Question

to restore growth in revenue and profitability the firm acquired competitor Jos.A.Bank in late 2014 for $1.8 billion after a heated bidding war.The final bid of $65 in cash for each Jos.A.Bank 's share represented a 56% premium to the closing price in early october 2013.The combined company had annual revenue of $3.5 billion and projected annual savings of $100-$150 million consisting of lower overhead,more efficient marketing and improved customer service.

How does the size of the premium paid for Jos.A. Bank affect the pace and extent of postmerger integration?

Answer 1

Presentation by Don Shay of PriceWaterhouseCoopers 2002

Shay of PriceWaterhouseCoopers (2000) and McCauley (1997) both argue that overpaying is not a driving force behind the failure of deals. They argue that deals fail due to poor implementation, not because the buyer just paid an unrealistically high price for the assets. McCauley finds no correlation between the percentage premium paid and the “success” of the deal, based on an industry benchmark standard. The study did not find that overpayment was a problem among the deals examined; in the sample, the size of the percentage premium was unrelated to the success of the deal

Haspeslagh & Jemison, regarding “relatedness.” This finding is consistent with consulting firm presentations to the FTC staff from 2002. This work was done in conjunction with Krishna Palepu of Harvard Business School. The study did not find that overpayment was a problem among the deals examined; in the sample, the size of the percentage premium was unrelated to the success of the deal

Another 2001 study concludes that 47% of deals fail to achieve the objectives stated in the merger announcement. This paper argues that procurement synergies often comprise 50% of the gains from a merger. This area is fertile ground to find cost savings, because for many firms outside expenditures can account for 50% to 70% of costs. They noted that a merger might be said to "work" if synergy savings covered the premium paid for the stock even if the deal was done to achieve cross-selling or other revenue opportunities.

One reason for the differing success rates between executive assessments and financial assessments may be that mergers and acquisitions can successfully reduce costs and achieve other management goals, but if the premium paid for the target firm was too large, then the merger could still be unsuccessful in a financial sense. The consulting literature does not often address the premium issue, but those that do argue that premiums are not a systematic force behind financial failure of M&A deals. In addition, comparison to a broad market value average is a tough test (relative to, say, a pre-deal and post deal profits or a cash flow improvement test). Other firms are constantly striving to succeed, and half of them have to fail the market average test.

Conclusion:- the size of the premium paid for Jos A. does not affect the post-merger integration. The size of the percentage premium was unrelated to the success of the deal.