Hostility Reigns for Men's Wearhouse and Jos. A. Bank

Men's Wearhouse and Jos. A. Bank keep upping the stakes for a merger, pushing the end of this game further out of sight.

Jan 8, 2014 at 3:39PM

One way to increase the value of your stock is apparently to have someone bid on your business, deny that offer, counteroffer to buy their business, get denied, and then repeat that cycle. Sure, you could just sell more and make more money, but this other way seems to be working pretty well for Men's Wearhouse (NYSE:MW) and Jos. A. Bank (NASDAQ:JOSB). Both companies have seen their stocks surge more than 30% in the last six months as they trade offers.

Earlier this week, Men's Wearhouse took the bidding war to a new level, skipping out on Jos. A. Bank's board and approaching shareholders directly.

Hostilities increasing
Until I was 25, I thought a hostile takeover was a very different thing. Specifically, I had visions of Die Hard, when Hans Gruber takes the Nakatomi executives hostage. That's not quite right. In this instance, Men's Wearhouse decided that instead of talking to the Jos. A. Bank board, it should just talk directly to the people who own the company -- the shareholders. If it can convince enough of them to sell at $57.50 per share, it doesn't need the board to be happy because it will own the majority of the business.

The combination seems to be inevitable. In fact, an analyst at Belus Capital said, "Anybody who follows corporate America can see that these two companies have to be joined." That's pretty close to true. Both companies are targeting the same customers, sell the same sort of merchandise, and have similar price points. The combination of businesses would have all sorts of positive impacts on the collective businesses.

A winning combination that keeps losing
By combining businesses, the two suit sellers would eliminate overlapping store locations, cut staffing costs, and increase margins by removing the biggest chunk of competition. For investors, the only real question is who should take over whom -- and does it even matter?

Men's Wearhouse is the bigger of the two, and has more reach to start out with. If you're going to rebrand all locations to one brand, using the large one just makes cost sense. Right now, Men's Wearhouse operates almost twice as many locations as Jos. A. Bank.

The difficulty for Men's Warehouse is that Jos. A. Bank has decided not to go quietly. The company recently lowered the ownership threshold for its shareholder right plans to kick in, making it more difficult for Men's Wearhouse to sneak up on it. Now, if an unapproved shareholder ends up with just 10% of the outstanding shares, new shares will be offered to every other stockholder.

The long term
The change in its poison pill program makes Jos. A. Bank a much more difficult target for Men's Wearhouse to step up and buy without board approval. As a result, it seems incredibly unlikely that the two companies will get together without involving the boards. In the long run, that may make for a better joint venture, but it's also going to make the joining process more drawn-out.

Shareholders of both businesses are probably best off just waiting the thing out, with the assumption that eventually there will be a merger. If it all goes wrong, both companies are going to see their stocks plummet. At that point, you might consider calling in Mr. Gruber -- I hear he does good things.

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