The Kmart/sears Merger of Faltering Firms

The Kmart/Sears Merger of Faltering Firms

Submitted By: Lychanda Brown

Date: October 14,2017

Situation Audit:

In late 2004, two giant U.S. retail corporations, Sears, Roebuck & Co. and Kmart Holding Corporation announced that they would merge operations to form the Sears Holding Company. The Sears name was apparently held in higher esteem by consumers than the Kmart name, becoming Sears Holdings Corp. SHC became the third largest retailer in the U.S. behind Walmart and Home Depot.  Some analyst questioned the optimism of two faltering firms becoming one winner. Part of the zeal from investors came from the faith they had in Edward Lampert. Lambert was the son of a lawyer from New York City suburb. Lambert became more focused after losing his father when he was 14 years old.  Interested in finance, he graduated from Yale, joined Goldman Sachs and found his mentor Robert Rubin. In 1988 he left the firm and started the hedge fund.   At the time of the merger Lampert was 42 years old. He had a track record of purchasing struggling companies and turning them around and had built a fortune.  In 2003 he was kidnapped. The asking ransom was $1 million dollars but he convinced them to release him for $40,000.  

In 2002 Kmart filed bankruptcy, as a result 600 unprofitable stores were closed, employees were terminated and stockholders common stock was wiped out.  Lambert began buying Kmart’s debt and after the retailer emerged from bankruptcy in 2003 he held more than 50% of Kmart’s new stock.  Sears had its struggles as well. By the 90’s it was squeezed by the changing retail environment and customers were flocking to Walmart & Target for the lower prices. The objective of the merger was to combine and coordinate products and avoid redundancies and strengthen existing product lines.  Lambert faced many challenges with the possible merger. Some analyst saw Lambert’s best course of action would be liquidating the underlying real estate of Kmart & Sears, thinking it would fuel ever-rising stock prices and that it would be wise. In the analysis the question was whether operational gains could be achieved with the merger.  Lambert told reporters It’s an opportunity to transform two companies that were once great into a company relative to the 21st Century.

The "merger" was finalized in March 2005 and the combined entity was named Sears Holding Company. Kmart bought Sears for $12.3 billion. Layoffs were forth coming amongst 5,000 people working at the two stores. The plan was to convert about 400 Kmart stores into midsize Sears Essentials.  

Problem/Decision Statement:

One must beware of optimistic projections for mergers.  Most mergers take place with high assumptions of expectations of growth and synergy.  Many are short live and drain the company’s finances.  Stock market play a vital role and doesn’t always support a risky merger. What happens if to the grand scheme if stock prices cause them to lose lofty valuations.

1. Do you think this merger will fly? Why or why not? Yes, I think the merger will fly.  Optimistic assumptions have no place in merger decisions since most fail. However, Kmart stores and Sears stores are still in operation today so that’s proof enough for me that it worked out.
2. Explain why total sales information for a retail chain is insufficient in evaluating performance? A key measure of how a retail chain is doing is same store sales.  Total sales reflect new store opening and tell nothing about how the existing store is doing.
3. Visit a Kmart store and a Walmart store.  What was your overall impression as to strengths and weaknesses? I haven’t visited a Kmart in over 20 years.  However, Walmart is a store that I visit quit frequently. Strengths included: variety, low prices, conveniently located, just to name a few. Weakness include: employees aren’t very knowledgeable about he products offered, the checkout lines are always long, and the stores are not always clean.
4. Visit a Sears and a Target store.  What was your overall impression as to strengths and weaknesses? There isn’t a Sears store in my area anymore. But I remember the great customer service that was provided upon each visit and that was a major strength. The only noticeable weakness the location. I enjoy going to Target but the prices are not as budget friendly as Walmart. A strength is the shelves are always stocked with merchandise.
5. Do you think you would like to be a Kmart store manager? No. I don’t think I would like to be a Kmart store manager.
6. Does the size of the Kmart/Sears entity after the merger give it competitive advantage? Why or why not? No, it doesn’t give them the competitive advantage. The bargaining power of buyers is very high in the case of retail business. Due to the presence of various similar services providers the customer tends to switch they find that competitors’ products are better in terms of quality and prices. With the source of buyer power, buyers tend to have a greater control over the manufacturers. Sears Holdings Corp. is considered as the retail store that caters to the moderate and more educated and well-off clientele as to compare with its rivals.
7. Is market share all that important in this case? Discuss. Yes, Market share refers to a company's portion of sales within the entire market in which it operates. This metric indicates a company's size within its market.
8. Kmart does not really have to match the low prices of Walmart. It should not even try. Evaluate this statement by an analyst. Kmart shouldn’t have to match the low prices of Walmart because they don’t have the buying power that Walmart has and it doesn’t have all of the product offerings.