Tags: Mens Wearhouse | Joseph A. Banks | Eddie Bauer | cash

Joseph A. Banks Shows Why Cash Is Bad for a Company to Hold

By    |   Wednesday, 19 Feb 2014 07:21 AM

Men's Wearhouse (MW) tried to buy competitor Joseph A. Banks (JOSB) at a large premium to the stock's price. The deal made sense because it could be partly financed with $340 million in cash that Joseph A. Banks carried on its balance sheet.

The $340 million in cash represented an equity value of more than $12 per share in cash and accounted for more than 25 percent of the market capitalization of Joseph A. Banks. Interestingly, Joseph A. Banks has not reported any growth in earnings for the past five years. The cash on its books might have been the company's most valuable asset.

Management of Joseph A. Banks, however, wanted to remain independent and last week put together a deal to spend at least $825 million for Eddie Bauer. This deal will be financed with a large amount of debt and will leave Joseph A. Banks with little cash on its balance sheet.

There is no question Joseph A. Banks is paying a lot for Eddie Bauer. According to analysts, this deal values Bauer at more than 12 times estimated 2013 adjusted earnings for Eddie Bauer.

According to SEC documents Men's Wearhouse filed when attempting to buy Joseph A. Banks, the average deal in this sector is done at 8.7 times earnings. Some deals are worth more than the average price, but Joseph A. Banks is paying a large premium and anticipates synergies between the two companies will only save $25 million a year for a company expecting $2 billion in annual sales.

The purpose of the deal seems to be to make Joseph A. Banks unattractive as a takeover candidate, allowing the management team to continue drawing high salaries from a company that has reported no significant earnings growth lately.

Most importantly, this deal shows what can happen when a company has a large cash balance. Management can spend the cash to effectively destroy value in the long run and make the company less attractive to outside investors.

© 2017 Newsmax Finance. All rights reserved.

 
1Like our page
2Share
MichaelCarr
Men's Wearhouse (MW) tried to buy competitor Joseph A. Banks (JOSB) at a large premium to the stock's price. The deal made sense because it could be partly financed with $340 million in cash that Joseph A. Banks carried on its balance sheet.
Mens Wearhouse,Joseph A. Banks,Eddie Bauer,cash
330
2014-21-19
Wednesday, 19 Feb 2014 07:21 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved