MEN'S WEARHOUSE AND JOS. A. BANK

Pressured by activist investors to pursue growth, Men's Wearhouse is the story of a clothing retailer which undertook an expensive and ultimately value destroying acquisition. The firm had a history of growth and of making intelligent (value enhancing) acquisitions, such as tuxedo rental business After Hours Formal Wear (later renamed Tux). Completed in 2006, the acquisition allowed Men's Wearhouse to tap additional customers in an era of declining brick and mortar retail sales. From 2009 through 2013, revenue and profitability at Men's Wearhouse showed continuous improvement. However, in 2013, the firm's financial performance foundered.

To restore growth in revenue and profitability, the firm acquired competitor Jos. A. Bank in late 2014 for $1.8 billion after a heated bidding war. The final bid of $65 in cash for each Jos. A. Bank's share represented a 56% premium to the closing price in early October 2013.The combined company had annual revenue of $3.5 billion and projected annual savings of $100 to $150 million consisting of lower overhead, more efficient marketing, and improved customer service. The combination of Jos. A. Bank's, a seller of men's tailored and casual clothing, U.S. retail operations seemed to line up geographically with the larger Men's Wearhouse, which operated in the U.S., Canada, and Puerto Rico. The potential for substantial cost savings through elimination of overhead, redundant stores, and economies of scale and purchasing appeared substantial. But actually realizing these potential savings would be challenging.

The animosity that had been created between the management groups of both firms made collaborative premerger integration planning for the culturally disparate organizations difficult. Instead, closing occurred in an atmosphere of mistrust and insecurity among employees, as well as confusion and uncertainty among suppliers and customers. During the following 24 months, Men's Wearhouse stock fell 70% from its level at closing reflecting investor concern about the long-term viability of the merger.

A specialty retailer of men's suits and a provider of tuxedo rental in the United States and Canada, the new Men's Wearhouse Inc. operates in two segments: retail and corporate apparel. The retail operation offers its products and services through its four retail merchandising brands and Internet Websites. The firm's corporate segment provides corporate clothing uniforms and related work apparel. As of December 2016, the firm operated a total of 1,758 retail stores.

Private equity firm, Eminence Capital, which owned a 4.9% stake in Jos. A. Bank and a 10% position in Men's Wearhouse prior to the takeover, had been pushing Jos. A. Bank to make a deal for months. In fact, both Men's Wearhouse and Jos. A. Bank's management teams had clung stubbornly to their desire to remain independent. Expressing growing impatience, Eminence Capital unsuccessfully took Jos. A. Bank to court to try to force the retailer to negotiate exclusively with Men's Wearhouse.

Eminence Capital, which had at first backed Jos. A. Bank's bid to acquire Men's Wearhouse switched sides and encouraged Men's Wearhouse to adopt a so-called Pac Man defense in which the hunted becomes the hunter. Eminence Capital was hedging its bets with investments in both firms, and the combination of the two firms offered to be a winner for the private equity firm. As evidenced by the firm's increased ownership stake after the merger, Eminence fervently believed that substantial synergy between the two clothiers would unlock substantial value for shareholders.

Another private equity firm that also stood to benefit from a deal between Jos. A. Bank and Men's Wearhouse was Golden Gate Capital, which owned outdoor gear retailer Eddie Bauer. Jos. A. Bank had agreed to buy Eddie Bauer for $825 million in a bid to discourage Men's Wearhouse's takeover bid. The merger agreement with Eddie Bauer stipulated that any alternative bidder such as Men's Wearhouse that came along with a higher bid would pay Golden Gate $48 million as a breakup fee. Golden Gate also had been a financing source in Jos. A. Bank's original bid for Men's Wearhouse. The Golden Gate break-up fee forced Men's Wearhouse to up its initial bid putting an additional $210 million into Jos. A. Bank's shareholders' pockets. At closing it appeared that both Eminence and Golden Gate came out winners as well as Jos. A. Bank shareholders.However, the longer run outlook for Men's Wearhouse shareholders appeared uncertain due to its problematic ability to digest Jos. A. Bank.

Once the merger was completed, Men's Wearhouse was faced with the task of figuring out how to make good on its publicly stated commitment to eliminate $100 to $150 million in costs over three years. These anticipated synergies were a major part of the justification for paying the substantial premium for Jos. A. Bank, and Men's Wearhouse was under considerable pressure to realize these savings as quickly as possible. To assist in the integration, the firm hired advisory firm AlixPartners, a well-known retailer turnaround firm, to support the integration process.

In addition to implementing cost savings programs, Men's Wearhouse pursued an aggressive strategy to rationalize Jos. A. Bank's marketing strategy. The latter competed almost exclusively on the basis of price and frequent promotional campaigns. Men's Wearhouse sought to change Jos. A. Bank's customer base by weaning them away from what had attracted them in the first place: highly aggressive pricing and promotion campaigns. Jos. A. Bank's promotions such as "buy one get three free" have proven toxic to Men's Wearhouse.Sensing a chance to turn around the brand, the new owners saw an opportunity to gain market share.

