Men's Wearhouse Goes From Prey to Predator

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Financial news, like all news, is largely about conflict, so it's always heartwarming when a thing happens and everyone is like "oh yeah that is a thing that should totally happen, good thing." If you have any objection to a merger between Men's Wearhouse and Jos. A. Bank Clothiers, speak now or forever etc., because so far everyone's on board. Let's review:

1. In October, Jos. A. Bank offered to buy Men's Wearhouse, because it thought they'd be good together.

2. Shareholders agreed: Both companies' stocks went up, which is unusual.

3. Today, Men's Wearhouse offered to buy Jos. A Bank, because it thought they'd be good together.

4. Shareholders agreed: Both companies' stocks went up even more.

So pretty good! Now careful readers will notice that that chronology is missing a step 2.5, in which, despite shareholder enthusiasm for the deal, Men's Wearhouse turned down the Jos. A. Bank offer (which expired on Nov. 14) in order to wait two weeks and then launch its own. So there is some disagreement. And it is the awkward kind: Not "Wouldn't these companies be good together?" but rather "Who should run the combined company?"

Men's Wearhouse makes its case today in really just a blizzard of jargon, check out this slide:

Slide 14. What color is this? Orange? Red? Burnt sienna? Anyway, bad slide, but whatever it's not like they're a fashion company or anything.

Nice work everyone, go capitalize on that compelling strategic combination.

But actually it's not just the jargon; Men's Wearhouse is a bit bigger than Jos. A. Bank and so plans to finance the deal out of cash on hand and new debt, rather than through Jos. A. Bank's plan of getting a weird equity infusion to pay for its deal. Which probably does make a bit more sense, though the alternative of a no-new-debt, all-stock merger would avoid financing questions altogether. (But would make management questions rather touchier: If there's no acquirer, who gets to be chief executive officer?)

Somewhere between jargon and real financial argument lie synergies; Men's Wearhouse thinks it can save $100 million to $150 million a year in purchasing efficiencies, customer loyalty, reduced overhead and so forth. That partly accounts for why shareholders are so overjoyed, though there also seems to be some multiple expansion in their valuation of the future company. Here is some very toy math around the pro forma company, assuming that today's Men's Wearhouse price reflects market expectations for what the new company will be worth:

The price per share of MW and JOSB are from around 1pm today. Unaffected prices (October 8 close) were $35.24 and $41.66, respectively.

Since everyone -- both managements, both boards, both sets of shareholders -- agrees that what's best for shareholders is a merger, it would be awkward if a merger didn't happen. Will it happen? I mean, everyone seems to think so, though Jos. A. Bank is being coy, saying only that it will "evaluate the proposal and respond in due course."

It'd be tough to say no, right? I mean, you could haggle over price, I guess; Jos. A. Bank has traded above Men's Wearhouse's offer all day so presumably shareholders are expecting that. I guess it's harder to haggle over who buys whom. Cynics certainly think that mergers are all about managers expanding their empires for their own greater glory, rather than about increasing shareholder value. It would be hard for Jos. A. Bank's management to reject this deal on "No, really, we should be in charge" grounds without sounding a bit self-aggrandizing.

Though there is a bit of an opening for those arguments, in that Men's Wearhouse rejected Jos. A. Bank's bid in part "because it came at a moment of upheaval for the company, which in June ousted founder George Zimmer as executive chairman." Wouldn't you want your company run by the management team that was least recently, um, upheaved? But from today's presentation, I guess the moment of upheaval has passed and the new management can get back to using its strategic principles to capitalize on compelling strategic combinations, strategically.

  1. Since mergers normally destroy value! Or whatever.

  2. Also I am just going to put this here because some people will be interested:

    [imgviz image_id:icW.Jc0Gpp1Y]

  3. Also here is just a very very toy sensitivity table for the pro forma company's stock price, because I miss Excel:

    [imgviz image_id:inVH1rD_t7lM]

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