Jones Apparel Stirs Up Maxwell

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The financial flexibility we talked about last week when discussing Jones Apparel Group's (NYSE: JNY) fourth-quarter and full-year 2003 financial results was put to work today, with the company announcing an offer to buy Maxwell Shoe (Nasdaq: MAXS) for $20 per share in cash, or approximately $300 million. Importantly, this doesn't constitute an actual agreement -- Maxwell management has yet to formally respond. Nevertheless, Maxwell shares jumped ahead nearly 20% on the news.

All this is somewhat unusual, as companies generally don't like it when merger rumors hit the Street before the deal is ready to go. The reasons for this are obvious enough: The acquiring company might see its target's shares rise suddenly on news of its interest, which could make the two parties less amenable to a deal -- perhaps disappointing investors in the company to be purchased (assuming it's a friendly, and not a hostile, purchase offer).

A letter, delivered today to Maxwell's chairman and CEO, was attached to Jones' press release. Jones is making its offer -- and the approval of its board -- known, it would seem, because the company says Maxwell shares have risen significantly on heavy trading volume since Feb. 19, the day Jones first approached Maxwell to announce its interest. This is perhaps debatable, though the shares did pop a bit yesterday on heavier-than-usual volume.

The deal seems to make strategic sense for Jones: Its recently acquired Kasper division, which owns the AK Anne Klein apparel business, licenses the footwear business of the same name to Maxwell. It's worth noting that Jones would pay significantly more, on a price-to-sales basis, for profitable, growing, and cash-generating Maxwell than it did for then-bankrupt Kasper. Maxwell at this price would command about 1.3 times sales, while Kasper fetched about 0.5 times sales.

At last check, Maxwell shares were fetching more than the $20 Jones is offering. Though the company's overtures to Maxwell stress cooperation, this story looks as though a simple resolution might not be in the offing.

Talk about Jones' move on our Jones Apparel discussion board.

Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story. He can be reached via email.