The hostile world of men’s suits

One of the more dramatic stories continuing from last year is the merger drama between Jos. A Bank and Men’s Wearhouse, two men’s wear retailers battling for control and over a potential combined company.

The New York Times’ Michael J. de la Merced reported Monday that Men’s Wearhouse decided to take its offer directly to shareholders:

Men’s Wearhouse went hostile on Monday in its pursuit of Jos. A. Bank, raising its offer to $1.6 billion and taking it directly to the company’s shareholders. It also said that it intended to press for two new directors.

The moves signal a new stage in the takeover battle, one that began last year with Jos. A. Bank in the role of unwanted bidder. Now the pursuer is the pursued, one that has so far deemed the takeover bids too low.

And the onetime target has gone fully hostile, something that not even Jos. A. Bank was willing to do in its own aborted merger campaign.

“Although we have made clear our strong preference to work collaboratively with Jos. A. Bank to realize the benefits of this transaction, we are committed to this combination and, accordingly, we are taking our offer directly to shareholders,” Douglas S. Ewert, Men’s Wearhouse’s chief executive, said in a statement.

In its announcement on Monday, Men’s Wearhouse said that it had raised its offer by 4.5 percent, to $57.50 a share, and would start a tender offer for Jos. A. Bank stock that will expire on March 28.

Ronald Barusch wrote for the Wall Street Journal’s Dealpolitk blog that they key to completing the offer would be replacing two of the Jos. A. Bank directors, a task that could take a while given its structure:

Assuming the Jos. A. Bank board wants to fight the bid, which seems likely since it rejected Men’s $55 per share offer last month, it could take Men’s a year and a half to complete its tender offer. That is because Jos. A. Bank has a poison pill which effectively prohibits Men’s from buying a controlling stake in Jos. A. Bank without approval of the Jos. A. Bank board. The only people who can remove that impediment to the Men’s bid are the Jos. A. Bank directors. So on Monday, when it announced its tender, Men’s said it planned to seek to replace two of Jos. A Bank’s seven directors as well.

Jos. A. Bank has a staggered board, so directors serve three-years terms and under Delaware law cannot be removed prior to the end of their term. That means that even if the Jos. A. Bank shareholders fully support its bid, without the support of management it will take Men’s until the 2015 annual meeting (which if held at the same time as last year’s meeting would be in June of 2015 and could even be a couple of months later) for Men’s to replace a majority of the Jos. A. Bank board.

Lots could happen between now and then, including significant counter-moves by Jos. A. Bank. Jos. A. Bank started this situation by making a bid for Men’s at $48 per share. Undoubtedly, if there is to be a merger of the two companies, Jos. A. Bank management would prefer to end up on top as it proposed last September. And if Jos. A. Bank were to make a new bid for Men’s, with the cooperation of Men’s shareholders, it could move much faster than Men’s can to close a deal.

Men’s does not have a staggered board, and its entire board is up for election in at the 2014 annual meeting. (Its 2013 annual meeting was held in September.) So Jos. A. Bank could replace a majority of the Men’s board in the fall if it had a compelling offer on the table for Men’s. And that schedule could be significantly accelerated.

Elizabeth Lazarowitz wrote for The New York Daily News that an earlier offer was rejected, but investors liked the combination sending the stock of both companies higher since the initial bid:

The $57.50 per share cash offer is about 6% above the stock’s Friday close at $54.41 and higher than Men’s Wearhouse’s earlier bid of $55.

Jos. A. Bank had rejected the earlier offer in December, saying it “significantly undervalued” the company.

“Jos. A. Bank should be reluctant — in the best interest of its shareholders — in order to strengthen its position and maximize what Men’s Wearhouse will pay,” Stifel analyst Richard Jaffe told the News.

Jos. A. Bank kicked off the merger battle last year, offering $2.4 billion for Men’s Wearhouse. The bid came just months after Men’s Wearhouse booted founder and TV spokesman George Zimmer as executive chairman after he clashed with the board.

Shares of Jos. A. Bank, up about 8% since Men’s Wearhouse’s initial November bid, rose 4.5% to $56.87. Men’s Wearhouse shares also ticked higher, rising 2% to $51.68.

While the combination seems to make sense on paper, given the board structure it’s hard to see the hostile offer actually succeeding because it will take so much time. Investors believe that some type of deal will get done, but the moderate gains in the stock signal they’re still uncertain about the price – and the timing.