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The Merger of Kmart & Sears




The Merger of Kmart & Sears;As the engineer of the $11.5 billion planned purchase of Sears, Roebuck & Co. by Kmart Holding Corp.;Edward Lampert is stepping out of the shadows of Wall Street to make a high?profile bet that the;fortunes of not just one but two retailing giants can be turned around. He keeps his strategy close to the;vest, and his fortune is uncertain, though it was estimated at $2 billion ahead of the acquisition news.;Mr. Lampert?s hedge?fund firm, ESL Investments inc., which owns 43 million shares of Kmart, and 31;million shares of Sears, recorded paper gains of nearly $600 million in the wake of the takeover news.;He knew that was a spectacular one?day return given that market interest rates were 6%.;Short?sellers have been wary of Kmart ever since it emerged from bankruptcy in early May 2003. After;Mr. Lampert bought up some $1 billion of Kmart?s distressed debt in 2002, he kicked off an aggressive;restructuring campaign that included closing stores and selling off real estate to competitors. Investors;were so enamored of his results that they helped to double Kmart?s stock price in the past 18 months;from $58 per share to the current value of $120 per share.;The SEC filing also included a new employment contract for Sears chief executive Alan Lacy, who is;slated to be CEO and vice chairman of the combined company, Sears Holdings Corp. Under the;employment pact, which runs for 5 years after the merger?s effective date, Lacy is entitled to a minimum;base salary of $1.5 million a year and a target annual bonus of 150% of the base salary.;An acquirer?s brand typically is the one that goes forward, but companies have been known to flout the;rule based on whose brand is stronger in the marketplace. When Nations Bank bought Bank of America;the merged company took the Bank of America name and re?branded all the Nations Bank branches.;Asked to comment on the Kmart / Sears deal, an analyst said ?I don?t think the combined company will;be a much more significant challenge to Wal?Mart. Consumers think that when they want price they go;to Wal?Mart. When they want value ? a little fashion ? they go to Target.? After hearing this, Mr.;Lampert began to wonder if he had made the correct decision. ?I wonder,? he thought to himself;?would I have been better off buying Target instead?? Although it was too late, he began to look at the;financials for Target to see if he would have been better off buying Target.;1. Suppose that after one year Mr. Lacy is given an option to either stay with the company for the remaining four years of his contract or to leave immediately and take a lump sum payment of $3.5 million. Which option would you recommend;2. What is the Net Present Value (NPV) of buying Sears;3. Assuming that you could add the financials for Target and Kmart, what would be the return on equity for a merger of Target and Kmart? How does it compare with the ROE of Wal-Mart;4. Conduct a Dupont analysis of Kmart and Sears (separately) and indicate the area you think is most urgently in need of improvement for each company;5. Assume you had sold short 20,000 Kmart stock 18 months ago and you had to cover your position immediately. What would be your total gain or loss (ignore the time value of money);6. Of the four companies, which is the most liquid in your opinion? Using the liquidity information, which of the Sears or Kmart brands should be dropped;Attachment Preview;Screen Shot 2014-12-08 at 6.05.32 PM.png;Additional Requirements;Min Pages: 1;Level of Detail: Show all work


Paper#20994 | Written in 18-Jul-2015

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