On the Money: Bumps in the Road

A former restaurant analyst offers his perspective on IHOP’s acquisition of Applebee’s.

By David Farkas, Senior Editor -- Chain Leader, 9/1/2007

During his 15 years as an equity research analyst for Piper Jaffray, Allan Hickok won five “All-Star Analyst” awards from the Wall Street Journal, in part because of his accurate coverage of Applebee’s International. Chain Leader recently asked Hickok, now managing director for investment bank Houlihan Lokey in Minneapolis, for his analysis of IHOP’s acquisition of Applebee’s.

Can you think of a similar deal, when a company buys another with twice its market capitalization?

[Long pause.] I can’t think of one.

What are bumps in the road for this acquisition?

When you try to buy another company, you want to integrate it some way, making sure you get the efficiency you expect. You have different systems, people and cultures. Sometimes the process of change occurs very swiftly and is efficient and embraced. Sometimes it does not.

How long will that take?

That’s hard to predict. Maybe several years. My advice is to make sure everybody is aware that this [integration] will take time. These are two big organizations.

By “everybody,” I’m assuming you mean investors and franchisees?

Yes, investors and franchisees. I don’t know how long it takes to put [the two chains] together in the way they should be put together.

IHOP CEO Julia Stewart has shown she can handle change.

True. It started with reinvigorating the IHOP business with menu changes and the look and feel of the units. She dragged the concept into the year 2000, all the while getting a more viable lunch and dinner business. IHOP today is not just cheap pancakes and an endless variety of syrups.

I was also thinking about the shift in IHOP’s business model.

This is my read. Julia didn’t assume she knew everything. She brought in some professionals who helped assess the situation and helped her come up with recommendations. IHOP had issues. It was an older concept and it wasn’t growing that much. The company would use its own balance sheet to build stores. It was a very different model then.

She asked, how do we capitalize on the balance sheet and store base? We don’t need these [company] stores. We are going to change and let franchisees be franchisees.

How did Applebee’s miss addressing the devastating macroenvironment around them?

They got away from the basic idea of the concept: being the low-cost provider in casual dining. The product was acceptable and affordable. It’s not always that the best food wins.

Can Applebee’s return to its former glory?

Just because the stock declined from $40 to $24 and it got bought by IHOP at a $4 premium, it doesn’t mean the chain doesn’t have a dominant presence. Applebee’s is going to be around for a long, long time.

More analysts’ remarks on IHOP’s acquisition of Applebee’s.