JoS. A. Bank Clothiers, Inc. turned down a $1.5 billion takeover bid from Men’s Wearhouse, Inc. last week in a move that extinguished the latest, and only, live offer between the two rival men’s clothing retailers.
JoS. A. Bank made the initial, unsolicited $2.3 billion offer to acquire Men’s Wearhouse months after the company had dismissed founder and Executive Chairman George Zimmer. When the proposal was leaked in early October, the Men’s Wearhouse board formally rejected the $48-per-share offer as “opportunistic” and “inadequate.” On November 15, JoS. A. Bank dropped its bid, but Men’s Wearhouse went on the offensive soon after.
The proposal by Men’s Wearhouse to take over its smaller rival on November 26 was a classic “Pac-Man” defense by turning the tables on its would-be acquirer. The “Pac-Man” defense was first introduced in 1982 by Martin Marietta Corporation, which boldly bid on the Bendix Corporation, the very company that was trying to take it over. The defensive option against takeovers is named after a popular 1980s video game “Pac-Man,” in which the titular character with a power pellet can devour enemies that otherwise roam the maze to take its life.
Yet this defense tactic has been used sparingly in large public deals, perhaps due to the risky nature of dueling bids and the legal uncertainties of potential outcomes. For example, in a case where both the initial offer and “Pac-Man” defense offer succeed, the tender of shares between the companies raise questions of whether shares one company owns in the other are eligible to vote and through what mechanisms voting power may be exercised. These questions are further complicated if companies are incorporated in states with significant differences in relevant provisions of corporate statutes.
Here, there was no outstanding bid when Men’s Wearhouse made its offer to buy JoS. A. Bank, but it was arguably in response to another unique twist in the narrative. In a move Ronald Busch of the Wall Street Journal refers to as a “Pac-Man” offense, after Men’s Wearhouse rejected the initial $2.3 billion bid, JoS. A. Bank Chairman Robert Wildrick suggested the company would be “receptive to being bought instead by Men’s Wearhouse if it would pay the same 42 percent premium Jos. A. Bank says it is offering.” Ricky Sandler, CEO of Eminence Capital, the largest shareholder of Men’s Wearhouse and a supporter of the merger, referenced Mr. Wildrick’s statement to support his view that the deal was and should not be dead.
JoS. A. Bank attempted to mitigate the statement by stating it was “merely illustrating the point that Boards of Directors should carefully consider significant cash premiums for their shares” and that “the comments were not meant, in any way, to be inviting a counter offer.” As a company incorporated in Delaware, JoS. A. Bank would be required under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. to accept a premium bid if there is no higher bid to maximize the company’s value at sale for its stockholders’ benefits when the sale of a company becomes “inevitable.”
Men’s Wearhouse’s proposal represented a 32% premium over JoS. A. Bank’s closing share price before the original offer became known in October and a 45% premium over JoS. A. Bank’s unaffected enterprise value. JoS. A. Bank’s decision to reject the offer does not seem to have spurred any legal argument under Revlon. In fact, within two hours, Men’s Wearhouse issued a statement that it would consider all options to make the merger a reality.
Both companies stand to benefit from a merger in a mature industry where cost cutting allows an entity to fare better while everyone else competes on price within a particular niche. The negotiations do not appear to be over. Whether the companies will merge out of necessity or hold out to retain management controls is unclear as we enter a new stage in a new year.