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Hostile M&A deal perfectly suited for final exam

3/21/2014

Jos A Bank - Getty ImagesThe final exam for some MBA students at UNC Kenan-Flagler involved assessing breaking news as one of the most dramatic hostile takeover battles in recent years unfolded: the acquisition of Jos. A. Bank, the men’s clothing retailer, by its competitor, Men’s Wearhouse.

Anil Shivdasani, an award-winning teacher, realized that the dramatic twists and turns in the takeover provided a chance for students in his mergers and acquisitions class to apply what they were learning to a real-time deal.

The saga began when Jos. A. Bank made an unsolicited acquisition proposal to buy Men’s Wearhouse last October.

Men’s Wearhouse responded by not only rejecting this proposal, but launching a counteroffer to buy Jos. A. Bank – a rarely used strategy known as a “Pacman defense.”

But this is where things got interesting, said Shivdasani, Wachovia Distinguished Professor of Finance and a former investment banker at Citigroup who has advised leading companies across the globe on strategic financial issues.

Jos. A. Bank responded by entering into an agreement to purchase Eddie Bauer and conducting a repurchase of its own shares in an attempt to fend off Men’s Wearhouse – and left the door open to walking away from Eddie Bauer if the company received a higher offer from Men’s Wearhouse.

During the week before the sale, students pored over financial statements and SEC filings and developed financial models to determine the best outcome for Jos. A. Bank shareholders.

In addition to the deals already proposed, students evaluated other options that they thought the Jos. A. Bank board should consider – including a leveraged buyout of the company and a debt-funded leveraged recapitalization.

Anil Shivdasani - UNC Kenan-Flagler“What is clear is that from a shareholder’s perspective, some form of combination between Jos. A. Bank and Men’s Wearhouse made the most sense for shareholders,” said Shivdasani. “While both companies released differing financial estimates regarding what a merger between the two companies would look like, it was clear that shareholders stood to gain a lot from a successfully negotiated deal.”

In comparison, many students were less certain about Jos. A. Bank’s proposal to buy Eddie Bauer.

“We found both the deal’s underlying cost and revenue synergies questionable,” said Ed Lammas (MBA ’14). “We saw limited potential for revenue synergies, when retaining mainly independent stores and brands, while cost synergies felt implausible with the two stores having completely different product offerings.”

In the end, Men’s Wearhouse reached an agreement to buy Jos. A. Bank and Jos. A Bank terminated its deal to purchase Eddie Bauer, supporting what many students suggested as the best approach for the two companies.

During the M&A class, students analyzed several landmark transactions, many of which Shivdasani had first-hand experience with, which provided a “unique practitioner and academic view that is refreshing and incredibly valuable,” one student wrote.

Another student called the class a favorite: “As someone going into investment banking, literally all of the work was applicable to my educational goals and served as great prep for work in a few months.”