Divorce Corporate Style Dealmaker Barry Sternlicht and Disney prodigy Richard Nanula used to be best friends. Then they started working together. Now at Starwood, the behemoth that used to be ITT, their relationship is imploding.
(FORTUNE Magazine) – Analyze this: You've got a corporate star seeking his own stage. You've got an ego looking for validation. You've got money chasing a megadeal. Easy, right? You've got trouble. Okay. But when Barry Sternlicht seized control of ITT last year and coaxed his best friend, Richard Nanula, away from Disney to help him run it, nobody predicted a mess like this. Investors in their company, Starwood Hotels & Resorts Worldwide, have lost billions. The friendship is unraveling--and so is the business relationship. "Why did I do this?" wails Sternlicht, strung out by life at the top. "Am I stupid, or am I a jerk? Half the time, I think I'm stupid. The other half, I think I'm a jerk."
So it goes when two smart guys have the money and the resumes to be masters of the universe--and think they have the talent and the temperament too. Sternlicht and Nanula, both 38, had been best friends since their days at Harvard Business School. They were in each other's weddings. They went on family vacations and trips to the Super Bowl together. Even when they lived on opposite coasts, they talked almost daily. "We were each other's biggest fans," says Nanula, who was Michael Eisner's protege at Disney and, at 31, the youngest CFO ever of a FORTUNE 500 company.
It's not that Sternlicht and Nanula now despise each other. Nor are they warring over the vision for Starwood, which Sternlicht built from a near-bankrupt shell into the world's largest hotel and gaming company, with name brands like Sheraton and Westin and trophy assets from Caesars Palace in Las Vegas to the Gritti Palace in Venice. Both men want to make Starwood the No. 1 broad-based leisure company and a champion of shareholder value. One of their models is Disney.
The core problem, these longtime pals have discovered, is that their "complementary" styles--Nanula is as calm and cautious as Sternlicht is intense and impetuous--aren't complementary after all. And--who could have guessed it?-- they are clashing over power. Sternlicht got upset last summer when the New York Times ran a glowing profile of Nanula, identified as Starwood's boss, and photographed him perched regally at the company's posh St. Regis Hotel. According to insiders, Sternlicht griped that Nanula "looked like King Tut." Tut, tut. Sounds like plain old envy on the part of a kid who should learn to share credit. But Sternlicht is not a sharer. In January he demoted Nanula from CEO to president. "We're not equals," says Sternlicht, now chairman and CEO. "I think of myself as captain of the ship. Richard is my first mate."
The Wonderful World of Starwood this is not. The relationship between the captain and his first mate got so stormy last fall that Sternlicht, to his credit, brought in an organizational consultant named Michael Feiner. A former senior vice president of personnel at Pepsi-Cola, Feiner (whom some Starwood employees nicknamed "the marriage counselor") has been working with Sternlicht and Nanula much the way a therapist would with warring couples. But can this partnership be saved? Probably not. Sternlicht seems too egocentric to lead a FORTUNE 500 company. Nanula, so far, hasn't made the grade.
Let's start with Sternlicht. As he fought Hilton for control of ITT in the fall of 1997, he considered taking on a partner--buyout firm KKR or billionaire investor Richard Rainwater--to share the financial burden. But, as we said earlier, Sternlicht is not a sharer. He won the takeover battle by going it alone and paying a fantastic price: $10.2 billion, almost twice ITT's stock market value before the bidding began and twice the value of Starwood itself. "That's a recipe for disaster," says Mark Sirower, a Wharton professor who has studied Starwood and written a book, The Synergy Trap: How Companies Lose the Acquisition Game. Sternlicht didn't--and still doesn't--believe he overpaid for ITT, but he did quietly fret that maybe he was taking on too much. In the elevator on the way up to the law offices of Cravath Swaine & Moore to close the deal, he turned to a colleague and said, "Be careful what you wish for."
