On Wednesday, the first volleys of a war started when Men’s Wearhouse issued a news release rejecting a $2.3 billion offer from Jos. A. Bank Clothiers to acquire the men’s clothing company. For spectators, it’s not only a battle to watch for its outcome but also for how hostile takeovers have evolved.
Men’s Wearhouse flat out rejected Jos. A. Bank’s offer, bringing to mind the shrill “just say no†defenses of the 1980s.
Men’s Wearhouse claimed that the offer “significantly†undervalued the clothier. This wasn’t Men’s Wearhouse’s only complaint. It also called the bid “opportunistic†and “subject to unacceptable risks and contingencies,†as Jos. A. Bank’s proposal is subject to due diligence and the retailer has only a highly confident letter for its debt financing from Goldman Sachs rather than committed financing. To boot, Men’s Wearhouse stated that the bid “could raise significant antitrust concerns.â€
Men’s Wearhouse not only rejected Jos. A. Bank’s proposal but also, in another maneuver from the 1980s, adopted a poison pill, which effectively limits a shareholder to 10 percent ownership of the company (a threshold that rises to 15 percent if the shareholder is a passive one).
For now, Men’s Wearhouse’s outright rejection has been validated by the market. A number of analysts also called the offer price too low. On Wednesday the stock price of Men’s Wearhouse closed a few cents over the $45 a share that Jos. A. Bank offered, implying that the market thinks a higher bid is not only likely but justified as well.
While Men’s Wearhouse is currently saying no, it may soon find itself pressured by the new shareholder forces in our capital markets.
A few months ago I deemed the hostile offer on life support, if not dead. The reason was that companies no longer wanted to take the risk that a hostile bid involved. Bidders instead preferred to rely on unsolicited offers that would pressure the target to come to the table.
Jos. A. Bank appears to be following this more modern strategy. The first sign of this is that the company has locked itself out of truly making a hostile bid. Since the advent of a poison pill, an effective hostile bid is typically accompanied by a proxy contest to unseat the target’s directors and remove the pill. This would clear the way for the bidder to purchase the company despite the board’s resistance.
But Men’s Wearhouse’s annual meeting of directors was Sept. 10, meaning that Jos. A. Bank would have to wait almost a year to begin a proxy contest.
Men’s Wearhouse is incorporated in Texas, which means that while the company allows shareholders to remove directors by written consent at any time, such a removal can only be done for cause. Cause, however, is essentially defined as willful misconduct, something that does not exist here since the directors are merely saying no. So for Jos. A. Bank a full hostile option is effectively foreclosed.
Jos. A. Bank lawyers are at Skadden, Arps, Slate, Meagher & Flom and its banker is Goldman Sachs, so it has competent advisers on its side. In this light, it is not hard to conclude that the company consciously avoided making a hostile bid.
Instead of relying on a hostile offer, Jos. A. Bank is most likely counting on two things to get a deal. First, the two companies have a large overlapping shareholder base. BlackRock, for example, owns 9 percent of Men’s Wearhouse and 8.2 percent of Jos. A. Bank. Jos. A. Bank is likely to count on these shareholders to pressure Men’s Wearhouse into a deal.
Second, almost every bidder bids low in the first round to allow room for an increase, but a lower bid also pushes shares into the hands of arbitrageurs and hedge funds. About 30 percent of Men’s Wearhouse’s shares were traded on Wednesday, meaning that it appears that this has happened.
Jos. A. Bank is most likely hoping that shareholder pressure from overlapping shareholders and arbitrageurs will push Men’s Wearhouse to a deal. And there is also the possibility that a hedge fund shareholder activist will take a significant stake, focusing these forces on Men’s Wearhouse. In this light, Men’s Wearhouse’s poison pill is really about limiting shareholder activist hedge funds from building too big a stake and working together.
It all means that Men’s Wearhouse’s hard-line 1980s-like strategy may not last and may go the same way as Michael Jackson’s moonwalk.
