In many merger or takeover tussles there is invariably a winner and a loser. Typically shares in the acquirer dip on assimilation concerns, while those in the target rise as its market cap reaches the deal price. Of course the disastrous 2001 marriage of Time Warner and AOL is an example of the exception that proves the rule! So what about the current unusual case in which smaller men’s outfitter Joseph A. Bank (Ticker: JOSB – currently trading at $55.79) made a $2.3 billion bid for larger rival Men’s Warehouse (Ticker: MW – currently trading at $51.03)? The larger company promptly turned around with a $57.50 cash bid for Jos. A. Bank or a premium at the time of 5.7% to its closing price at the time of the bid. There is of course more history, but you’ll get the point – there’s a war in the menswear department.
For investors the question is who is likely to win? Synergies and management determination aside, along with the observation that Men’s Wearhouse is clearly bigger, we can look to the implied probability distribution using options to gain insight into what odds investors assign to the most likely outcome.
Already the spread between the two company’s share prices is diverging suggesting that the market has slated the bigger Men’s Wearhouse as more likely to be victorious. But let’s display the current projected likelihoods that prevailing share prices of each company will rise by 10% when the “loser” is bought.
This exercise is complicated by the fact that the two stocks do not follow the same options expiration cycle. Yet that actually helps in our conclusion, which is that options traders currently assign a far higher likelihood that the cash bid by Men’s Wearhouse will further boost the value of shares in Joseph A. Bank.
Starting with Men’s Wearhouse a 10% rally in its stock price would lead it to $56.13. The options market currently assigns a value of 3.5% of its share price landing between $55-60 by options expiration in May.
For a similar 10% rise in shares of Jos. A. Bank, which would admittedly see it above the $57.50 cash bid price to $61.37, the second chart shows that sooner-to-expire April options currently imply a 23.7% chance of such an outcome.
Chart – Men’s Wearhouse (MW) Options implied Probability Distribution for May Expiry
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Chart – Jos. A. Bank (JOSB) Options implied Probability Distribution for April Expiry
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