Mergers Expert Reveals the Truth about True Mergers
With liquidity crises now threatening the survival of many restaurant chains, radical measures are called for, argues investment banker David Epstein of J.H. Chapman & Co. True merger, anyone?
By David Farkas, Senior Editor -- Chain Leader, 7/1/2009
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"The impetus to move ahead on a true merger must come from the board," says David Epstein of J.H. Chapman & Co. |
With liquidity crises now threatening the survival of many restaurant chains, radical measures are called for, argues investment banker David Epstein of J.H. Chapman & Co. True merger, anyone?
What do you mean by a "true" merger?
A true merger is where two companies join together and their ownership stays the same. Unlike an acquisition, where one company buys another using cash or stock and the owners of the target company go away, in a true merger ownership doesn't walk away with cash or notes.
What happens to the CEOs?
There is always the issue of what happens to them. Who's going to manage the merged company going forward? We believe that decision should be put in the hands of the board of directors.
Why is the timing right for true mergers between chains?
Because many are doing whatever they can to retain profits and cash flow. Many are cutting overhead, G&A expenses and renegotiating with landlords. They are doing everything they can to preserve cash.
And there's not much left to do, right?
Many companies have done all they can. Lenders in many cases are not willing to do enough that will help the company survive. By the way, I'm focusing on second-tier and regional chains that have used debt to finance growth.
By survive, do you mean avoiding bankruptcy?
Or any type of liquidation. Boards that once thought in terms of growth now think in terms of survival. They have to be thinking about radical things they may not have considered in the past. The first thing they ought to investigate is not to sell themselves but to merge, wherein you maintain ownership, though maybe now a smaller amount.
Have we seen anything like this recently?
There is a hybrid example: Triarc's merger with Wendy's. Although a clear takeover by Triarc, it's a similar type of [merger] situation, though not the way we'd expect to see it in a true merger.
What would you expect to see, at least in theory?
The easiest example would franchisees of the same concept, say, Applebee's, in New York and New Jersey. They're fairly close and have the same synergies. In a true merger, the synergies, whether food costs, site selection or administration, are shared by both owners. You end up with more buying power and maybe more clout with the franchisor because you are larger.
Any others?
Franchisors that have similar concepts but do not own many stores. Say, two small coffee chains. You could take advantage of purchasing cups as well as administration. That would be advantageous from a value standpoint to both. Or consider Big Apple Bagel and Cousins Subs. Both are in the sandwich segment, but BAB sells sweet goods through My Favorite Muffin. Those could be sold in Cousins.
How do companies figure out who'd be a good match?
If you were to ask CEOs of small or medium-sized companies who they'd acquire if money were no object, they'd have a short list of two or three chains. That list may make very good merger partners as well. CEOs know who they are already. I don't believe it takes a lot of science to determine that.
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