Finally, after months of sniping and drama, Men's Wearhouse (NYSE: MW ) has successfully won over competing clothier Jos. A. Bank (NASDAQ: JOSB ) , and will complete a $1.8 billion merger. Analysts generally love the deal, and the market responded by sending both stocks higher. However, there's cause for concern that giving in to its rival's demands for a higher price -- the $65 per share accepted bid values Jos. A. Bank's enterprise value at 10 times its EBITDA, and implies a multiple of 17 for its cash flow -- suggests that Men's Wearhouse has to work overtime now to ensure a smooth transition and integration, and there's no guarantee that will happen.
Certainly there's some sense to the notion that a sluggish economy means at least one of the two retailers is superfluous in the marketplace. While menswear has been one of the few niches that has been a bright spot for retailers, with both J.C. Penney and Macy's recently counting on the segment to bolster otherwise lackluster Christmas-season sales, it's not so clear the vaunted savings of $100 million to $150 million through "synergies" over three years can be achieved. Sure, there will be improved purchasing power, lower overhead, and more efficient marketing and customer service, but the markets that the two companies address really isn't the same, despite both selling "men's suits."
The Men's Wearhouse customer is generally regarded as being younger and more fashion-conscious, while Jos. A. Bank's target demographic is seen as more traditional. While that could mean an expansion of opportunity for the new company, which would have an estimated $3 billion in combined annual sales, it could also be stitching together two different corporate cultures that might not be as seamless as believed.
Case in point: Just before the financial markets implosion, office supplies retailer Staples tried to swallow rival Corporate Express and ended up struggling for years to integrate it despite supposed synergies in melding the delivery giant into its operations. It's still stumbling even today, and will shutter as many as 10% of its stores to account for the new retail environment. A similar economic or financial collapse coming soon after Men's Wearhouse gobbles up its rival could spell trouble, even if the deal isn't so large (though it is much pricier).
The real seeds of change in the men's suits war began when Men's Wearhouse founder and then board chairman George Zimmer sought to take the suits seller private after losing confidence in his hand-picked successor as CEO, which ultimately led to Zimmer's ouster. It wasn't long after then that Jos. A. Bank thought it saw an opening to take over a rival it perceived as weakened.
That, of course, led to the tables being turned, and to today's situation, where predator has fallen prey, and will now be subsumed by its one-time foe. With Men's Wearhouse's shares having doubled during the past year, it's agreeing to pay a hefty premium to acquire its rival. With the economic landscape still volatile and unhealthy, investors might use this opportunity to cash out whatever profits they've made, and wait to see whether a case of indigestion sets in, as I believe will happen, or if it can zip this deal up without a hitch.
A buttoned-up opportunity
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