From the start he was like a fighter pilot handed the keys to an airline company: Managing unhinged him. Integrating his companies--Starwood and Sheraton and Caesars and Westin Hotels (which he'd bought one month before ITT)--"was a bitch," he says. Since he had never worked in a big corporation, he was naive about office politics and protocol. Early on he named Richard Mahoney, a loyal Westin executive, president of Caesars and dispatched him to Las Vegas. Peter Boynton, at the time Caesars' president and CEO, learned of Mahoney's arrival--and his new title--from a press release. Boynton threatened to quit. Sternlicht, startled and upset, swore he didn't want that. The two worked things out. But there's no love lost. "Barry doesn't affect my life," Boynton says.
Nanula was supposed to be a stabilizing force. But shortly after he arrived from Disney last June, things began to fall apart. In July, Sternlicht lost a fight in Washington to preserve Starwood's unusual tax-advantaged structure. This was a disaster, in Wall Street's view, since the corporate structure, a so-called paired-share REIT (real estate investment trust), was the foundation of Starwood's highflying stock. Critics say that Sternlicht's brash lobbying did him in, but he disagrees. "My mistake was buying ITT," he says. True, in that the ITT acquisition cast light on Starwood's tax loophole and drew out rivals Hilton and Marriott. At their urging, Congress closed the loophole, which meant that Sternlicht had to pay taxes like other hotel owners on properties he acquired.
Bad luck led to bad judgment, which led to bad blood. The faltering Asian economies whacked Caesars' profits like a wrecking ball. The credit markets' collapse last summer killed plans to refinance Starwood's onerous $8 billion debt. Investors worried. The stock went from $57 to $19 in seven months. When Sternlicht agonized over the swooning stock, Nanula urged him to keep his worries to himself and not talk to investors. The silence was not golden. "Pieces of the stool were being pulled out from under us, and we shut down communications with investors," Sternlicht says. "It was a big mistake. Investors hate uncertainty."
Nanula knew all about corporate infighting from Disney, but he'd avoided big scuffles himself, until Starwood. In October, Juergen Bartels, the pugnacious boss of the hotel group, threatened to quit because he disliked reporting to Nanula, who hadn't worked in the business before. Tensions flared even more late last year after Sternlicht asked Nanula to smooth out profits in the volatile gaming business. Nanula didn't act fast enough. "Richard was getting acclimated and learning the business," Sternlicht says. "I kept saying, 'If we don't do these things now, we're not gonna make our numbers.'" They didn't. On the December day when Starwood warned of an earnings shortfall, the stock dropped 11%.
A month later, when Starwood converted to a standard tax-paying corporation, Sternlicht took over as CEO. He says it's a logical transition. Under the REIT, he had been CEO of the trust, while Nanula was CEO of the management company. But it appears that Sternlicht is recasting his friend as his patsy. Nanula, ever the dutiful organization man, accepted the change stoically. "Richard's a smart guy, and he knew it wasn't an issue to fight a war over," says Mike Feiner, the marriage counselor, who admits he can do only so much to prevent a corporate divorce. "The 'best friend' aspect makes this very tricky. This is the same reason family businesses run into trouble."
The partnership between Sternlicht and Nanula raises the question asked about many married couples: What did they see in each other? Sternlicht, the middle of three sons of a Holocaust survivor, always felt driven to beat the odds. When he was 14, his doctor X-rayed him and told him he would never be tall. Perhaps defiantly, Sternlicht grew to five-foot-ten. Nanula is the son of an Italian father and an African-American mother; they divorced when he was 6. Nanula handled the breakup the way he has every hardship: He made things seem just fine.
By the time the two men arrived at Harvard Business School, by way of Brown (Sternlicht) and the University of California at Santa Barbara (Nanula), Sternlicht was controlling, hyperactive, and hellbent on conquering the world. Nanula was reserved and self-possessed. Despite their differences, they connected instantly. They played basketball on the same intramural team. They were also stock market junkies. Nanula mostly studied the market. Sternlicht traded his small stash, calling his broker as he dashed between classes.
