Men's Wearhouse Needs to Put on Its Thinking Cap

In light of Jos. A. Bank's (NASDAQ: JOSB  ) $825 million planned purchase of outdoor apparel maker Eddie Bauer, Men's Wearhouse (NYSE: MW  ) said last week it would reconsider its own $1.6 billion, or $57.50 per share, bid for its men's suit rival. Although Bank said the maneuver has nothing to do with thwarting Men's Wearhouse -- it's all about growth, don't you know? -- the Eddie Bauer acquisition would fortuitously have the same effect.

The bitter back and forth between Bank and Men's Wearhouse has been ongoing since October, when the former offered to buy the latter for $2.3 billion, and was summarily rejected. When Men's Wearhouse deployed the so-called Pac-Man defense, turning around and making its own bid for Bank, it was seen as a bit of genius as all of Bank's arguments for the deal could now be used against the company. Not to mention that the retailers' tie-up still made a lot of sense.

Jos. A. Bank says it still could, but only if Men's Wearhouse pays much more than it has offered to date. Banks' board of directors would have to first determine whether a new offer "would reasonably be expected to create greater value" than what it would realize from the Bauer deal, which also includes the buyback of up to $300 million in company stock. By giving itself an out, for which it would pay hedge fund operator Golden Gate Capital, the owner of Eddie Bauer, a $48 million breakup fee, Bank is able to maintain the pretense the acquisition is for growth and not about blocking Men's Wearhouse.

Source: Wikimedia Commons.

And that's not wholly without reason, either. Jos. A. Bank has said all along that if its acquisition of Men's Wearhouse fell through it would pursue other deals to grow the business. Certainly the Eddie Bauer bid is in that vein. As Bank also noted, it helps diversify its offerings, not just into outdoors wear but also into women's clothes, which could give it some needed variegation to help smooth out business cycles. Jos. A. Bank said it expects the combined company will generate more than $2.1 billion in revenue this year, effectively doubling the sales it recorded last fiscal year.

Men's Wearhouse does need to rethink the bid since a combination with Eddie Bauer makes Jos. A. Bank likely too big to acquire outright. Having given the rationale that the more immediate value for shareholders is with this new purchase -- along with the breakup clause included -- Bank finds itself a better defense from attack by those like Eminence Capital that bet big on it being acquired by Men's Wearhouse.

Men's Wearhouse has said its offer runs through March 28, while Jos. A. Bank expects its Eddie Bauer deal to close by April 30. Because the Men's Wearhouse-Bank bid is undergoing antitrust review, there might not be enough momentum to keep the offer alive. It would seem that unless there's another surprising turn of events, both companies look like they'll remain independent.

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