Under pressure from its shareholders after rejecting a takeover by Jos. A. Bank, Men's Wearhouse turned the tables Tuesday, proposing to buy its smaller rival for $1.2 billion.
The offer to buy the Hampstead-based retailer for $55 a share came after Men's Wearhouse turned down a $2.3 billion acquisition bid from Bank and refused to negotiate even as some investors lobbied for a merger between the nation's two biggest men's specialty chains.
Merging the two would create a $3.5 billion men's retailer with more than 1,700 stores, improving their chances for survival in a cutthroat retail realm where they face stiff competition from department stores and online retailers.
"After a thorough review, our board concluded that an acquisition of Jos. A. Bank by Men's Wearhouse has strategic logic and the potential to deliver substantial benefits to our respective shareholders, employees and customers," said Bill Sechrest, lead director of the board of Men's Wearhouse.
Men's Wearhouse's offer represented a small premium over Bank's Monday closing price of $50.60 a share. Bank's stock surged Tuesday, rising 11.3 percent to close at $56.29 per share, suggesting that investors may expect the sale price to increase. Men's Wearhouse shares climbed 7.5 percent to $50.60 each
Bank issued a short statement Tuesday saying its board would evaluate the proposal and wouldn't comment further.
The surprise bid, however, presents problems for Bank if it wishes to remain in control of the merger, since it likely cannot argue against a merger it's been advocating.
Analysts expect Bank to be open to the offer, though that may not be good for Baltimore's corporate community. A takeover of Bank by Houston-based Men's Wearhouse likely would mean the loss of the corporate headquarters.
Such a counteroffer is known in investment banking as a Pac-Man defense, named after the video game in which Pac-Man turns on the ghosts trying to catch him.
"We believe we are the right acquirer for this combination and that our experienced management team is best positioned to execute the integration of our companies and achieve the synergies that would result," Sechrest said in the announcement.
Spencer Klein, co-head of mergers and acquisitions at Morrison & Foerster law firm in New York, said it's very unusual for a company that is the subject of a hostile bid to make a counter-hostile bid to acquire its suitor.
"It reflects an acknowledgment by the Men's Wearhouse board that the logic behind combining the two companies is solid," Klein said. "Essentially what they're saying is there will be upside as a result of putting these two companies together, and we want that benefit to go to our shareholders instead of having all those benefits go to Jos. Bank's shareholders."
It could be difficult for Bank's board to reject the idea, he said, "since they proposed putting the two companies together themselves."
New York-based Eminence Capital LLC, Men's Wearhouse's largest single shareholder, had waged a campaign to urge the retailer to re-start merger talks with Bank, trying to persuade other hedge funds and investors to push the company to consider a Bank takeover.
"We are pleased to see that the board of Men's Wearhouse agrees with us and recognizes the substantial benefits of merging with Jos. A. Bank," said Eminence CEO Ricky Sandler in a statement Tuesday.
Analysts see substantial benefit in such a merger.
Richard E. Jaffe of Stifel Nicolaus estimated annual synergies of $100 million to $150 million over three years thanks to more efficient purchasing, customer service and marketing and streamlining of corporate functions. The roll-out of Men's Wearhouse's successful tuxedo rental business could help boost Bank sales by 10 percent to 15 percent, Jaffe wrote Tuesday in an update report on the company.
"The benefit of taking over your largest rival and becoming the largest specialty retail channel for men's clothing … is significant, albeit difficult to quantify," Jaffe wrote. "We have seen the benefits accrue to TJX and Macy's over time as these retailers acquired their rivals and used their size and market strength to dramatically improve profitability."
The men's apparel retail market is dominated by department stores, said Steve Isberg, an associate professor of finance at the University of Baltimore's Merrick School of Business.