At long last, Men's Wearhouse (NYSE:TLRD) and Jos. A. Bank Clothiers (NASDAQ:JOSB)investors can finally take a breather. On March 11, Men's Wearhouse announced that it had entered into a definitive agreement to acquire its smaller rival in a transaction valued at $1.8 billion, or an offer price of $65 per share. In response to this news, shares of Men's Wearhouse and Jos. A. Bank rose 5% and 4%, respectively. Now that everything is finalized, are shareholders in for good times ahead, or will this acquisition prove to be a letdown?
Men's Wearhouse paid handsomely for Jos. A. Bank
In November, Men's Wearhouse first offered to buy Jos. A Bank for $55 per share. This offer, followed by subsequent offers by the company, helped push shares of the smaller retailer up nearly 56% since October. That was when Men's Wearhouse refused Jos. A. Bank's bid to acquire its larger rival for $48 per share.
The endgame for both companies began in February, when Men's Wearhouse made its third bid for the business at $63.50 per share. Jos. A. Bank turned down the offer but granted its suitor the right to inspect its books after learning that Men's Wearhouse might pay up to $65 per share... if it liked what it saw.
With cash of $59.3 million on hand, Men's Wearhouse must borrow substantial amounts of capital if it wishes to complete the acquisition. Even if the business uses some of the $339.9 million in cash on Jos. A. Bank's balance sheet, it will have nowhere near enough capital to acquire the company. Fortunately, it's unlikely that Men's Wearhouse will have a hard time making a deal work; it has a mere $87.5 million in long-term debt on its financial statements compared to the massive $1 billion in shareholder equity.
But does the deal make sense?
After the transaction is complete, Men's Wearhouse will have pro forma revenue of $3.5 billion and a jaw-dropping 1,700 locations in operation throughout the U.S. Even better, management forecasts annual cost savings created from synergies of between $100 million and $150 million after the first three years the companies are combined.
All of this makes Men's Wearhouse's decision to pursue Jos. A. Bank look like a no-brainer, but there is some downside that investors should consider. Aside from the burdensome debt the company inherits, and the possibility that expected synergies may not bear fruit, the company is acquiring a business that has had a mixed operating history.
You see, over the past four years, Jos. A. Bank has seen its revenue soar an impressive 36% from $770.3 million to $1 billion. But net income has only increased 12% from $71.2 million to $79.7 million, as rising costs have harmed profits.
In contrast, Men's Wearhouse grew its top line at a slightly slower pace of 30% from $1.9 billion to $2.5 billion. But net income jumped 185% from $46.2 million to $131.7 million. So, what we have here is a larger, more efficient enterprise buying out a smaller, less attractive competitor at nearly 23 times earnings.
Based on the data provided, it looks as though Men's Wearhouse's acquisition will be a great source of growth for the business -- but at a considerable cost. Aside from being an expensive purchase, Jos. A. Bank has a history of lackluster profits.
On the plus side, given Men's Wearhouse's proven profit growth over time, it's likely that some strong synergies will develop as a result of the acquisition, but this cannot be guaranteed. It is with these thoughts that the Foolish investor should analyze both companies in greater detail to determine how well Men's Wearhouse and Jos. A. Bank might blend and whether or not the transaction will deliver on long-term goals.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.