In the cheap-suit business, the hunted has become the hunter. Less than two weeks after Jos. A. Bank (JOSB) ended its bid to buy Men’s Wearhouse (MW), the latter has turned around and tried to buy the company whose advances it recently rebuffed.
In the M&A world, this is known as the Pac-Man defense: The target runs away, eats a poison pill, then turns around and tried to eat its pursuer. The slight difference in this case is that the original bid of $48 per share to buy Men’s Wearhouse was never all that hostile on the part of Jos. A. Bank, just persistent.
Men’s Wearhouse is now offering $55 per share to acquire its counterpart, a 9 percent premium to the stock’s closing price on Monday. Confusing the issue is that when turning down the initial bid, Men’s Wearhouse said a tie-up between the two companies raised anti-trust issues.
Assuming a combination of the two companies makes some sense, which should be the acquirer and which the acquired? Here are a few ways to think about it.
•Size Men’s Wearhouse is a far bigger operation. The Houston-based retailer has almost 1,000 stores, including a footprint in Canada and the U.K., compared with Jos. A. Bank’s roughly 600 locations, which are confined to the U.S. In the most recent 12 months, it reported sales of $2.5 billion, slightly more than double that of its target. In short, Men’s Wearhouse executives may be more adept at bringing economics of scale to bear and handling a large supply chain.
•Quality Scale aside, Jos. A. Bank, by many measures, is better run. In the past five years, its return on equity has been double that of Men’s Wearhouse and its 7 percent profit margin has also been nearly twice that of its new suitor. What’s more, Jos. A. Bank just increased its earnings outlook. In the recent quarter, Men’s Wearhouse posted a 28 percent decline in profit, as virtually every facet of the business flagged, from suits sales to tuxedo rentals.
•Cash Jos. A. Bank also has a bigger war-chest, despite its size disadvantage. When the companies last shared financials in early August, the smaller retailer had $333 million in cash and short-term investments on hand, compared with $32 million at Men’s Wearhouse.
Perhaps the only thing that’s clear is that all the corporate chest-puffing is getting expensive. If both companies are bent on a tie-up, it would be wise to get the deal done and stop paying investment bankers to maneuver for scant advantage. Both firms will need every scrap of resources they have to fend off new competition from online menswear companies like J. Hilburn and Indochino, which are skipping bricks-and-mortar altogether in order to offer quality suits at decent prices.
