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Blaming the Bogeyman

16 November 2021

(St, Louis Post Dispatch)

November 14, 2021 (Dave Nicklaus)

When Panera Bread went private four years ago, longtime CEO Ron Shaich had nothing good to say about the public markets he was leaving behind.

In a series of interview and speeches, he lambasted Wall Street’s fixation on quarterly results and the activist investors who sometimes targeted his company. “Our public markets have become increasingly shortsighted, and indeed hostile, to companies like Panera,” he told the National Press Club in 2019.

Now, Panera is returning to those very same markets. Panera Brands, which also includes the Einstein Bros. Bagels and Caribou Coffee chains, announced Tuesday that it plans to file for an initial public stock offering.

Shaich is no longer with the company, having left in 2019 amid acrimony over three employees he tried to hire for a new venture. The company’s IPO plans raise an interesting question, though: Have the markets changes, or were the complaints about short-termism exaggerated all along?

Radhakrishnan Gopalan, a professor of finance at Washington University’s Olin Business School, believes the latter. “This idea of public markets and short-termism is a bogeyman that companies raise whenever they want to go private.” he said.

Shares do sometimes plummet after a quarterly earnings surprise, but that’s just part of the process of digesting new information. “From the perspective of the CEO, the market may seem to be overreacting to short-term bad news,” Gopalan said. “But research has shown that short-term bad news is often a sign of long-term trouble.”

Going private does bring advantages. Private firms tend to be more nimble, and their owners are often willing to shoulder more debt, which has tax advantages and can magnify returns.

Being publicly traded also has its pluses. Public companies can tap enormous pools of capital and can use their shares to compensate employees or buy other businesses.

For anyone who’s scared of activist investors, the private-equity world is the wrong place to look for refuge. According to one survey, private equity owners replace 58% of CEOs within two years of buying a company.

“If you go private, you have a private equity firm looking over your shoulder and they are more activist than any activist in the public markets,” Gopalan said.

Meanwhile, it’s not hard to find examples of public markets being extremely patient and forward-looking. Amazon and Tesla lost money for years, but investors believe in their visions.

Ken Crawford, senior portfolio manager at Argent Capital Management, doesn’t put too much emphasis on short-term results, and he doesn’t think other investors do either. “Investors realize that short term gains are nice to have, but they give management the benefit of the doubt over the long term,” he said.

The largest owners of public companies these days tend to be index funds, which are the ultimate buy-and-hold investors. Private buyers don’t necessarily have such a long-time horizon.

“They might not be quarter-to-quarter focused, but most private equity funds are looking to sell to another buyer, or go public, in three to five years,” said Richard Ryffel, director of wealth management at Clayton-based First Bank.

As it happens, that’s exactly how long JAB Holding, a Luxembourg company controlled by Germany’s Reimann family, kept Panera private.

Shaich was targeted by activist investors a couple of times, but he fought them off and delivered investors a 9,000% return over 18 years. The public markets provided the capital for Panera to grow from fewer than 100 bakery cafes to 2,000 and the company was worth $7.5 billion when JAB bought it.

Those are pretty good results for someone operating allegedly hostile territory.