Big Mac Attack

McDonald’s unveiled plans late last year to haul
away Colorado-based Boston Chicken and use
what’s left of the struggling company for firewood, in a cash deal worth
about $175 million. A federal court overseeing bankruptcy proceedings for
the chain approved the deal yesterday.

Big Mac is about to put the big smack-down on Boston Chicken. And Ronald
McDonald looks a lot like “Chainsaw Al” with floppy shoes and a side order
of nuggets right about now. How in the heck did we get here? And what ever
happened to finger lickin’ good!?

Pull up a chair, and sit a spell. Here’s a fun fable for investors who’ve
never heard of the riches to rags story that took place long before Al Gore
ever invented the Internet.

Way back in the winter of 1993, a funny little restaurant chain decided to
hit the new issues market and shake the IPO money tree with a revolutionary
new idea. There was more than its share of hyperbole surrounding the
offering, and when it opened at 10 bucks a pop, shares soared to nearly $25.

Now here’s a little footnote – 150% gains back then were about as common as
a solar eclipse. It was something to get excited about, and it sure hogged
the water-cooler chat. It caused such a stir on Main Street because
everyday people were familiar with the product, and most folks just love
get-rich-quick stories.

For consumers tired of the same ol’ burgers and fries, Boston Chicken was
marketed to soccer moms everywhere as the healthy fast-food alternative.
And the same folks who feasted on yummy roasted chicken and country cookin’
were the same retail investors who placed that call to their brokers and
pushed the stock all the way up past $40.

This phenomenon was like a train rolling downhill, and the company’s
underwriters were greasing the wheels. Lucrative underwriting deals were
the order of the day, and brokers lined their pockets with the windfall.
Merrill and Morgan Stanley shook their pom-poms and hoodwinked investors to
stay put.

Only problem was, Boston Chicken was expanding faster than the love bug
virus, and this chicken ate cash. Lots of it. To the tune of $1.5 billion
to finance more than 1,200 franchisees nationwide. And, the company cooked
its books to hide some early signs of trouble that suggested the numbers
didn’t support its hyper-expansion plans.

But investment banks turned a blind eye to it and busied themselves finding
additional buyers for the convertible bonds, while padding their bottom
line with more underwriting fees. By mid-1997, Joe Investor was left
holding the bag…as usual.

Amidst much-publicized finger-pointing and no shortage of duck-and-cover,
investors tarred and feathered Boston Chicken, running the restaurant chain
out of town. Shares plummeted, and President and CEO Larry Zwain got the
boot. Swimming in a billion dollars worth of debt, Boston Chicken headed
for Chapter 11.

That’s where we left our hero, until McDonalds rode up looking for a good
deal. And by the looks of it, the burger chain got one. Not for the
chicken, but the real estate. Boston Chicken still runs 850 restaurants in
33 states. It’s the old adage: bad business, good dirt. And Mickey D’s
wants to replace many of the existing outlets with pizzerias and spicy food.

As expected, the deal leaves bond and shareholders with nothing and even
gives most creditors the shaft. Today, the penny stock is a day trader
special at just $0.07, and the story behind this once-highflying Wall
Street darling serves as a cautionary tale.

All in all, McDonald’s got a whopper of a deal, and the little people were
left with a nothing burger…as usual.

Any questions or comments, love letters or hate mail? As always, feel free
to forward them to

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