Will McDonald's let the revolution pass it by?

William Ackman, founder and managing partner of hedge fund Pershing Square Capital Management has recently campaigned to better use McDonald’s assets by spinning off its existing corporate restaurants, borrow against its high value real estate holdings, and use the cash to buy back its shares.

McDonald’s is the epitome of global capitalism and THE pioneer of global franchising. So, it is no wonder that its top brass were savvy enough to meet privately with Mr. Ackman to explore the proposal. It is estimated that his plan would lift McDonald’s share prices by some 50% (WSJ: subscription needed), quite a boon for McDonald’s shareholders.

Yet there is considerable corporate resistance. McDonald’s CEO Skinner and CFO Paull have publicly refused the deal. Paull argued the Ackman plan would undercut the company's critical and close relationships with its franchisees. Spinning off company-owned restaurants into a separate big company to be bought by franchisees would threaten the smaller owners at the heart of the company's success.

Huh?? Something is not right.

First, McDonald’s would net some $3.27 billion from an IPO of its corporate stores, some $700,000 per company-owned store, including net debt. That’s a sizeable chunk of money that could be used for its long-term development. But then it could gain additional franchise fees as its IPO franchises its corporate stores in order to maximize returns. The company would get a double bonus.

Such a revolution is also in the interest of its franchisees. Granted, franchisees can be afraid of change, particularly re-engineering a corporate structure that has historically served them well enough. There are many who would love to have the opportunity to buy corporate restaurants in their locale instead of competing with them. Franchisees naturally feel out-competed when they have to go against the resources and potential corporate preferences in supporting their own assets over a franchisee’s. But it goes even deeper than those natural instincts among franchisees. It goes back to the beginning of McDonald’s history. Ray Kroc himself was no fan of corporate restaurants and thought the network would be better if franchisees themselves ran each restaurant operation. Certainly, no one works as hard as a franchisee to make sure their restaurant is a success.

In an op-ed from The Wall Street Journal, Alan Murray wrote (subscription required) concerning these recent events, “The stock price [of McDonald’s] and the dividend to shareholders have nearly tripled since 2002. And the company has ranked at the top of the Dow Jones Industrial Average in the past two years in terms of return to shareholders…there's something surreal about McDonald's coming under attack from a hedge-fund manager who thinks it's not doing enough for its shareholders.”

There is nothing surreal about it. It’s called capitalism. It simply isn’t good enough to create shareholder value; capitalism’s creed is to maximize it. Murray continues,“Even the very best management teams aren't safe in today's free-for-all corporate environment…The old order of things is definitely gone. But a new order is waiting to be born. McDonald's quandary proves the point.”

True, true, true. McDonald’s executive team has my sympathy but it has been my experience that the old order of things should constantly be looked at, tweaked and if needs be re-invented. It’s not easy at the top. In difficult and fast-moving times, the corporation needs leaders open to new and sometimes revolutionary ideas because if they don’t lead the revolution, the revolution will eventually overtake them in a most unsettling way.