Fast-food chain Wendy's (NYSE:WEN) is reportedly merging with Triarc Companies (NYSE:TRY), which owns and operates fast-food stalwart Arby's. On the surface, this sounds like good news. After all, the combined companies will now sport about 10,000 units and $12.5 billion in sales, making the new unit a very formidable player in the fast-food sector. Triarc is paying roughly $26.78 a share, which is approximately a 6% premium over Wendy's stock price prior to the announcement, according to recent Associated Press stories. (To learn more about this process, read The Merger - What To Do When Companies Merge.)

I would argue that this omelette of a merger is not all its cracked up to be, and that investors may end up with a bad aftertaste from deals that are approached like this one.

First, some background
Over the last several quarters billionaire Nelson Peltz and Triarc had reportedly been courting Wendy's and essentially kicking the company's tires. In fact, last summer news reports suggested that Peltz might offer between $37 to $41 a share for Wendy's. However, for numerous reasons a deal wasn't hammered out until just this past week.

Beware Of Deals That Linger
I firmly believe that Peltz and his crew would have signed a deal with Wendy's last year, probably in the mid- to high-$30s. However, Wendy's board seemed to waffle at Peltz's interest. Plus they got caught up in disagreements during the courting process, and in the interim the playing field changed. While the board was weighing its options, it seemed to get distracted - but, its competitors did not.

For example, over the last year the industry's 800-lb gorilla, McDonald's (NYSE:MCD) introduced several popular new menu items ranging from premium coffee to the "angus burger". And Burger King (NYSE:BKC) ran popular promotions related to the "Simpsons" and "Transformers" and has benefited from extended operating hours. Meanwhile, Wendy's pipeline and promotions appeared to lack serious beef. And its efforts in the lucrative breakfast market seemed to pale in comparison. I think that Peltz saw the business was vulnerable and knew that he had leverage over Wendy's board. (Learn to analyze restaurant stocks, so that you can put your money where your mouth is, in Sinking Your Teeth Into Restaurant Stocks.)

Activist Activity Isn't Always Good
When it was first reported that Peltz might be interested in Wendy's, even I was excited. I mean Peltz/Triarc/Trian (its investment arm) picked up almost 10% of the stock, and so his allegiance certainly seemed to be aligned with the common shareholder.

However, it's important to note that at the same time Peltz and Triarc can afford to be patient and to wait to find efficiencies from the business combination. They don't need a big premium up front because over the long haul it looks confident that they can find enough cost savings or grow the business enough to justify the transaction.

Another point is that at the end of the day Peltz and Triarc are probably going to do what's best for them. So, if that means selling off land, changing the menu or the appearance of the stores, then they'll probably do it. Dave Thomas and his family's wishes are probably of little concern.

Activists that hold the common stock may generally have shareholder's interest at heart. But at the end of the day, they often have more patience and can afford to maintain the investment for an extended period of time. Plus they'll usually protect their own hide first if it means making a buck. (Learn more about activists, and how to interpret their activity in Activist Hedge Funds.)

Bottom Line
I think that there are some lessons that can be learned from the Wendy's merger. Namely that deals that linger can be dangerous, and that activist activity might not always be a positive.

Related Articles
  1. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  2. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  3. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  4. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  5. Stock Analysis

    Tribune Media: An Activist Investment Analysis (TRCO)

    Learn more about the breakup of Tribune Company, once a powerful newspaper and broadcasting giant, and the role of activist investor Cliff Robbins.
  6. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  7. Stock Analysis

    Air Products and Chemicals: An Activist Investment Analysis (APD)

    Learn about the productive, and uncommonly friendly, activist investment made by Bill Ackman into Air Products and Chemicals.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center