Thursday, September 22, 2005

This year's model?

You have to wonder why investors tolerate the mere existence of executive teams these days. After letting their C-level charges run amok at Enron, Krispy Kreme and other scandal mills, institutional shareholders have progressed from monitoring where a company is moving, to actually plotting the course.

We saw that again yesterday with McDonald’s long-expected announcement that it’ll sell a piece of Chipotle to the public, a la what Wendy’s plans to do with Tim Hortons. In both instances, the partial sales will appease big shareholders who wanted to cash in near-term on the brands’ success. It’s akin to realizing the appreciation in your house’s value by selling part of the yard. The money’s in hand, but the situation is markedly different.

Maybe the move would be less perplexing if this new investor activism wasn’t so pronounced. If you could be certain Chipotle’s shareholders would be a passive lot who merely collect their dividends or enjoy the growth of a young public company in expansion mode, what’s the big deal? But what if they demand that the chain start franchising, or take some other dramatic step to maximize shareholder return in the shortterm? Like making a move that works against McDonald’s, which, after all, will technically be a separate company.

Sure, McDonald’s will be the controlling stakeholder, so if push comes to shove it’ll prevail. But who wants a company to be run by the threat of wielding your stake in a power showdown?

Maybe we’ll be proven wrong; life for Parent Company and Satellite Holding will be unchanged, and shareholders will get their higher returns without paying a longer-term cost. But in the meantime, with Wendy’s and McDonald’s both making this move, you know other public restaurant companies are going to take the same route. The model may be shifting from a restaurant conglomerate with multiple brands, to a master brand with a collection of majority-stake holdings in promising ventures. The set-ups will likely deliver dramatic results, one way or the other.

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