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Did two gaming titans get too big?
Deals that once made sense led to borrowing that hangs over gaming giants
Leila Navidi
Two giant companies, MGM Mirage and Harrah’s Entertainment, own 16 of the Strip’s 25 largest casinos. With both facing huge debts, fresh competition is possible if properties are sold for quick cash.
Saturday, April 18, 2009 | 2 a.m.
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Through two mergers proposed five years ago, the Las Vegas Strip largely became the domain of two corporate titans.
In 2004, MGM Mirage proposed an $8 billion acquisition of Mandalay Resort Group. Months later, Harrah’s Entertainment announced a $9 billion offer for Caesars Entertainment — a “me too” deal made possible by Wall Street’s heightened interest in the casino business.
MGM Mirage would go on to control about half of the Strip’s hotel rooms and Harrah’s, which would ultimately become the world’s largest casino company, less than 30 percent.
The deals made financial sense at the time, analysts say. But some wonder whether Las Vegas would be better off today had more competing casino operators — instead of executive teams running two major players — been in charge going into this recession.
“In this economy, Las Vegas might be better off with more individual operators, but before this downturn I don’t think it mattered,” said South Point owner Michael Gaughan, who has seen the consolidation and breakup process at work in his three decades of casino management.
With the Strip’s two giants at risk of filing for bankruptcy protection, the possibility is increasing that they will spin off casinos for quick cash. The prospect of new competition pleases some visitors and locals with a dim view of the consolidation of power between two companies that own 16 of the Strip’s 25 largest casinos.
Whether the industry or Las Vegas is better off with more independent operators or fewer corporate titans in charge is a debate that could yield lessons for the gaming regulators whose job it is to monitor such deals.
•••
Critics blame the companies’ financial problems on their size. Acquisitions enabled them to take on more debt, making them financially vulnerable, they say.
But executives and analysts say the poor economy is ultimately to blame rather than consolidation. The acquisitions benefited the state by increasing corporate profit, yielding more casino jobs as well as reinvestment in existing casinos and new properties, and boosting tourism by improving the attractiveness of Las Vegas.
UNLV economics professor Bill Robinson said the mergers created something akin to an oligopoly. They limited competition along a geographically narrow corridor, creating a situation where each company had to match the other’s ambitions.
“Big companies are better off not building,” he said. “But if one company builds, it wins, and if another one doesn’t, it loses, but if both build, they both lose.”
When MGM Mirage proposed its acquisition of Mandalay Resort Group, banks were enthusiastic to lend to casino companies because of the industry’s rapid growth and strong earnings. The company secured a $7 billion loan and turned down an extra $3 billion the banks wanted to lend. The loan was the largest in the casino business at the time and involved banks new to the gaming industry.
Bill Lerner, a gaming consultant with Union Gaming Group, attributes the companies’ current troubles to the economy, not consolidation. But Lerner acknowledges that growth, which begets more growth, helped them take on more of the debt that imperils the companies today.
“Consolidation enabled companies to grow even more rapidly and aggressively because they had more access to capital based on the cash flow they were generating,” he said.
•••
In separate hearings to approve the deals in 2005, Nevada regulators — required by law to foster industry competition and vet deals for antitrust violations — aired concerns about whether consolidation would lead to efforts to control prices for goods and services as well as a lack of innovation.
In approving the deals, regulators agreed with the companies’ position that casinos are unique and complex entities offering myriad, ever-changing attractions under one roof. It’s easier for car manufacturers to raise prices and control supply and demand, but price hikes at casinos are more difficult to implement across the board and, in any case, would prompt customers to go across the street to the nearest competitor’s property, executives said.
Lack of innovation would likewise be met head-on by opportunistic neighbors constantly scouting the competition, they said.
“Those of us who look after this combined company have to be aware that any lack of innovation on our part, any sclerosis in our efforts to be active, will be met with people coming in and just kicking us silly with new products that are much better than ours,” Harrah’s CEO Gary Loveman said in a June 2005 Gaming Control Board hearing before the board’s vote of approval.
Both MGM Mirage and Harrah’s noted that each of their properties has a different price point and appeals to a certain group of customers who prefer the mix of attractions there.
MGM Mirage’s property heads, called presidents, are given the autonomy to improve and run their properties how they see fit, executives told regulators at the time.
In addition, both companies said their deals — by increasing revenue and profit that would be reinvested in Las Vegas — would enable them to better compete with other tourism destinations worldwide as well as the rise of other gaming markets, such as California’s tribal casinos.
Regulators believed there were enough competitors on the sidelines — including Palms owner George Maloof, as well as Steve Wynn and Las Vegas Sands owner Sheldon Adelson — to foster competition on the Strip.