For their senior project they worked together analyzing a theme-park concept for Disney--actually, an idea that Eisner had come up with and Sternlicht had heard about one summer when he was working for Arvida, Disney's land-development unit. "The Workplace," as the park was called, would show visitors how products like Nike sneakers, Titleist golf balls, and Hershey's chocolate were made. Sternlicht led the project, using his Disney contacts to line up a meeting with Eisner. Nanula, who had just accepted a job at Disney, did the bulk of the presentation. "Richard presented my idea brilliantly," Eisner recalls. "He explained why it wouldn't work. I liked that. Richard isn't afraid to disagree."
After Harvard, their careers diverged, although they did do their first big deal together. Nanula was at Disney, in strategic planning, and Sternlicht at JMB, a big real estate investment firm in Chicago. When Nanula tipped off Sternlicht that Disney might want to sell Arvida, Sternlicht told Neil Bluhm (the "B" in JMB). That's how two 27-year-olds scored key roles negotiating a $400 million transaction. Says Northwest Airlines Chairman Gary Wilson, who as Disney's CFO at the time observed the two at the table: "Barry was clearly a transactor. You could tell from the body language. He was a young entrepreneur. Richard seemed much more corporate. He had the broader perspective on the business."
Nanula, the disciplined company man, thrived at Disney. Sternlicht failed early on. In 1989 he was the lead analyst on the buyout of a British property company, Randsworth Trust, that collapsed and cost JMB and its partners $425 million. It wasn't Sternlicht's fault any more than anyone else's, Bluhm says. But, he adds, "I hope Barry learned that trees don't grow to the sky." For a while they seemed to. After Sternlicht left JMB, he hooked up with a money manager named Dan Stern, who worked for the wealthy Ziff and Burden families. "The whirling dervish," as the Ziffs called Sternlicht ("Don't you do research?" they asked), scooped up dozens of distressed apartment complexes in fringe markets like San Antonio and Colorado Springs. He tripled his investors' money in 18 months.
In 1994, Sternlicht acquired control of Hotel Investors Trust, the paired-share REIT, and used the stock to acquire high-end hotels in prime urban areas. The stock, with the ticker symbol HOT, rose sixfold in three years. It was a series of management changes at Disney that finally led Sternlicht to ITT. When Eisner sent Nanula to run the Disney Stores--to give him much-needed operating experience--he brought in Steve Bollenbach from Host Marriott to be Disney's new CFO. Bollenbach was as pro-deal as Nanula was prudent. While Nanula had discouraged Eisner from buying a TV network, for example, Bollenbach engineered Disney's $19 billion buyout of ABC.
Then, frustrated by Michael Ovitz's role at Disney, Bollenbach quit to become CEO of Hilton. From this perch in 1997, he attacked ITT and set up Sternlicht's big play (see chart). Behind the scenes of the takeover battle, Nanula phoned regularly from Disney in California, cheering on his friend and advising him to take the high road. "Talk about what you're gonna do," said Nanula. "Don't bash the other guy." Sternlicht bashed--and won.
All the while, Nanula was acting as Eisner's "no" man. It was a critical role. "You can hold back the bridle of a fast horse more easily than you can get a dead horse to move," Eisner says. "I liked having Richard say, 'No, we shouldn't do that. Stop. It's irresponsible.'" In the early '90s, Nanula told Eisner that EuroDisney was in big trouble; Nanula negotiated with Saudi Arabia's Prince Alwaleed bin Talal bin Abdul Aziz Alsaud to help save EuroDisney from bankruptcy. Sternlicht watched Nanula with awe. Says Jonathan Eilian, one of Sternlicht's original deal partners: "Barry would say, 'My best friend is the CFO of Disney.' He looked up to Richard."
