Men's Wearhouse Inc (MW.N) struck back at Jos. A. Bank Clothiers Inc JOSB.O with a $1.5 billion bid to acquire the suit and tuxedo retailer, only weeks after rejecting a takeover offer from its smaller rival.
Men's Wearhouse, under pressure from activist shareholders to merge, offered $55 per share in cash for Jos. A. Bank, a offer that values the smaller retailer's stock at a 9 percent premium to its close on Monday.
Jos. A. Bank shares rose as much as 12.5 percent on Tuesday to a two-and-a-half year high of $56.91, topping the offer in a sign investors might be expecting a better bid. Men's Wearhouse shares rose as much as 12 percent to a year-high.
"For the shareholders of Men's Warehouse and for Jos. A. Bank, Christmas has come early. They will see huge benefits to the merging of these two companies," said Jerry Reisman, an M&A expert at law firm Reisman Peirez Reisman and Capobianco LLP.
The combined company would have 1,700 stores that rent tuxedos and sell suits, a scale that in the past has raised antitrust questions about a merger.
The retaliatory offer from Men's Wearhouse, which the company said implies an enterprise value of about $1.2 billion for Jos. A. Bank, follows pressure from its largest shareholder, New York-based hedge fund Eminence Capital LLC.
Eminence, along with other hedge funds that hold about 30 percent of Men's Wearhouse shares, had tried to persuade other investors to pressure the company into accepting the takeover offer from Jos. A. Bank.
"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 Chief Executive Ricky Sandler.
The last person to push Men's Wearhouse to sell itself was its founder, George Zimmer, known to U.S. television audiences for his advertising catch phrase, "You're going to like the way you look - I guarantee it."
Zimmer was ousted by the board in June after arguing for a sale of the company to an investment group. At the time, he accused the board of trying to silence him for expressing concerns about the direction of the company he founded 40 years ago.
Men's Wearhouse is serious about acquiring Jos. A. Bank and is not simply trying to force the company to raise its bid for Men's Wearhouse, according to sources familiar with the process.
"Viewed in the most favorable light, by making this offer, Men's Wearhouse is agreeing with Jos. A. Bank that combining the companies makes sense, but is trying to capture the upside for its own shareholders rather than giving it to Jos. A. Bank's shareholders," said Spencer Klein, co-head of mergers and acquisitions at law firm Morrison & Foerster. "Viewed in a more unfavorable light, it can be perceived as another in a line of defensive moves designed to keep the existing board and management of Men's Wearhouse entrenched in place."
Jos. A. Bank confirmed that it had received the acquisition proposal and said it was evaluating it with its advisers. As of August 3, the company had cash and cash equivalents of about $333.2 million and no long-term debt.
The unusual tactic of a target firm turning around to try to buy a suitor is known as the Pac-Man defense, named after the 1980s video game in which Pac-Man turns on the ghosts trying to kill him.
Other situations in which the Pac-Man defense was used include French oil company TotalFina's $43 billion bid for rival Elf Aquitaine, which countered with a $50 billion offer in 1999, and the takeover battle between aerospace companies Bendix Corp and Martin Marietta in 1982.
Men's Wearhouse swiftly rebuffed Jos. A. Bank's offer in October to buy it for $2.3 billion, or $48 per share. Jos. A. Bank walked away from the bid on November 15, although it did not rule out another bid.
In a statement on Tuesday, Men's Wearhouse said it had the "advantage in scale, growth and performance" to combine the two chains.
"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," said Bill Sechrest, lead director of the board of Men's Wearhouse.
Men's Wearhouse, based in Fremont, California, operates more than 1,100 stores under the Men's Wearhouse, Moores and K&G banners.
Jos. A. Bank, a century-old seller of men's tailored and casual clothing, has more than 600 stores in the United States.
"Men's Wearhouse's leadership was not only personally offended by the efforts of Jos. A. Bank to try to take them over, but they see this as an opportunity to strengthen their business by eliminating the competition," said Reisman.
After rejecting the October offer, Men's Wearhouse also adopted a poison pill to prevent a hostile takeover.
It also said at the time that a combination of the two companies raised antitrust issues.
Jos. A. Bank shares were up 11 percent to $56.21 in afternoon Nasdaq trade, while Men's Wearhouse shares were up 9 percent to $51.30 on the New York Stock Exchange.