A key part of that argument at the time was an eye-popping pipeline of future growth. As many as 40,000 rooms, including resort hotel rooms and condominium units, were planned or under way on or near the Strip. Those included Wynn Las Vegas and neighboring Encore, Palazzo, the Trump condo-hotel tower as well as projects that didn’t pan out.
Even without many of these projects, the deals wouldn’t create monopolies — the primary concern of regulators.
Gaming Control Board Chairman Dennis Neilander blames company woes on the financial meltdown, adding that regulators must balance the growth and stability that some deals create against other factors, like market concentration.
“There are pluses and minuses to every deal. On balance they made sense from the state’s perspective,” he said. “They didn’t limit competition in a way that negatively affected the future growth of Las Vegas.
“The Las Vegas market has never been any more competitive than it is now,” he added.
•••
Recently, Steve Wynn has encouraged the breakup of gaming giants, saying new owners will bring fresh ideas to the table. And M Resort owner Anthony Marnell III has marketed his single, privately owned casino on the premise that owners based on site can react more quickly and favorably to customer needs.
Phil Ruffin, who recently purchased Treasure Island from MGM Mirage, said having a single owner-operator running a casino isn’t necessarily any better for customers or employees than a gaming giant.
“I don’t think it makes a lot of difference,” he said.
In fact, having a single operator rather than a conglomerate at the helm might mean more financial risk for a property because casinos are expensive to own and operate, he said.
Before selling the New Frontier to a real estate firm, Ruffin ran the property with a close hand and a lean budget, with few layers of management between him and his employees. Now he owns a higher-end property with a larger management staff and more overhead.
Ruffin says he won’t be running things much differently from the way MGM Mirage did, though he might find more ways to cut expenses being that he, the owner, will be based at the property seven days a week.
Gaughan has also chafed under the corporate mantle.
When Boyd Gaming bought Coast Casinos in 2004, Gaughan remained at the helm of Coast, running it like a separate company. In a move to downsize and become his own boss, Gaughan split with Boyd in 2006, selling his stake in the company and buying the casino he would rename South Point.
Gaughan remembers the days when the Las Vegas casino industry was populated not by Wall Street-funded giants but colorful — and opinionated — owner-operators.
“Sometimes we couldn’t agree which way the sun was going to rise in the morning,” he said of the Nevada Resort Association, the lobbying group he chaired in the early 1980s.
These days, company owners don’t usually attend association meetings. Instead, they send underlings who aren’t authorized to make decisions on their own, Gaughan said.
Giants such as MGM Mirage, Harrah’s and Station Casinos — tripped up by too much debt — are well-run companies that made competitors step up their game in Las Vegas, he said.
The health of the competitive landscape will ultimately depend on who takes over what — whether it’s a group of bondholders installing the nearest available casino chief or a skilled operator on the sidelines, like a Jack Binion, Gaughan said.
“I would not want Jack Binion” running a nearby casino, he said.
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Way too big... But there is always light at the end of the tunnel and Las Vegas will better in the future because of it...
duh, this monopoly has killed vegas. gaming commision should only allow someone to own no more than 2 casinos. no competition has gotten vegas to over priced rooms, higher food prices, and terrible gaming products for it's patrons.
only reason we asking this is the downturn of econmy if there was no downturn we weren't have ask this. yes there two big monopoly game here gaming commision should have not lets this happen. two company can raise or lower prices anyway they please now they treat there customer like crap. so las vegas gaming did them self in. now they want local with stayvacation to help them screw the casino. if the casino can read the blog about them they might think thing over. alot visitor have alot complaint at the end they said they will not come back. thank you casino oh will there always indian gaming with cheap alcohol
In any other industry - this never would have been allowed - the merging of all those casinos into two corporations. Too much rested on those two companies and ALL the powers that be were turning a blind eye to the fact that hard financial times could happen in the future, whether it would have been a recession or even another 9/11. You didn't need an MBA to figure out that something like what is happening now might happen, but not to the extent it did. That's just the way the economy goes. Maybe we will see a break up of these monopolies in the near future. It can only help both the casinos and the tourists and most importantly, Las Vegas itself.
tourism is the only thing this town has. when you have two companies owning THAT much of the pie, it's not good.
less competition = bad product = fewer customers.
now that they have "de-themed" the resorts, they are all the same. same cheese-ball nightclub, same cirque show, same slots, yuck!
the same equation applies to newspapers. every city has one, maybe two papers, and they all got fat and lazy and now they don't know how to compete and they're going out of business.
the economy has just quickened the process.
now the resorts "care" about getting local business? haha! ya, i can't wait to pay $8.00 for a corona so i can stand in line to pay $500.00 for a bottle of grey goose.
