Wendy’s

Wendy's is a fast food chain restaurant that has been in operation since its foundation by Dave Thomas in 1969. It is owned by Wendy’s International and has its headquarters in Dublin. It is one of the largest hamburger fast food chains and has about 6,700 locations. Wendy's serves hamburgers made with fresh beef and chicken sandwiches, fries, Frosty deserts, soft drinks, and a variety of fresh, healthful foods - garden salads. The company’s main competitors include McDonald's with about 31,000 locations and Burger King which has approximately 12,000 locations across the world.

Three quarters of the company's restaurants are franchised. The company and its associates directly employ about 46,000 people that run the company’s operations. The company generates about $2.469 billion in total sales each financial year most of which comes from the US fast food market. The majority of its stock belongs to the Roark Capital Group. The company’s market capitalization is approximately $430 million. The firm’s exterior store appearance, food quality and menu are standard. Operation hours, product pricing, employee uniforms and wages are on the franchise owners.

Wendy’s strength includes more than forty years of operation and experience in the quick food industry, its presence in around 30 countries around the world. Wendy’s has the ability to attract millions of customers with fast foods at low prices that other restaurants are not able. Wendy’s has the size and scope playing it better than any other fast food company. As stated by Steve West of St. Louis at Investment Technology Group that the company’s long history of operations offers stability and value. However, fast food is unhealthy and operating as a franchise is cumbersome to manage besides having competitors globally.

Although there is a variety in business acquisitions, investors need to take into account the complex issues involved in the acquisition process. The most beneficial of  all being the equity structure of the target company. This should involve a complete analysis of the company’s costs and benefits associated with the acquisition deal. However, the basic tenet in any business acquisition process is to clearly communicate one’s financial objective in the form of a decision criteria (Picot, 2002). As a fast-food company Wendy’s product requires little or no product research and development effort, thus research and development is not a potential capital deviation factor.  However, the company’s financial management decision to not leverage it with debt is driving up the weighted average cost of capital from an optimal rate of 8.60% at a 30% debt ratio to 9.16%. Wendy’s current debt ratio stands at 11.43%, meaning Wendy’s is not fully utilizing it’s debt potential. This decision coincides with the company’s increased gross revenue by 20% from 2004 to 2006, as well as increased gross profit by 9.4% over the same period making it afford to pay a share price of $24.99 per share.

Channels of distribution. Wendy’s fast food company currently has a strong presence in the fast food products channel. It is also targeting alternative channels, such as the international presence in the foreign fast food market. One of the acquisition decision criteria is the target company’s channels of distribution, there is a preference to acquire a company with strong presence in one or more alternative channels (Haransky, 1999). This would accelerate Fate Holding Group primary strategy to move into alternate channels as a means to increase its revenue and profit.

Products acquisitions decisions are also influenced by the target company’s differentiated or product uniqueness (Gaughan, 2002). Desirable product offerings exists in two categories. The first are directly competing products from an existing competitor and here Wendy’s like its competitors, it serves burgers and fries, the restaurants serve chicken sandwiches, wraps, and a variety of salads. The company has differentiated products that are not offered by its competitors for instance, instead of milkshakes, which are in any fast food restaurant, Wendy's serves its signature thick Frosty. These product features are the strength of the company’s presence in the fast food industry. The firm has no sophisticated products or intangible goods that significantly impact financial decisions. Wendy’s has never suffered major market backlash that could significantly affect its annual numbers or capital structure decisions.

One of the highly desirable decision criteria in company acquisition transactions is the customer base, existing or new. An acquisition that brings new customers to the company have significant value (Picot, 2002).  Its customer base is very diverse, it has male and female from different age groups, but most of them are from the Generation Y group. Generation Y includes teens aged 14years to young adults of 28 years old. This group is a very important client in the Wendy’s client list. Its customers are both from the traditional home market as well as alternate channels such as its international locations. As brand Wendy’s personality is central to the relevancy as a  top gun in the fast food industry. According to the group’s CEO the brand is constantly reviewed to ensure the company remains relevant to  consumers, redesigned its point-of-sale and menu boards while staff uniforms reflect a more modern clothing culture. Its advertising and online communications also appeal to customers of all ages. This criterion would mean more profits and increased presence of the FHG group.

Wendy’s has developed historically from 1969 to become a market leader in the fast food industry through a balanced mix of organic and acquisition growth. Its organic growth and long term funding have been through strong management skills and acquisition capital. Wendy’s acquisitions continue to add value through new capital assets, new management talent and a wider geographic footprint. Given its strong, sustained rate of growth, Wendy’s International  is worth a business to acquire.

 

References

Chunlai Chen, Z., and Findlay, C. (2003). A Review of Cross-border Mergers and Acquisitions in APEC. Asian-Pacific Economic Literature, 17 (2), 14-38.

Picot, G. (2002). Handbook of international mergers and acquisitions: Preparation, Implementation and Integration. New York: Palgrave Macmillan. 

Gaughan, P. A. (2002). Mergers, Acquisitions, and Corporate restructuring. 3rd ed. New York: John Wiley & Sons, Inc.

Haransky, S.A. (1999). Merger Mania and Misunderstandings: Why the Merger and Acquisition Process Sometimes Fails. Journal of management in engineering, 15 (6), 13-14.

DiGeorgio, R. M. (2003). Making mergers and acquisitions work: What we know and don’t know – Part II. Journal of Change Management, 3 (3), 259-274.