Friday, February 14, 2014

Jos. A. Bank to Acquire Eddie Bauer: What Does "Related" Mean?

The Wall Street Journal reports that Jos. A. Bank has agreed to acquire Eddie Bauer for $825 million.  As you may recall, Jos. A. Bank has been in a back-and-forth contentious situation with Men's Warehouse, with each firm trying to take over the other over the past few months.  Now, Jos. A. Bank has moved in a different direction.   Does it make sense? Are there true economies of scope here between the retailer of men's suits and the seller of outerwear and sportswear? 

As an outsider, it's hard to determine if the synergies justify such a merger.  However, I would argue that we should be cautious about such a deal.  When we think about mergers, we often look for signs that the firms are engaging in "related" diversification, i.e. that significant synergies exist.   At first glance, we might conclude that these two firms are related, since they both sell apparel.  However, we should be much more disciplined about what "related" truly means.  Consider the cases from a decade ago, when many companies who sold alcoholic beverages combined in a wave of mergers and acquisitions.  Many people initially endorsed these deals.  After all, a beer producer buying a winemaker looked like "related" diversification . Surely, significant synergies existed.  Yet, it turns out that beer and wine companies are not as related as we might think, even though both are in the business of selling alcohol.  The synergies turned out to be much less substantial than many players thought.  The challenges of integration were substantial.   That lesson should be applied here, before we jump to the conclusion that these two apparel companies can easily combine to achieve significant synergies.  

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