As Applebee’s International moves through the process of merging with IHOP Corp., a high-ranking Applebee’s official recently sent a memo directing associates to “be positive” in the face of a transition that will force leadership changes and alter operational dynamics in corporate offices and restaurants alike.
The message from Philip R. Crimmins, senior vice president of development for Applebee’s, which agreed in July to be acquired by Glendale, Calif.-based IHOP Corp. for about $2.1 billion, illustrates the difficulty of integrating two companies—each with its own cultures, practices and management teams—into a unified and streamlined entity with a common vision. In his memo, Crimmins outlined 10 steps associates can take to help them weather the changes.
“I waited a couple of weeks to say this because we were all going through the stages of grief,” he said in the memo, which Applebee’s filed with securities regulators Aug. 7. “But it’s time to face the new world. When we are depressed, negative, cranky, etc., we are just not attractive to others, especially someone who might be considering us for our next job—on the IHOP team or elsewhere.”
Applebee’s is not the only company facing the hurdles of combining with another system. By year’s end several other of the industry’s largest companies are scheduled to have merged. Rare Hospitality’s 287 LongHorn Steakhouses and 28 The Capital Grille restaurants are expected to be under the Darden Restaurants Inc. umbrella. And if activist investor Nelson Peltz has his way, Wendy’s will be a sister brand to Arby’s, under parent company Triarc Cos. Inc., where Peltz serves as nonexecutive chairman and is one of the largest shareholders.
In addition to the billion-dollar deals involving Applebee’s and Rare, this summer Wichita, Kan.-based Fox & Hound Restaurant Group purchased the Littleton, Colo.-based Champps Americana casual-dining system; high-end Restaurants Unlimited Inc. of Seattle acquired upscale Pacific Coast Restaurants Inc. of Portland, Ore.; and the two leaders of New York-based Patina Restaurant Group bought out the upscale Smith & Wollensky steakhouse brand—all with the help of private-equity cash.
The recent surge in strategic purchases is causing widespread growing pains as merging restaurant systems accomplish the difficult task of integrating different cultures, definitions of success and leadership styles, and eliminating duplicative functions.
At Applebee’s uncertainty abounds, various sources say. While a transition team has been formed with senior executives from both IHOP and Applebee’s, decisions about pending layoffs, the sales of corporate restaurants and brand roles have not yet been finalized.
“We’re in a unique scenario because, remember, we are fundamentally restructuring [Applebee’s], so there is uncertainty,” IHOP chairman and chief executive Julia Stewart said, referring to her company’s plan to refocus Applebee’s as a leaner, 100-percent-franchised system. The chain now has about 508 corporate restaurants and nearly 1,400 franchised locations. IHOP is parent to the nearly 100-percent franchised 1,319-unit family-dining brand.
“We are very much in the middle of mapping out what the new organization will look like,” Stewart said. “I envision a parent company with two robust business units, dedicated leaderships and a lean central office.”
According to filings with securities regulators, Applebee’s plans to move its headquarters to Lenexa, Kan., in December, from its nearby current location in Overland Park, Kan. Severance packages for departing employees have been created and retention and service bonuses also have been discussed. IHOP has hired an outside consulting firm, The Parthenon Group, to help with the integration.
“We’ve tried to communicate as much as [Applebee’s] management allows us,” Stewart said. “Eventually, Applebee’s management will see to it that I’m there to speak live, as so far it has been a lot of memos.”
Stewart said that after the deal closes, which is expected in the fourth quarter, she will spend a significant amount of time with Applebee’s franchisees and employees to understand even more fully what the brand needs to orchestrate a turnaround from two-plus years of negative same-store sales and slipping traction with consumers.
IHOP is even exploring a potential change to its corporate name and the ticker symbol that it trades under on the New York Stock Exchange to better reflect the two brands and cultures, Stewart revealed.
In the meantime, Crimmins, in his memo, encouraged Applebee’s associates to “develop your own strategic alternatives,” a reference to the corporate-speak Applebee’s and others have used when deciding to explore corporate options, such as a sale. He urged associates to “find your old resume” and “star in your own commercial” by taking inventory of wardrobe or hairstyle in order to make a good first impression.
“IHOP will have a lot of debt and they will highly value those who can help them cover their debt by selling and managing franchises, improving the brand image, increasing sales, etc.,” Crimmins said in the memo. “Certain people on our team will have a better future in the new IHOP/Applebee’s company than they would have had otherwise. And if you believe you won’t be here for the long term, you especially should focus on your personal upside.”
At Atlanta-based Rare Hospitality, which agreed last month to be purchased by Darden for about $1.4 billion, a leadership plan already has been established and it has been decided that the newly combined companies will be based in Darden’s headquarters city, Orlando, Fla. Darden, already the industry’s largest casual-dining operator, owns 680 Red Lobster, 614 Olive Garden, 73 Smokey Bones, 23 Bahama Breeze and seven Seasons 52 restaurants.
“There are a lot of people that will get offered opportunities in Orlando, but not all will be able to accept,” Darden chairman and chief executive Clarence Otis said, foreshadowing the inevitable loss of talent, voluntary resignations or layoffs that typically accompany large mergers.
“We are trying to make sure that this touches the restaurant leaders, the general managers, the regional directors and employees as little as possible,” he said.
Financing for the deal was prearranged and Darden’s cash tender offer of $38.15 per share for all Rare Hospitality stock began Aug. 31 and runs through Sept. 28. The deal is expected to close next month.
To facilitate the merger, Darden and Rare created an integration team comprising senior executives from each company that plans to disseminate to all associates twice-weekly communications about the merger, and set up a website to answer frequently asked questions, Otis said.