Men’s Wearhouse Dusts Off the Pac-Man Defense

29-Nov-2013

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Men’s Wearhouse Dusts Off the Pac-Man Defense

By STEVEN M. DAVIDOFF

Deal aficionados have a Thanksgiving present. Men’s Wearhouse has turned the tables on Jos. A. Bank Clothiers, offering to acquire the company, which had previously bid to acquire Men’s Wearhouse. What fun!

Men’s Wearhouse’s Pac-Man defense is a beloved tactic that first arose in the 1980s during the legendary Martin Marietta-Bendix battle. Since then, the Pac-Man defense has occasionally been employed by the targets in hostile battles. It was last seen more than 13 years ago and involved a counteroffer by Elf Aquitaine for Total Fina in 1999 and a counteroffer by the Chesapeake Corporation for Shorewood Packaging in 2000. The typical result of these battles is a combination of the warring companies. The question is, who becomes the management and which set of shareholders, if any, receive a premium?

In this vein, Men’s Wearhouse’s bid is an acknowledgment that the two companies should be combined. And like other Pac-Man situations, the question is, who is the better acquirer, and perhaps even more important, which management team should run the combined operation?

A Pac-Man defense has loomed in the background since Jos. A. Bank first bid. At the time, Jos. A. Bank’s chairman, Robert Wildrick, told The Wall Street Journal that Jos. A. Bank would be “receptive to being bought instead by Men’s Wearhouse if it would pay the same 42 percent premium Jos. A. Bank says it is offering.” Even Ricky Sandler, the chief executive of Eminence Capital, which owns 9.8 percent of Men’s Wearhouse and is agitating for a deal, has stated that the companies are a natural fit that could create up to $2 billion of value. Shares of Men’s Wearhouse are already up nearly 10 percent, perhaps in support of this argument, and those of Jos. A. Bank are up 11 percent.

The bid by Men’s Wearhouse is an acknowledgment of this fact and highlights that Men’s Wearhouse is arguably better positioned as the acquirer. Men’s Wearhouse is bigger, with a market capitalization of $2.4 billion compared with $1.57 billion for Jos. A. Bank. Men’s Wearhouse’s bid also knocks Golden Gate Capital out of the bidding. Golden Gate was Jos. A. Bank’s co-bidder, which agreed to put up $250 million in additional financing. And the cost to Men’s Wearhouse to finance a Jos. A. Bank offer would be lower because of decreased leverage and less borrowing. Men’s Wearhouse highlighted this point in its news release, noting that its bid was not contingent on financing.

So given Men’s Wearhouse’s better footing, how does this play out?

Jos. A. Bank has no choice but to talk to Men’s Wearhouse, given that the company has acknowledged that a combination is a good idea. This is also not a case where either company goes hostile; the pressure from shareholders will be on both to reach a deal. The question thus becomes whether this turns into a merger of equals, in which the companies combine through a stock-for-stock exchange with a premium. But Men’s Wearhouse is likely to resist such a maneuver because it is the bigger company.

These negotiations will turn on which company is the better acquirer and which management team will prevail. Men’s Wearhouse acknowledged this in its news release, stating that “our experienced management team is best positioned to execute the integration of our companies” but that the exact management of the companies was up for discussion.

Going forward, the questions of management and allocating a premium will become paramount. No doubt Eminence will want to have a say about this, but there is substantial overlap in the shareholdings of each company. According to Capital IQ, BlackRock owns about 9 percent of each company and Vanguard about 6 percent. For the institutions that own shares in both companies, a high premium may actually be a disadvantage. In either case, it is also another reason for a combination, particularly with up to $2 billion of value that can be unlocked.

Let the negotiations commence

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