Reporter's Notebook
The problem with going public

The problem with going public

This post is part of the Reporter’s Notebook blog.

In October 2010, Bravo Brio Restaurant Group ended a five-year drought of restaurant company IPOs. Seventeen more companies have gone public since, including Fogo de Chão, which is having its offering today. A few others, including Burger King, went public in back-door reverse mergers.

There are lots of advantages in being a public company. Companies raise money, and currently at much higher valuations than can be found in a private deal, enabling them to pay off debt or fund growth. It also enables owners to exit investments, again at higher valuations. Being public gives companies a certain level of credibility. Stock options can be good incentive for management. It may even increase sales.

But there are plenty of disadvantages, too. Companies that go public have to navigate a world of intense scrutiny, constantly changing expectations and a short-term worldview that barely sees beyond the next few quarters. Going public is incredibly expensive and complex.

Management has a constant measure of its performance in the form of the company’s stock price. And if that price doesn’t keep up with the price of other concepts, then investors will put pressure on the company. Sometimes this pressure comes from activists that will displace board members and, frequently, company executives.

This results in strategies that put the company’s long-term viability at risk. It even forces companies to dump assets, even at big losses, because of fears of short-term impacts on stock price.

Consider Bloomin’ Brands and Ignite Restaurant Group. In November, Bloomin’ Brands agreed to sell Roy’s Restaurants for $10 million. Not to be outdone, Ignite sold Macaroni Grill in March for $8 million.

Both were bargain basement prices that represented a loss of investment for both companies. True, they were each struggling, and buyers are hardly eager to take on fixer-upper concepts in a market in which sales are generally improving. In addition, a strong argument can be made that fixing said concepts could be distracting.

Yet smart money in both cases would have held onto the chains, fixed them up, and then sold them for as strong a price as possible. Selling low is just bad business. Yet the glare of being a public company kept both Ignite and Bloomin’ from spending the time and effort to fix those chains and try to get a better price.

To be sure, there are times when this works in the opposite direction. Shareholders basically fired Darden Restaurants’ board of directors after it sold Red Lobster against their wishes, for instance.

The short-term focus can also be seen in real estate decisions. Investors are actively pushing companies to offload real estate. Sale-leasebacks can be a good financing mechanism for companies looking to make investments for growth. But these deals are often used for share buybacks that benefit short-term shareholders. Pressuring earnings for the benefit of short-term shareholders is problematic.

And as we’ve written before, short-term investors ride the early wave of enthusiasm, setting high expectations that can be difficult to match. Canadian tea retailer David’s Tea went public earlier this month, soared 40 percent on its IPO and then lost 28 percent of its value in a couple of days after reporting a loss in its first quarterly report — a loss driven almost entirely by the cost of going public.

None of this is to say that companies should avoid going public, particularly with the wealth involved. And plenty of companies have deftly navigated the demands of ensuring a long-term success with short-term wins. But it’s a difficult world, and with the number of small concepts going public, not all of them will succeed.

When asked whether he’d consider an IPO at the National Restaurant Association’s Finance Summit in May, Greg Flynn, CEO of Flynn Restaurant Group, said he wouldn’t because he has no problem raising cash.

But he also described being a public company CEO as “torture.” “If you could possibly avoid it,” he said, “Why wouldn’t you?”

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