Dear lexus1,
You asked whether now was the correct time for COSI to go public. You
clarified by adding, “My question is was it done at the right time,
since Cosi Inc. has not declared any profit as of yet. I was seeking
some feedback or others opinions on this issue.”
As you know, COSI went public on November 22 at an offering price of
$7. The company issued 5,555,556 shares and raised $38.9 million.
http://biz.yahoo.com/bw/021122/222107_1.html
The company defines itself as “the ultimate place to drink, dine and
unwind from wake-up call to last call” (source: company site,
www.getcosi.com). Prior to discussing the issue of the IPO, let me
just say that from a business stand point I see this kind of
positioning as being problematic. Why? Because it is very unfocused.
Cosi is trying to capture the whole gamut of possible restaurant
environments within the confines of a single establishment – a coffee
bar, a diner, a bar, and a restaurant all rolled up in one. Problem
is, people think in terms of venues – when you position a restaurant,
you have to make sure that it fits within a rubric that already exists
in the customer’s mind (or you can try and create a new one, but that
is much harder; in any event, it needs to be focused). Second issue
with Cosi is the negative connotation of the name – true, it’s a play
on “cozy” – but it’s also slang for mucous… So, first and foremost,
I’d say that the company should have resolved some basic marketing
issues prior to its going public.
When a company goes public it opens itself up to a level of scrutiny
that is orders of magnitude greater than what it had been accustomed
to before. A private company is run pretty autocratically by its
management, should consider customer wants and needs, and may or may
not entertain employee input. A public company all of the sudden has
to deal with Wall Street, analysts, shareholders, media etc. What may
have “sort of worked” for the company when it was private may no
longer count when the company is public.
Why do companies go public? Livingstone’s “Portable MBA in Finance
and Accounting” (Livingstone, 1992) cites the following reasons (p.
383-385) –
+ Access to permanent, non-interest bearing capital
+ Access to subsequent capital (through secondary offerings)
+ An opportunity for owners to cash out
+ Generate increased public awareness of the company (increase store
traffic)
+ Enhance credibility with suppliers, banks and customers (better
credit terms etc.)
+ Attract and retain high quality key management through use of stock
and options
+ Allow others to participate in the company’s success (friends and
family, employees)
+ Provide access to less expensive debt (e.g. follow-on bond offering)
+ Easier path to M&A
But there are many disadvantages to being public, among them
(Livingstone, p. 385-389) –
+ Cost and time of the IPO and process
+ Future lack of operating confidentiality enjoyed when private
+ Potential loss of managerial control (e.g. hostile takeover, board
process)
+ Greater pressure to achieve short term results
+ Constraints on management actions due to SEC regulations
+ Necessity to comply with more stringent and extensive accounting and
tax requirements (also great expense)
+ The ongoing costs of running a public company (filings,
publications, etc.)
Years ago, a company could not go public without first demonstrating
profitability. This is no longer so, and in my opinion that is
unfortunate. A public company that wants to allow its major
shareholders to profit from stock appreciation needs to focus on the
short term. If the company is not well established, this means
foregoing necessary long-term investments in order to secure
short-term market gains. During the dot.com boom, people were not
looking at fundamentals, and “profitless” companies went public, and
their stock did well – but most of those companies have now been
delisted, or their stock is down more than 99% from its peak
(affectionately known as the “99 Club”).
To a certain degree, the market knows how sound a company is.
Profitability is, of course, one excellent indicator. In addition,
Cosi is not in a hot industry (the restaurant business is extremely
fickle with about 1% of new ventures meeting with financial success),
and the market is extremely unreceptive to IPOs at this point in time.
The competitive environment is also a significant consideration.
Hoover lists the following as being competitive to Cosi –
AFC Enterprises
Briazz
Brinker
Community Coffee
Diedrich Coffee
Krispy Kreme
New World
Panera Bread
Peet's
Pret A Manger
Quizno's
Schlotzsky's
Starbucks
Tully's Coffee Corporation
Wall Street Deli
Zanett
Several major players are among the company’s competitors, including
Krispy Kreme, Panera, Peet’s, Quizno’s, Schlotzsky’s, Starbuck’s and
Wall Street Deli.
When a company IPOs, it also sends signals to the market via various
means. For example, Cosi was taken public by William Blair – a good
investment bank, but not exactly a powerhouse comparable to Goldman
Sachs, Merrill Lynch or CSFB. I would also look in to whether
insiders sold stock at the offering, another strong signal to the
markets that provides implicit interpretation as to insiders’ feelings
concerning the stock.
To summarize, a company such as Cosi should not have chosen the IPO
route at this point in time, especially since the company has not yet
managed to achieve financial stability and independence.
I hope this response adequately addresses your request.
Thanks,
ragingacademic
References:
Livingstone, J. L. (1992). The Portable MBA in Finance and Accounting.
New York: John Wiley and Sons.
Additional Links:
Cosi
www.cosi.com
Hoover’s Online
www.hoovers.com
Search Strategy:
Yahoo Finance, Hoover’s Online
“COSI” |
