Last week, an activist investor, Ancora Advisors, made an offer to buy casual dining chain J. Alexander’s.
The primary reason for the offer: J. Alexander’s is too small to be public and doesn’t get the credit it should for generally strong same-store sales performance.
The company later rejected the offer and basically agreed with the premise that should have a stronger value.
But the offer gets at the heart of an ongoing concern among small, publicly traded companies: They can struggle to get attention from investors.
And when they do get attention, they’d rather not have it. Which is probably why few small companies are going public now.
J. Alexander’s is among the smallest, stand-alone restaurant chains on the public markets. It is No. 185 on the Technomic Top 500 Chain Restaurant Report—by comparison, the recently-sold Zoe’s Kitchen, famous for going public in 2015 with less than $10 million in earnings before interest, taxes, depreciation, and amortization, or EBITDA, is No. 111.
(Kona Grill, at No. 209, is one of the few standalone public companies that is smaller.)
Since owner Fidelity National Financial spun the company off in 2015, J. Alexander’s has had only two quarters in which same-store sales have fallen, and its average performance over that period has been a 1.9% increase.
That is not spectacular, but it is also generally consistent performance akin to many of its larger competitors—Cheesecake Factory’s average over that period was 0.7% and BJ’s Restaurants’ average was 1.1%.
Ancora’s argument, backed later by another activist in Mario Gabelli, is that J. Alexander’s isn’t getting the credit for that performance. The company’s stock is down about 5% since its 2015 spinoff.
But both BJ’s and Cheesecake stocks are down over that same timeframe, too, and those chains had similar variations in price over that period as investors grew excited or disappointed. Indeed, all three have had relatively similar performances over that timeframe.
J. Alexander’s was just smaller. But it’s a smaller company, and many fewer people own the company’s shares. BJ’s, for instance, more than twice as many shares out in the market as BJ’s does. Of course, BJ’s will get more attention.
Smaller companies are, however, prone to attract activist investors and others that gain control and push ideas or strategies that end up wrong-sided—whereas larger companies can better resist such strategies.
The best example is Famous Dave’s, which in 2013 attracted so many activist investors they owned a majority of the Minneapolis-based chain’s stock. Some of those investors put former McDonald’s executive Ed Rensi in the CEO’s chair. The stock skyrocketed.
Rensi put in place the wrong strategies. Sales plunged. The stock fell, too, and within 17 months he was out and the company is only now recovering—though it has gone through a series of further CEO changes in the years since then.
Plenty of reasons exist for small companies not to go public. For one thing, it’s costly and that money would be best spent on investing in new restaurants.
But mostly, public markets can be reactionary, and the attention frequently conferred upon small companies tends to be negative. The aforementioned Kona has literally had a revolving door in its CEO’s office over the past several months as the company’s stock price has plunged.
So maybe it’s not a surprise that small companies are in fact avoiding going public. In the aftermath of the recession, congress passed new rules to enable small companies to raise money from investors.
Numerous restaurant companies took advantage of rules allowing for private filing of IPO documents (as companies like Noodles, Zoe’s Kitchen, and Shake Shack did from 2014 and 2015), or crowdfunding (like Fatburger owner Fat Brands).
Most companies that took advantage of such ideas, however, saw their stock prices decline in the aftermath. There hasn’t been a traditional IPO in four years. And no company has crowdfunded an IPO in more than a year.