December 2, 2013 12:00 pm

Men’s Wearhouse brings Pac-Man dealmaking tactic back to arena

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments
Men's Clothier Offers Recession Sale, Keep Suit For Free If Laid Off©Getty

Jos A Bank store in Chicago

In the neon arcade world of Pac-Man, the game’s greedy protagonist has only one sure-fire way of avoiding the clutches of the ghosts that pursue him: turning the tables and eating them instead.

The corporate defence tactic that draws its name from the eat-or-be-eaten video game returned to the dealmaking landscape last week as suit retailer Men’s Wearhouse tries to block the overtures of a rival with a takeover offer of its own.

For two months, the Men’s Wearhouse board had been unyielding in its refusal to entertain a takeover bid by Jos A Bank, dismissing as “opportunistic” an offer that represented a 42 per cent premium to the retailer’s then share price.

But in what appears to be a tacit acceptance of the logic behind an enlarged company, Men’s Wearhouse then made a $1.2bn offer that would see it gobble up its smaller rival.

The decision to deploy the Pac-Man defence is the latest twist in battle to control America’s multibillion-dollar discount menswear market. It also heralds the return of a dealmaking manoeuvre, out of fashion for a generation, that has yielded some unusual results.

In September 1982, aerospace company Martin Marietta took the unprecedented step of responding in kind to a takeover bid by its rival Bendix Corp.

The ensuing dust-up dragged on for a month and ended without clear victory for either company. Instead, Allied Corp, which entered the fray to help Bendix vanquish Martin Marietta, swallowed Bendix for $2bn. Martin Marietta, while avoiding the ignominy of being taken over, was left nursing a debt burden four times larger than it started with, having borrowed $1bn to fund its own takeover effort.

Since then, the tactic has been used sparingly.

In 1998, Marston Thompson & Evershed, the UK brewery, responded to interest from long-time sparring partner Wolverhampton & Dudley by launching a bid of its own. The defence pushed W&D to increase its original £262m offer by 9 per cent.

A year later, Elf Aquitaine fired up a $51bn Pac-Man defence against TotalFina. The result – again, after a protracted fight – was a friendly deal that created one of the world’s largest oil producers, Total.

The same year, Chesapeake reacted to a $700m offer from Shorewood, a rival packaging company, with a particularly brutal Pac-Man defence. In addition to launching a $500m counterbid, Chesapeake bought 15 per cent of Shorewood’s shares, sued the company’s board and, eventually, saw it sold to a third party.

“Going with the Pac-Man basically means management are recognising that the deal makes sense, but are desperate to keep their jobs. It is good for the executives, but pretty rough for shareholders,” says a banker who has been involved in such a deal.

Since 1999, there have been just five examples of the Pac-Man defence being used, according to data from Dealogic. This reflects the flaw inherent to the tactic: more often than not, a target deploys the same industrial logic as its original bidder.

Going with the Pac-Man basically means management are recognising that the deal makes sense, but are desperate to keep their jobs

- A banker

In doing so it undermines its own rationale for a defence.

In the case of the Men’s Wearhouse/Jos A Bank tussle, both companies have acknowledged the logic for non-organic growth. Beyond a shock move by either to branch into womenswear or haute couture, there is an absence of other competitors to buy.

Robert Wildrick, Jos A Bank’s chairman, has said he would be happy to engage with Men’s Wearhouse if it makes an offer.

Another likely driver for a deal is the common shareholder interest between the two companies. Activist investor Eminence Capital owns big positions in both retailers. A host of large institutional investors also have holdings in both companies.

For the shareholders without this common interest, the eat-or-be-eaten question remains, with one side getting paid a premium for their stock and the other getting to keep a stake, and management team, in an enlarged group.

Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from and redistribute by email or post to the web.

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments


Sign up for email briefings to stay up to date on topics you are interested in