Men's Wearhouse tried to move away from the Jos A. Bank strategy of being "always on sale" by cutting the number of promotional events in favor of a single, bigger buy-one-get-three-free sale at the end of a quarter. This approach was not well received by Jos. A. Bank customers who had historically been accustomed to regular sales promotions. The strategy change not only cut into Jos. A. Bank's revenue but discouraged the number of potential customers from visiting the retailer's outlets. In hindsight, it is apparent that these overly generous promotions are what drove large numbers of customers to shop at Jos. A. Bank and that these customers became addicted to them. Despite the negative customer reaction, Men's Wearhouse CEO Doug Ewert remained resolute about the need to transition away from the unsustainable promotional strategy inherited from Jos. A. Bank. The objective was to have fewer sales such that the firm could charge higher average prices throughout the year.

While overly aggressive promotional campaigns can hurt profitability, it can be far more damaging to revenue by eroding store traffic. History has not been kind to retailers who have tried to alter customer expectations. Men's Wearhouse founder and former CEO George Zimmer expressed concern that the aggressive cost cutting to make the integration work was going too quickly and that it would undermine the firm's ability to grow sales. Zimmer, who had been fired by Men's Wearhouse over governance and compensation issues, reasoned that, given the similarity of the two firms' offerings, former Jos A. Bank customers were simply shopping at nearby Men's Wearhouse stores.

From the outset, management at Men's Wearhouse said publicly they would not rebrand Bank's stores believing the two firms had separate customer bases and different corporate cultures. Where Jos. A. Bank retains the more classic lines, Men's Wearhouse revels in its trendier image. Because of that, the ability to cut costs by closing stores was slow to materialize. Moreover, realizing supply chain efficiencies along with cuts in advertising costs and duplicative corporate functions created friction between the two firms' workforces, impairing communication and the implementation of new programs.

In addition to changing its promotional strategy, Men's Wearhouse sought to update Jos. A. Bank's merchandise by adding more tailored fits and accessories, such as shoes. The chain also rolled out a new ad campaign and worked to retrain employees to sell products under the new promotional strategy. Postmerger integration efforts also included integrating the brands and upgrading the e-commerce system. The buy-one-get-three free promotions have ended and were replaced with a buy-one-and get-two free promotion at Jos. A. Bank. In addition to promotional changes, the firm has launched a new loyalty program. Furthermore, Men's Wearhouse signed an agreement with Macy's to open licensed tuxedo rental shops aiming to attract new customers.

The challenge to date of integrating Jos. A. Bank has proven to be bruising for Men's Wearhouse. The firm was forced to take in 2015 a $90.1 million non-cash write down in the value of the Jos. A. Bank brand due to its declining revenue. Men's Wearhouse also has been burdened by the need to make principal and interest payments on its staggering debt load which has limited reinvestment in stores that needed updating. To finance the deal Men's Wearhouse borrowed $1.6 billion. In addition to its long-term debt, Men's Wearhouse also carried off balance sheet debt from operating leases for its stores totaling $700 million bringing total debt at the time of closing to $2.3 billion.

Two years after buying rival Jos. A. Bank, Men's Wearhouse has seen the market value of its equity and debt plunge as investors and bondholders question the firm's ability to reverse the decline in sales at Jos. A. Bank. When the deal closed in September 2014, the firm's equity value exceeded $2.6 billion eventually topping out at $3.2 billion in October 2015. Since then the firm's equity value has fallen to less than $700 million by the end of 2016. The firm's 7% bonds due in 2022 also plunged to $.65 cents per dollar of face value from $104 during the same period.Standard & Poor's lowered the firm's credit rating to well below investment grade.

Throughout the turmoil, Eminence Capital, the activist investor that had pushed so hard for the merger, has remained the firm's largest investor. The private equity firm has expressed confidence in the clothier's long-term strategy pointing out that Men's Wearhouse brand remains strong and that Jos. A. Bank accounts for only 24% of consolidated sales. While management remains adamant that there are no plans to divest or spinoff Jos. A. Bank, only time will tell if the unit can be turned around.

Questions:

1. How does the size of the premium paid for Jos. A. Bank affect the pace and extent of

post-merger integration? Would you have made another recommendation?

2.How did private equity investments in both firms affect the size of the premium paid for Jos. A. Bank? Were the Private equity firms simply interested in getting a deal since it boosted the value of their investment? Explain your answer.

3.What key external and internal factors affected post-merger integration? Give examples.

4.How does a hostile takeover impact the likelihood of a successful integration? Be Specific.

5. What is the key premise(s) underlying Men's Wearhouse's belief that the two firms can

be successfully integrated? Was each premise correct? Be specific.

6. What is the fatal flaw in the integration effort? Provide your reasoning.

7.George Zimmer, the founder of Men's Wearhouse, argued that the integration was too fast. Why would his argument to slow the integration make sense only if the premium paid had been smaller? Do you agree and why?