Kmart and the acquisition of sears
In late November 2004, Kmart Corporation announced that it would purchase Sears, Roebuck & Co. for $11.5 billion.
Kmart grew from the S.S. Kresge Co. five and dime store opened by Sebastian Spering Kresge in Detroit in 1989. The first Kmart store was opened in 1962 and the S.S. Kresge Co. name was officially changed in 1977. By this time, the company had 1,206 stores. The company was at its peak in the mid 1980’s and was America’s largest retailer. However, it went through some rough times and filed for bankruptcy protection in 2002. It emerged from Chapter 11 in 2003 with healthy signals for continuing operations. In January 2004, it employed approximately 158,000 people and has no unions or collective bargaining agreements.
Sears, Roebuck & Company was originally the R.W. Sears Watch Company founded in 1886 by Richard W. Sears in North Redwood, Minnesota. Alvah C. Roebuck was a watchmaker that Mr. Sears hired in 1887. The company created a one-stop shopping experience that it is known for by introducing the first large mail-order catalog. The first store was opened in 1925 in Chicago. By January 2004, Sears was operating 871 full-line stores in the United States. Its four key areas of operation are Home Group, Apparel/Accessories, Sears Auto Centers and Sears.com. In January 2004, it employed approximately 201,000 people in the U.S. and Puerto Rico and 48,000 in Canada.
The merger would make the combined company move to the number three spot in the retail industry. When the announcement of the merger was made, there was already a positive response because share price in Kmart moved up by 7.7% to $109 and shares in Sears rose by 17% to $52.09 per share.
The merger will also provide synergy in the sales generated in the fourth quarter of the year of the calendar year. For Kmart, sales in the last quarter are around 28% of the year’s revenue. Sears also has much larger sales in the fourth calendar quarter.
The strategy for the merger was that Kmart could benefit from Sears’ Craftsman tool and Kenmore appliance product recognition and there would be more presence for Kmart brands like Martha Stewart in the Sears/Kmart stores.
The key issue is that both Sears and Kmart have been struggling in the retail market and some Kmart shareholders thought that combining both companies was not a good move. They thought that it would be difficult for Sears and Kmart to identify their customers and succeed as one when they had been struggling independently before. Also, they had questions about whether the merger would bring financial rewards.
Since the merged Kmart/Sears could not compete with Wal-Mart on price, it was felt that a well-defined strategy was lacking in this merger. It appeared that the combined Kmart/Sears superstores would be trying to compete with everyone; from Wal-Mart to Target, JC Penney, Kohl’s, Lowes and Home Depot. As far as the shareholders were concerned, without a well-defined strategy, the merger would fail. Examples are when Burroughs purchased Sperry Corporation to form the new company, Unisys. Because the strategy was not right, the financial results were not impressive.
There is the minimal risk of the negative publicity Sears could get from the merger because of the Martha Stewart factor. Martha Stewart was a shareholder in Kmart and has been getting some bad press of late because of her five-month sentence for obstruction of justice relating to insider trading. If the merger goes through, the Martha Stewart line will get double the exposure it is already getting and Americans are not convinced that Martha Stewart’s character gives a wholesome reputation.
Recommendations and detailed support for recommendations
As mentioned earlier on the issues and risks to this merger, the company has to think out and plan a well-defined strategy for it to succeed in the highly competitive retail market. It has to define its customers properly and has to be sure of whom its real competition is and then form a plan to make sure the newly formed company can thrive in the market. While the Martha Stewart factor makes the deal interesting, it does not appear to be a big risk so it is not a real threat.