Suit Wars Case

Posted: August 26th, 2021

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Suit Wars Case

Question 1: Synergies on the Merger

Men’s Warehouse(MW) and Jos. A. Bank have an extensive network of physical and online shops that focuseson the Men’s apparel industry. The Men’s Wearhouse’s primary focus is men’s suits and tuxedo rentals in the United States and Canada. While Jos. A. Bank’s niche is men’s tailored casual wear, footwear, and accessories. In this case, the possible synergies in the merger would be economies of scale, economies of scope, financial synergy and market power. In terms of economies of scale, the two companies will benefit in case of a merger as it will improve purchasing efficiencies, optimize store space, improve inventory, and reduce the operating expenses(Hrnjić et al. 12). Economies of the slope will be derived from optimizing customer services when the two firms operate together, thus enhancing customer satisfaction and marketing strategies. The two companies will also benefit from financial synergies such as investment opportunities and reduced cost of borrowing as they operate in the same industry. Thus, merging will enjoy financial economies of scale.

Question 2: After-Tax Annual Synergies

The risk-free rate of 2.75% was adopted to calculate the annual after-tax synergies as it is the rate on a ten-year government bond. The rate is provided in exhibit 6 in the case study, and the ten-year government bond istypically used for valuation by practitioners. The synergies will grow by 3% in perpetuity, as clothing isthe basic needs of individuals for a lifetime. The discount rate is 10%, which is the same percentage used as a cost of debt for Jos A. Bank as there is no data on corporate bonds for the company. The beta, together with the risk premium, is provided in the case in exhibit 6 (Hrnjić et al. 13). After getting together all these inputs, the annual synergy is calculated as the cost of equity by the CAPM.

CAPM=Risk free rate+ Beta (market return-risk free rate)

CAPM=3.55%- 0.94 (10%-3.55%)

CAPM= -0.02513

Men’s Wearhousehas $47.47 million,with a share price of $50.35.

Question 3: Comparison of the Annual Synergies to Individual Performance

The deal for the acquisition would be beneficial to the shareholders as more money would be channeled to cost-saving and the revenue synergies. The majority of the shareholders favored the proposal, but Men’s Wearhouse rejected it because it would be better off to conduct the business on its own. More so, the proposal was not beneficial to the company (Hrnjić et al 8). The management argued that Jos. A. Bank was not performing effectively as Men’s Wearhouse because their financials showed they were on a downward trend, having made losses in the three consecutive quarters. Men’s Wearhouse would hurt the business if the merger materialized as they would expose the business to unnecessary risk.

Question 4: Men’s Warehouseworth on per Share Basis Using Exhibit5

Using data on publicly traded firms at exhibit 5, the market capitalization of Men’s Wearhouse is $2.39 billion. The total number of outstanding common shares is 47.47 Million shares.First of all, we calculate the share price in Men’s Wearhouse.

Market capitalization= share price x total number of outstanding shares

Share price= Market capitalization / total number of outstanding shares

Hence, share price=2,390,000,000 / 47,470,000= 50.35

Share price= $50.35

Jos. A. Bank made an official offer on 9^th October 2013, to purchase Men’s Wearhouse for $2.3 billion,equivalent to$48 per share following Goldman Sachs and Financo’s advice as the company was looking for growth opportunities. Jos. A. Bank undervalued the Men’s Wearhouse share price by $2.35 (50.35-48). Thus, thiswould amount to a loss of $ 111,440,000.00 (47,470,000.00 x $2.35) to Men’s Wearhouse. Therefore, Men’s Wearhouse should reject the acquisition offer from Jos. A. Bank. Men’s Wearhouse rejected the offer as they believed that it was significantly undervalued for the firm and termed it as “inadequate” (Hrnjić et al. 10). The CEO, Douglas S. Ewert, said the board and management of the company were confident that continuing their strategic plans would increase the shareholders’ value, unlike Jos. A. Bank’s proposal, which was highly conditional and inadequate.

The company insisted that it had more stores than Jos. A. Bank. At the same time, it had reported growth in the sales revenue in the thirteen straight quarters of the business. The company also noted that Jos. A (Hrnjić et al 9). Bank had reported three consecutive quarters of revenue decline. Men’s Wearhouse also termed the deal as opportunisticand would expose the business to unacceptable risks and contingencies if they accepted the merger. Jos. A. Bank’s proposal did not have any committed financing; rather, it only had a confident letter from Goldman Sachs for debt financing. As such, therefore, Men’s Wearhouse specified that the merger proposal would raise significant mistrust concerns in the two companies.

Question 5: Men’s Wearhouse worth on per Share Basis Using Exhibit 7

Using the comparable analysis, we use the data on Exhibit 7 and assume all the given companies are in clothing industry (Hrnjić et al 13). We take the merger with the closest approximation of the two companies to determine their possible merger. From the case, we shall take the Timber Land Co. which is the target name and the acquirer name shall be VF Enterprises Inc. the merger has Value Inc. Net Debt of Target of $ 1915.45Million, Value to EBITDA of 12.03, and Value to EBIT of 6.29 which are close proximate with the case study.

Question 6: Differences between the Two Questions

Question 4 uses the transaction analysis to compare the two companies. The market capitalization of Men’s Wearhouse is used to calculate the share price. The market capitalization is provided in the case in Exhibit 5 (Hrnjić et al 12). The share price is then used to compare with what Jos A. Bank had offered. The acquiring company had undervalued Men’s Wearhouse share price by $2.35 to offer at $48 instead of the market value of $50.35. The analyses compares industrial trends, value of the transactions, time period, and method of payment. The common characteristics between Men’s Wearhouse and Jos A. Bank are then compared to gauge the viability of the proposal. Thus, the earned value(EV) for Men’s Wearhouse is $247.47and has a share price of $50.35

Question 5 uses comparable analyses to compare the performance of Men’s Wearhouse, Jos A. Bank, and their possible merger. Variables such as the industry rating, EV, return on equity, growth of revenue, and EBITDA are compared. For this purpose, we use the data in Exhibit 7 that providesthe information on comparable variables in the case. The assumption made is that all the provided companies are from the same cloth industry (Hrnjić et al. 13). After that, companies with a similar estimated growth of revenue, EV, return on equity, and EBITDAis selected. Net debt of target of $ 1,915.45Million, Value to EBITDA of 12.03, and Value to EBIT of 6.29, which are close proximate the case study.

WorkCited

Hrnjić, Emir et al. “SUIT WARS: MEN’S WEARHOUSE VERSUS JOS. A. BANK.”No. 2015- 03-31, 2015, pp. 1-18., Accessed 15 Apr 2020.