M G M can't be in too much financial trouble! They just gave the C E O a $500,000.00 increase in pay. Now he gets 2 million a year in base pay and 4.25 million in bonuses.I wish my company was near bankrupt,maybe I could get an increase in pay also. This is all a smoke screen. Just another show we are watching and we pay for the tickets!
MGM Mirage is the class of the strip. Harrah's is the slum lord of the casino world regarless where they are located. Loveman and Jones took this great company from the top to the cellar.
Most definately right about the monolopy and staycations. Forget the locals until times get hard and then go after them. Now we need to be loyal to them becaus they are in our town. Sorry not me. Sell, Sell. I will go to Laughlin, Railroad Pass etc before the strip.Interesting picture of the dark cloud above the strip.
Obama......can we get some bailout money will be the next thign coming out of their mouths....why not....they are handing out money like candy, why not MGM and Harrahs too
Really people? Las Vegas needed these monopoly companies. If it wasn't for this occurance, we wouldn't even imagine having a city center project. Say what you would about the construction of the project, the fact is, no independent operator could have or would have gotten the financing the build such a project, only mega-corps, your Mgm Mirage's and harrahs. Yes it is a dual-opoly, however, it's a dual-opoly in a industry/market nobody needs. You need electricity, food, water, shelter, not las vegas. Just like Sirus and Xm merging, it's in an industry that isn't essential to our well-being. If you believe that going to Vegas is a must to survive, then you need GA. With one C.E.O. running MGM, versus nine C.E.O.s running 9 properties, MGM is able to decresase expenses, increasing profits, allowing more money for investment, creating more jobs, and the cycle continues. All of thier properties are cash flow positive, just not enough to retire the debt they have outstanding. I work at the Strat, we are cash flow positive as well, however, the Goldman Boys payed to much for us to justify a acceptable return on investment. I do miss the days that downtown was operated by true gaming pioneers, Steve Wynn, Jackie Gaughn, Sam Boyd, Benny Binion. Now these casino companies, including the Strat, are operated by people from the east coast. Welcome Phil Ruffin to Vegas.
As we see in other industries, one of the unintended consequences of growth by acquisition is companies become too large to manage. Economies of scale are accompanied by a complexity of inter-personal relationships. Corporate cultures and politics do exist, and they cannot be manipulated by "sound management" practices.
The core element of every business is a vision. When leaders (whether founders or hired hands) provide a vision of a company which guides the millions of tiny decisions made each day by the collective of humans called employees, then things seem to go well. Everyone is working to make the vision into reality.
But when the vision provided becomes a commodity necessary to guide multiple corporate cultures, the humans make more of those daily decisions in error. And because the culture and political environment of big organizations discourage the free flow of information about the failure of the vision, the leader does not know that a correction is necessary.
So, yeah, big is not intrinsically bad, until a company becomes too big to manage. Then, shedding the acquisitions may be the best strategy.
formervegas76, you're right. Steve Wynn the greedy bastard and the other barons have killed this town by bleeding the tourists dry. I hope he goes the way of the dinosaurs and soon.
Oh well, as we've all learned greed is not good. Too little late. We'll know better next time. ======== Out of work, need a job? Check here http://spacyber.tripod.com/id22.html
lmao!
i love how everyone has to throw in their econo-babble to show how smart they are.
"complexity of inter-personal relationships"? haha!
In san diego the casinos are at war with each other to get patrons and we have gotten great deals there are a few like Barona that are so bad and so tight I will never go there
"a skilled operator on the sidelines, like a Jack Binion, Gaughan said"
Exactly what I have been saying. Look for Binion to make a dramatic comeback....and Vegas will surely be better off for it!
you all need to take your medicine and be quiet. Sorry, but you all talk big, but i bet you all go to the properties when your friends/family come visiting. Now that times are tough, you talk talk talk. But when things are good, you will be right back on the bandwagon. Do you really think you would be living here if casinos werent here in town?
Geez, perhaps a little bit more positive an attitude by all and we get our town where it needs to be..at the forefront. Remember..This is Vegas! How many others towns to people talk about around the world like they talk about us?
The real problem here is simple, Las Vegas was built on cheap rooms, drinks, food and entertainment, and the money was made on the gambling. Steve Wynn started this downturn when he built his mega resort in 1989-90 hired 3000 employees, 70% in the back of the house and that started the so called boom here.
What it really was the hotels went nut with prices, catered to the wealthy and forgot about the every day tourist not to mention the local casinos as well. I for one, feel sorry for the people out of work, but do not feel sorry for the greedy casinos. What we really need is the mob back to run things, they didn't hurt anyone, and treated the locals and their employees great. I have been here 36 years, and Las Vegas has turned into a complete carnival. It use to be a classy place, but no more.