Last Friday, Jos. A Bank Clothiers (UNKNOWN:JOSB.DL) announced that it was formally rejecting a buyout offer from Men's Wearhouse (NYSE:TLRD). For months, Jos. A Bank and Men's Wearhouse have engaged in back-and-forth discussions in attempts to acquire each other. However, with this recent rejection by Jos. A Bank, some investors might ask if the bidding war will continue or finally die out. Perhaps more important is whether or not Jos. A Bank is really worth taking over to begin with.
"I want it!" he said. "No! I do!!!" she replied
Last October, Jos. A Bank announced its willingness to acquire Men's Wearhouse for $48 per share. At that price, Jos. A. Bank valued Men's Wearhouse at $2.3 billion, 36.7% more than the company's valuation a day earlier. In response, Men's Wearhouse claimed that its competitor was trying to buy it out on the cheap.
A month later, Men's Wearhouse bid $55 per share (or $1.5 billion) for Jos. A Bank, a price that the smaller rival considered inadequate. This was followed up in early January with a higher offer of $57.50 per share which valued Jos. A Bank at $1.61 billion.
Just prior to the most recent announcement by Men's Wearhouse, Jos. A Bank amended its 2007 shareholder rights plan (aka poison pill) to make it more difficult for an outside party to acquire a significant stake in the company. In the event that any party acquires a 10% or greater stake in the company, all Jos. A Bank shareholders (with the exception of the entity who surpassed the 10% limit) will be issued more shares. This would effectively dilute the stake of the acquiring party and the acquirer would need more cash to buy enough shares to gain seats on the company's board of directors.
Why all the trouble?
By this point, some investors are probably asking why Jos. A Bank and Men's Wearhouse want one another so bad. This is especially true when you consider that Jos. A Bank's stock has risen 35.6% and Men's Wearhouse has jumped 43.7% since the news broke about the first potential deal in October.
Is it possible that both companies are no longer operating with a sense of what's best for their shareholders but, instead, denying any deal on the basis of pride? You see, there must be a price at which a deal no longer makes sense because of valuation. However, what is that price? To answer this, investors need only look at the value created by both companies in recent years.
Over the past five fiscal years, Men's Wearhouse has grown its revenue at a decent clip of 26.2% from $1.97 billion to $2.49 billion. While this may appear enviable, it falls far short of the 50.8% growth experienced by Jos. A Bank, which saw its sales go from $695.9 million to $1.05 billion. From this data alone, it looks like Jos. A Bank is a highly desirable investment, but there's a catch: in order to grow twice as fast as Men's Wearhouse, the company had to take a hit to its bottom line.
Over this time-frame, Jos. A Bank saw its net income rise only 36.5% from $58.4 million to $79.7 million. Meanwhile, Men's Wearhouse enjoyed a hefty 124% growth rate as net income rose from $58.8 million to $131.7 million. What this disparity between revenue growth and net income growth for each party means is that the companies have focused on different strategies.
Men's Wearhouse, for instance, believes in growing its business at a reasonable rate while placing emphasis on maintaining attractive margins. Jos. A Bank, on the other hand, is partial to the idea of playing catch-up with its larger peer by forgoing profits now in exchange for more market share and potentially higher profits in the future.
Moving forward, it will be interesting to see what avenue these two companies take. For now, Men's Wearhouse seems to think that Jos. A Bank has a lot of value behind its name, but I'm not so sure. In the recent past, Jos. A Bank's growth has been explosive, but the company's poor profitability overshadows its ability to grow. In the event that Men's Wearhouse pays too much for an acquisition, the last laugh may belong to Jos. A Bank's management who sold a less-than-stellar operation that Men's Wearhouse could easily mimic by cutting prices.