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Strategies & Market Trends : Speculating in Takeover Targets
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From: Glenn Petersen2/14/2014 5:25:26 PM
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Jos. A. Bank Takes a Page From a Long Ago Deal

By STEVEN M. DAVIDOFF
DealBook
New York Times
February 14, 2014, 4:55 pm

In purchasing Eddie Bauer, Jos. A. Bank Clothiers has cleverly structured its deal to try and avoid criticism that its pursuit of Eddie Bauer shuts down Men’s Wearhouse’s own bid for the men’s clothing company. It’s a deft maneuver, based on both Delaware law and a bit of ancient history.

Back in 1989, Paramount made a hostile offer for the company then known as Time Inc. Time had agreed to a business combination with Warner Communications. But Paramount’s offer appeared to create more value. In the face of having to try to convince its own shareholders to reject the Paramount deal and go ahead with the Warner merger, Time’s board opted to steamroll its own shareholders. Time restructured the Warner deal so it would be a straight out cash acquisition. The deal would effectively be a poison pill, since it made Time too big and too leveraged to be acquired by Paramount. The fact that many Time shareholders favored the Paramount bid was beside the point.

Paramount sued, but the Delaware Supreme Court sided with Time. The court held that so long as Time’s board had not agreed to a change of control, the acquisition could not be challenged. Time had adequately documented its strategic reasons for doing the deal, so it was free to acquire Warner even though it had effectively blocked the more valuable Paramount deal.

The decision upheld the principle that company boards could make acquisitions, even ones that blocked competing offers, with relative impunity. Shareholders could do nothing to stop it. Other countries, including the United Kingdom, require a significant vote on an acquisition to prevent these maneuvers, but most states in the United States do not.

Jos. A. Bank could thus have simply acquired Eddie Bauer without shareholder approval.

But if Jos. A Bank had simply done this, it would have been criticized for appearing to try to end the Men’s Wearhouse bid — a combination that seemed to make sense to both companies, which in the space of a year, have offered to acquire each other.

Instead, Jos. A Bank voluntarily put in its acquisition agreement a way out if Men’s Wearhouse comes back.

The Eddie Bauer acquisition agreement permits Jos. A. Bank to terminate the deal if a superior proposal is made for Jos. A Bank. A superior proposal is defined in the agreement as a proposal that provides for a full acquisition of Jos. A. Bank and that the Jos. A Bank board determines “would reasonably be expected to create greater value” than the Eddie Bauer acquisition and the plan to buy back up to $300 million of its own stock that the company also announced on Friday.

If Jos. A. Bank does receive a superior proposal, its board can terminate the Eddie Bauer acquisition by paying $48 million to Eddie Bauer’s owner, Golden Gate Capital. This corresponds to 3 percent of the value of Jos. A. Bank, based on the $57.50 offer price by Men’s Wearhouse. This is within the range of termination fees that targets typically pay if a subsequent bidder comes along.

Because this deal is, in part, structured like a private equity deal, if Jos. A. Bank’s financing falls through, Eddie Bauer can terminate the acquisition agreement and Jos. A Bank will be required to pay $55 million to Eddie Bauer’s owners. Otherwise, Jos. A. Bank can be forced to complete the deal.

The right to an exit that Jos. A. Bank negotiated is a clever maneuver. It allows Jos. A. Bank to say publicly to its shareholders: Look, we are acting in your best interests, and, in fact, we actually negotiated an out to take a better deal if it should come along.

But at the same time, the provision leaves the decision solely with Jos. A. Bank’s board. Given that antitrust regulators are still reviewing the Men’s Wearhouse’s bid, Jos. A. Bank’s board has a wide open hole to just say no to the Men’s Wearhouse bid. The more immediate value, the board could argue, is in the Eddie Bauer transaction. Men’s Wearhouse would have to come back with quite a bid to overcome this presumption, something it no doubt knows and many in the media speculated it was unlikely to do.

So Jos. A Bank cleverly gets around the heavy-handedness of appeared to unilaterally end the Men’s Wearhouse bid though a maneuver similar to Time’s while also getting its escape. Nice. It all means that what many investors who thought a combination of Men’s Wearhouse and Jos. A. Bank was a done deal are now left to see it as a dim alternative.

Steven M. Davidoff, a professor at the Michael E. Moritz College of Law at Ohio State University, is the author of “ Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion.” E-mail: dealprof@nytimes.com | Twitter: @StevenDavidoff

dealbook.nytimes.com

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