“I wish I knew how to quit you.â€
Perhaps that may be a bit overstated, but those words from “Brokeback Mountain†come to mind to describe the latest back and forth between Men’s Wearhouse and Jos. A. Bank Clothiers.
On Thursday, Jos. A. Bank announced that its board had unanimously rejected the latest offer from Men’s Wearhouse of $63.50 a share.
The rejection was no surprise. Jos. A. Bank made its choice to purchase the clothing retailer Eddie Bauer, and, despite once making a bid for Men’s Wearhouse, seems to have inexplicably run cold on a combination of the two men’s suit retailers.
But what was perhaps a bit more surprising was that Jos. A. Bank laid out the parameters for future talks with Men’s Wearhouse over a deal.
Jos. A. Bank didn’t really have a choice, though. Given statements from Men’s Wearhouse that it would consider bidding more than $63.50 a share if it were given the chance to do more due diligence on Jos. A. Bank, Jos. A. Bank’s board was forced to speak to Men’s Wearhouse. Otherwise, Jos. A. Bank would be seen as more interested in entrenching itself than in discussing all opportunities to get the best deal for Jos. A. Bank’s shareholders.
But Jos. A. Bank was careful to try to control the future course of any negotiations in its news release offering to talk. The company also went out of its way to note that it had “made no determination†to sell the company. This statement was directly aimed at keeping in place a “just say no†defense, justifying its refusal to sell to Men’s Wearhouse.
The company was also careful to note that while it would provide nonpublic information to Men’s Wearhouse, the sharing would come with conditions. Jos A. Bank stated that “we will need to understand what measures Men’s Wearhouse will agree to in order to eliminate the risk to Jos. A. Bank and its shareholders that the F.T.C. would prevent a transaction between Jos. A. Bank and Men’s Wearhouse from closing.†In other words, if Men’s Wearhouse wants to move forward with a deal, it will have to explain how it would obtain antitrust clearance from the Federal Trade Commission.
This is a real issue, since the commission is already conducting an in-depth investigation of this transaction. In other words, Jos. A. Bank is saying that it wants to hear what Men’s Wearhouse is going to do in terms of concessions as well as any fee it may be willing to pay if regulators halt the deal. This could be a significant stumbling point in any negotiations because the two are not only in the same business â€" men’s suits â€" but are also two of the main players in the tuxedo rental business. The regulators are likely to be looking for some form of concessions.
In addition, Jos. A. Bank is looking to set the tenor of any negotiation with Men’s Wearhouse by providing a draft of a potential merger agreement.
All of this is an attempt by Jos. A. Bank to continue to control the process while giving it grounds for an out, if it so chooses. By speaking to Men’s Wearhouse. Jos. A. Bank can show that it is acting in good faith. At the same time, we will see if the parties can not only come to an accommodation on price, but also the consideration offered (that is, cash or Men’s Wearhouse stock) and whether they can move past the antitrust issues.
Looming in the background is the suit that Men’s Wearhouse has filed against Jos. A. Bank in Delaware. There is a March 25 hearing on the suit. This is a sideshow more than anything. The case is about whether Jos. A. Bank’s planned $825 million purchase of Eddie Bauer is well considered and a reasonable response to the Men’s Wearhouse bid. It is not about whether Jos. A. Bank should accept the Men’s Wearhouse offer.
Delaware law is rather liberal here in giving boards discretion. So if the Eddie Bauer acquisition was carefully considered, it is unlikely to be challenged. In other words, unless its advisers failed to properly run the process for the board’s consideration of the Eddie Bauer purchase, the Delaware courts will not interfere. Even then, if the court were to do the unusual and strike down the Eddie Bauer acquisition, Jos. A. Bank is under no obligation to accept the Men’s Wearhouse offer.
This litigation is simply intended to keep the heat on Jos. A. Bank and allow Men’s Wearhouse to depose Jos. A. Bank’s executives about why they are not accepting the new offer.
The real action is thus in whether Men’s Wearhouse will now raise it bid, and, if it does, if Jos. A. Bank is going demand a pound of flesh to secure antitrust approval. It’s an odd state of affairs that Men’s Wearhouse is even paying a premium for a combination that makes so much sense.
Nevertheless, if Jos. A. Bank is pursuing a strategy to maximize value from Men’s Wearhouse, it seems to be on track. But if it has really had a change of heart and wants to resist a bid at all costs, the antitrust issues are where the board will find a reason to reject the Men’s Wearhouse deal.
But then again, almost everyone else on Wall Street thinks there should be a deal between the two. They may even be right.
