Men's Wearhouse's $1.2 billion turnabout offer for Jos. A. Bank Clothiers might have painted the smaller men's retailer into a corner.
After all, it was Jos. Bank's idea to combine the two companies with its now-withdrawn $2.3 billion offer for Men's Wearhouse.
But Hampstead-based Jos. Bank is taking its time to respond and suggested Thursday that it was exploring other acquisition options.
Perhaps Jos. Bank is playing coy and trying to extract a better offer from Men's Wearhouse, given its solid third-quarter results, but maybe it intends to spurn the offer just as Men's Wearhouse snubbed its bid. And maybe, one analyst suggested, it will go back after Men's Wearhouse with a richer offer.
A merger of the nation's two biggest specialty men's apparel chains would create the largest specialty retailer for men's clothing, a $3.5 billion company with more than 1,700 stores that some analysts said would better compete with department stores.
"It's likely a deal gets done," said Mark Montagna, a senior research analyst with Avondale Partners LLC, a Nashville-based investment bank.
Montagna said he believes Jos. Bank's board is taking its time to review the offer by Houston-based Men's Wearhouse. "They're going to take their responsibility seriously and do whatever they think is best for shareholders," he said.
Jos. Bank's shares have surged above the $55 a share offered by Men's Wearhouse, closing Friday at $56.72, which suggests that investors expect a higher price.
Men's Wearhouse did not respond to requests for comment.
But some aren't so sure that the two retailers will wind up at the corporate altar.
"It reminds me of two teenagers fighting, a war of words," said Mark Millman, CEO of Millman Search Group, an Owings Mills-based retail executive hiring firm. "I don't see anything materializing any time soon. The companies are so different. They have a different culture, different markets, different strategies. I don't see a fit in culture, customer, concept."
Millman also wondered about potential antitrust hurdles on the horizon that could make all the back-and-forth between the two leading men's chains a waste of time.
Jos. Bank would be better off pursuing another retail target, Millman said. Possibilities could include a regional specialty chain in women's apparel or another specialty, he said.
On Thursday, Jos. Bank CEO R. Neal Black said the retailer had "several potential acquisition candidates we are evaluating that might meet our criteria."
Black said that Jos. Bank's business strengths in retail could be applied to companies outside men's apparel.
But even as Jos. Bank reviews its options, Black said he wants the retailer's executives to remain focused on what's left of the holiday selling season.
"I think they are doing the right thing by focusing on the Christmas selling season," Montagna said. "That's where they make so much money, and that's also to the benefit of shareholders. They have to do well."
Jos. Bank has struggled to back off from its successful buy-one-get-one promotional strategy, but appears to have turned a corner with its third-quarter results announced Thursday. Sales climbed 6.3 percent, to $247.5 million, in the three months ended Nov. 2, or $2.5 million higher than analysts surveyed by Thomson Reuters had expected.
Earnings per share would have risen 9 percent, to 51 cents a share, in the quarter if not for the $1.2 million of legal and professional expenses related to its Men's Wearhouse bid. Instead, earnings per share rose to 49 cents from 47 cents.
The quarter's financial performance could give the company some leverage if it does engage in talks with Men's Wearhouse, one expert said.
"I'm sure what they'll try to do is tout the earnings growth as a way to push the offer price up, that we're exceeding sales and earnings and that translates to a higher value," said Steve Isberg, an associate professor of finance at the University of Baltimore's Merrick School of Business. "It could influence where negotiations go."
Isberg said it makes more sense for the companies to combine because department stores dominate the men's apparel market and retail consolidation hasn't left much room for specialty retailers to be profitable outside the higher end.
Analyst Richard E. Jaffe of Stifel Nicolaus has estimated annual synergies of $100 million to $150 million over three years because of more efficient purchasing, customer service and marketing, and streamlining of corporate functions.
"In essence, what Men's Wearhouse is saying is, 'Our two companies combined makes sense, but the leadership should be from our organization, and we are going to look to acquire you,'" said Karyl Leggio, dean of the Joseph A. Sellinger School of Business and Management at Loyola University Maryland.
Bank has several options, including accepting the offer as is, which is unlikely, negotiating for a higher price or even coming back at Men's Wearhouse again, perhaps with a higher offer, she said.
"Ordinarily, the executive team doesn't want to be out of power," she said. "Jos. Bank might be willing to make a higher offer if it has access" to Men's Wearhouse's books.
"My money is on the [possibility] that Jos. Bank will come back with a higher offer for Men's Wearhouse," she said. But "they've got to be careful. There's a price where it's not worth it to bid higher. You don't want to win at all costs."
Under the current offer, hammering out a deal would hinge not only on price, but on reaching agreement over how to compensate Bank shareholders and senior management, Isberg said.
"Those are two big issues," he said, but Men's Wearhouse "investors certainly want it to happen."
Eminence Capital LLC, which owns 9.9 percent of Men's Wearhouse and waged a campaign to urge the retailer to restart merger talks, has said it sees "substantial benefits of merging with Jos. A. Bank."
Even Black sees the counteroffer from Men's Wearhouse as something of a win, saying, "They now agree a combination of our companies make sense."