptions, which could result in further changes to these provisional values.

In connection with the Starwood Combination, we are currently assessing various regulatory compliance matters at several foreign Legacy-Starwood locations, including compliance with the U.S. Foreign Corrupt Practices Act. The results of this assessment may give rise to contingencies that could require us to record balance sheet liabilities or accrue expenses. While any such amounts are not currently estimable, we will review our provisional assessment of these contingencies as we gather more information.

Dispositions and Planned Dispositions

In the 2017 second quarter, we sold a North American Full-Service hotel and received $169 million in cash. We recognized a $24 million gain in the “Gains and other income, net” caption of our Income Statements.

In the 2017 first quarter, we sold a North American Full-Service hotel, which we had acquired in the Starwood Combination and previously classified as “Assets held for sale,” and received $306 million in cash. In conjunction with the sale, we also transferred the associated ground lease, as a result of which our future minimum operating lease obligations decreased by approximately $194 million as of the date of the sale as follows: $3 million in 2017, $4 million in 2018, $4 million in 2019, $4 million in 2020, $4 million in 2021, and $175 million thereafter.

At the end of the 2017 second quarter, we held $285 million of assets classified as “Assets held for sale” on our Balance Sheets related to a North American Full-Service hotel acquired in the Starwood Combination and the remaining Miami Beach EDITION residences.