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Tickers in this Article: GCO, FINL, FL, UBS
I'm a happily married man. As a result, the concept of divorce isn't something I think about too often. However, I do realize that there are occasions where the unraveling of a bad relationship makes sense, whether it's a personal or professional breakup. An example of this is the March 2008 agreement between specialty retailers Genesco (NYSE:GCO) and Finish Line (Nasdaq:FINL) to go their separate ways, ending months of legal wrangling over a flawed deal. In the end, both parties are much better off.

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What Might Have Been
On June 18, 2007, Indianapolis-based athletic shoe retailer Finish Line offered $54.50 a share in cash to buy Genesco, the Nashville-based multi-brand retailer with well-known names like Journeys, Lids and Johnston & Murphy. Finish Line was looking for a diversified revenue stream while Genesco's management believed it was the best deal possible for its shareholders. Finish Line's major competitor Foot Locker (NYSE:FL) offered $51 per share but the offer was rejected by Genesco management.

Had the Finish Line deal gone through, the combined business would have been saddled with $1.6 billion in debt at a time when America was just settling into a massive recession. The consequences could have been fatal. The most puzzling part of this deal fiasco is that Foot Locker's offer, although providing lower total dollars, added less debt to the balance sheet of the tentatively combined businesses. For that reason alone, Genesco management should have taken more time to consider the offer.

A Deal Is A Deal
In September 2007, Finish Line began to get cold feet. Its banker, UBS (NYSE:UBS) believed that Genesco was in worse financial shape than it first thought and was looking for a way out of the $1.5 billion deal. Genesco filed suit hoping to force Finish Line to complete the deal. Both companies' second-quarter reports at the time were worse than expected and the credit markets were tightening. This was a marriage that should have ended quietly but didn't.

In the end, Genesco reached an agreement with Finish Line and UBS on March 4, 2008. The merger was officially off and Genesco got $136 million in cash from UBS, $39 million from Finish Line as well as 6.5 million shares in Finish Line stock. It likely would have got more if it had settled earlier. Still, in hindsight it's a better result than actually merging. (Learn about Mergers and Acquisitions, The Merger - What To Do When Companies Converge.)

Better Apart
The total cost to Finish Line for the aborted merger was $91.4 million in fiscal 2008. With the additional stock issued to Genesco shareholders, it cost the company approximately $1.66 per share for the blunder. That's not bad when you consider its stock is up around 118% or just less than $5 since calling off the merger in comparison to a drop of 17.7% for the S&P 500 and an increase of 14.6% for Genesco, its one-time suitor.

It's difficult to speculate about the current share price of the merged companies but it's fair to assume that the additional debt would have meant annual interest costs nearly as high as the one-time hit to Finish Line for settling its lawsuit. As for Genesco shareholders, they won twice. Sometimes, breaking up isn't hard to do.

The Bottom Line
It's not clear what Genesco saw in Finish Line back in 2007. Whatever it was, the battle that ensued surely took management's eye off the ball and its business suffered as a result. Fortunately, the company has put its soured relationship with Finish Line in the past. Shareholders can breathe a huge sigh of relief.

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