Thursday, December 27, 2007

Peltz vs. Overton

Not since Godzilla squared off with Mothra have we seen a fight card quite like the one that was set by Wednesday’s investment news.

On one side we have the quirkiest company in the restaurant business, with a level of achievement that begs steroid testing. Cheesecake Factory, despite its size and success, still reflects the idiosyncratic thinking of chief executive David Overton, who built the business with an iron discipline seldom seen outside of Olympic training camps. Two years ago, while receiving an award from Nation’s Restaurant News, Overton attributed his leadership—and, by inference, the chain’s success—to a gifted palate. He explained that a few bites can tell him if an item will be a success or not. That highly personalized approach to menu planning, he suggested, is as much an underpinning of the chain as its painstakingly controlled expansion, a design that’s finer than what you’ll often find in fine dining, and a voluminous bill of fare that seems scientifically impossible to execute. It’s an oddball, to be sure, but one that should have its own wing at Fort Knox. Few restaurant companies are more esteemed for the caliber of their operation.

And now the company finds itself in a gladiator pit with a Wall Street bully tapping a truncheon on his palm, like a street tough looking for a rumble. We and every publication use the euphemism “activist investor” to describe Nelson Peltz, but that doesn’t begin to characterize his mode of making money. His mechanism is really the not-so-veiled threat—do what I demand or I’ll use my investment capability to do something drastic. It’s as close as investing can come to a street gang’s offer to leave local shops unharmed if they pay an acceptable fee for the “protection.”

If Peltz wields that modus operandi against Cheesecake—a big “if,” despite indications he’s buying as much as 14 percent of the casual-dining company—it’ll a cage match between him and Overton. And my money will be on Overton.

A Rocky he’s not. We’re talking about a guy who got involved with Cheesecake to help out his parents, who had run the business from their basement. He’s renowned for giving general managers a BMW lease as a perk, and for reflecting his Far Eastern religious beliefs in the design of the stores (look for a sky scene or star motif on the ceilings). We’re talking about Jimmy Stewart standing up to an angry Harvey Keitel.

Yet Overton seems to have the conviction that a business should be cared for and nurtured like a living entity. In contrast, Peltz comes off as a horseback rider who doesn’t care if his stead dies after he arrives at his destination. The whole point was to get him there, horse be damned. That disparity could make Overton fight like a wildcat to protect the business his parents founded. At the very least, he’ll likely call Peltz’s bluff.

So what can Peltz do? The obvious possibilities:

--Solicit allies from among Cheesecake’s other shareholders to form a sympathetic faction controlling more than 50 percent of the company’s stock.

--Mount a hostile takeover attempt on his own.

--Sue Overton or Cheesecake for reneging on their fiduciary responsibility.

--Threaten to dump his shares and thereby depress the stock’s price.

In either case, he’ll likely find Overton to be a reluctant yet effective schoolyard hero, willing to stand up to a bully. That resistance alone might convince Peltz to shift his attention to less feisty prey.

Unfortunately for Cheesecake, Overton owned only 5 percent of the company’s outstanding shares as of an April proxy filing, and he’s trimmed his holdings since then. But, after watching Cheesecake evolve from a single Beverly Hills restaurant some 30 years ago, I can’t believe he’ll cede to Peltz without a battle royale. He may be the reluctant hero who stands up to this new breed of corporate greenmailer.

Of course, this is assuming that Peltz is looking to follow his usual script. With Cheesecake’s shares trading at a yearly low on the morning Peltz’s interest in the company came to light, the terror of Wall Street may just be bargain-hunting along with everyone else this holiday season.

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