Leaving Disney wasn't easy for Nanula. But he reasoned that Starwood offered him a chance to be CEO of a FORTUNE 500 giant. "I wanted to kill him," Eisner recalls. "I was aggravated and personally hurt. But I couldn't tell him not to do it since it was a once-in-a-lifetime opportunity, and it would help him grow." Says Nanula: "I believe that to find out what we're made of, we have to take ourselves out of our comfort zones. I knew this job would do that. You know what? I also wanted to help Barry. He'd do anything to help me." Nanula recounts that two years ago when his wife, Tracey, gave birth to premature twins weighing barely a pound each, "Barry got on the first plane and was there in the emergency room. He stayed over. He's that kind of friend."
On a chilly, brilliant day in February, Sternlicht and Nanula are hosting a press lunch at Manhattan's St. Regis Hotel. Sternlicht is bouncing around the room, grabbing the podium to unveil Starwood's preferred-guest program--the hotel industry's version of frequent-flier deals. Posing for photos with Bartels, the hotel chief, Sternlicht is all camp, lifting his leg chorus-style and elbowing Bartels in the ribs. Nanula, who led development of the program, is virtually out of sight.
As the audience filters out, Sternlicht says, "Ride over to the W with me." The W hotel chain is Sternlicht's pet project--his big idea before ITT--and the Manhattan W is the first of 15 hip, urban "boutique" hotels he hopes to open in the next two years. Hopping out of his chauffeured Lincoln Town Car, hurrying through the W's revolving door, he says, "Come on, we have to talk and walk at the same time." It turns out that on this big day--when Starwood announced year-end earnings, postponed a billion-dollar bond offering, and dealt with the resignation of its Caesars Atlantic City boss--the chairman and CEO has come to the W to check on chair covers. Chair covers!
How long can Nanula put up with this? Plenty of people believe that he should check out now. His CEO title is gone. His stock options are deep underwater. His boss has relegated him to overseeing the business he's negotiating to sell: gaming. His old boss is inviting him home: "Tell him to call me," says Michael Eisner. As usual, Nanula is making things seem just fine. "Remember, I was looking not to be comfortable. Has it been tougher than I expected? Absolutely. But if I get more of a challenge than I bargained for, that's okay." He's the consummate diplomat. "I'm used to playing a background role. I'm willing to have whatever public persona Barry wants for me. This isn't about ego. It's about what's best for the company."
Sounds good. But Feiner points out that Nanula is only human: "If you want to keep someone as talented as Richard, you need to make him feel appreciated. Even then, I'm not sure Richard will feel satisfied. When you add hierarchy and authority to a best-friend relationship, it's a ball-buster."
The more compelling question is this: How long will Sternlicht stick around? "If I can't do this, I'll give it up," he says. How long will he give himself? "No comment," he replies. Starwood's depressed stock--which has risen 50% this year, to $34, but is still well below its pre-ITT high of $61--and heavy debt have left him with little currency to do deals. And sitting on the sidelines clearly exasperates him. Says Sternlicht's close friend, real estate investor Sam Zell: "We kibitz. Barry says to me, 'Jesus, I'm jealous. You can do these deals. You're not buried by these operational problems.'"
Sternlicht himself is down at least $100 million--a big chunk of his net worth. He says that this is the first time he has lost money on paper. He obviously misses his old life at Starwood Capital, the private company that he started in 1991. Sternlicht's colleagues there manage some $2 billion, invested in all sorts of real estate--but not in hotels. Sternlicht, still chairman and CEO, checks in daily to talk about the latest deals. On Sundays, his Starwood Capital buddies come to his house. "It keeps me fresh," he says.
Inside his Gulfstream III on a late-night flight from Boston to Los Angeles, Sternlicht is sprawled and shoeless. "Why did I do it?" he asks, reflecting on what he says has been the most difficult year of his life. He knows the answer: "My resume wasn't complete. I wanted to prove myself." Asked how his relationship with Nanula has changed, he simply says, "Oh, we're not as close as we were." He pauses, then adds, "When Richard came in, I knew it was the ultimate risk. If it worked, we'd dance into the sunset and laugh together. If it didn't, we'd sacrifice our friendship." That they've done. Sternlicht will likely be looking for a new No. 2, if he isn't already. Friends need not apply.