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The Merger of Kmart & Sears As the engineer of the $115 billion planned purchase of Sears Roebuck & Co by Kmart Holding Corp Edward Lampert is stepping out of the shadows of Wall Street to make

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 highAc€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. LampertAc€?cs hedgeAc€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 oneAc€day return given that market interest rates were 6%. ShortAc€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 KmartAc€?cs 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 KmartAc€?cs 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 mergerAc€?cs 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 acquirerAc€?cs 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 reAc€branded all the Nations Bank branches.   Asked to comment on the Kmart / Sears deal, an analyst said Ac€A?I donAc€?ct think the combined company will be a much more significant challenge to WalAc€Mart. Consumers think that when they want price they go to WalAc€Mart. When they want value Ac€?o a little fashion Ac€?o they go to Target.Ac€?? After hearing this, Mr. Lampert began to wonder if he had made the correct decision. Ac€A?I wonder,Ac€?? he thought to himself, Ac€A?would I have been better off buying Target instead?Ac€?? 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.   

Questions you should consider in reviewing the case:

1. Which firm is most liquid?

2. What is the return to shareholders?

3. What is the NPV of buying Sears?

4. What is the PV of Mr. LacyAc€?cs pay package?

5. How could we find the greatest underperforming area for any of the firms?

Income Statements Ac€?o January 31, 2004 (All numbers in thousands)

  Walmart Kmart Sears Target
Sales 258681000 23253000 41124000 48163000
Costof Sales 198747000 17846000 26231000 31790000
Gross Profit 59934000 5407000 14893000 16373000
Administrative Expenses 44909000 4998000 9111000 11534000
EBIT 15025000 409000 5782000 4839000
Interest 996000 162000 1025000 559000
Taxes (@35%) 4910150 86450 1664950 1498000
Net Income 9118850 160550 3092050 2782000

Balance Sheets as at January 31, 2004 (All numbers in thousands)

  Walmart Kmart Sears Target
Cash and Cash equivalents 5199000 2088000 9057000 816000
Receivables 1254000 301000 3397000 5776000
Inventory 26612000 3238000 5335000 5373000
Total Current Assets 33065000 5627000 17789000 11965000
         
Property, Plant, and Equip. 58530000 153000 6788000 16969000
Other Assets 6079000 120000 908000 1495000
Total Assets 97674000 5900000 25485000 30429000
         
Account Payables 31051000 1772000 7582000 7448000
Other current Liabilities 6367000 1050000 5194000 866000
Total current liabilities 37418000 2822000 12776000 8314000
         
Long term debt 20099000 2297000 4718000 10217000
Common Stock 431000 208000 823000 96000
Retained Earnings 39726000 573000 7168000 11802000
Total Liabilities and Equity 97674000 5900000 25485000 30429000

May 02 2020 View more View Less

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