Academic journal article Journal of the International Academy for Case Studies

Kmart-Sears Merger of 2005

Academic journal article Journal of the International Academy for Case Studies

Kmart-Sears Merger of 2005

Article excerpt

"Unless this new retail giant proves that it's capable of creating stronger customer connections, there will be no real value to this merger" (William J. McEwen, Gallup Management Journal)

"As a retailer, we really have not grown at all for the last 35 years" (Alan Lacy, Vice Chairman of SHC, Ex-Chairman of Sears) "The idea is to form "one great culture" (Edward Lampert, Chairman of SHC, Ex- Chairman or Kmart)


The primary subject matter of this case is corporate strategy. The subject matter is fleshed out in the context of a merger. This case is intended for an undergraduate or graduate corporate strategy section of a business strategy course. The case is designed to be taught in one class hour and is expected to require one hour of outside preparation by students.


In November 2004, retail giants Kmart and Sears announced plans to "merge" their operations. The "merger" was finalized in March 2005 and the combined entity was named Sears Holding Company. At the completion of the "merger," Sears Holding Company had revenues of more than $55 billion (in addition to $2.8 billion in debt), making it the third largest domestic retail company following Wal-Mart and Home Depot. The new organization would face three important issues: competition, synergy, and culture. Appropriate strategies, structures, and culture-blending initiatives must be developed to integrate these historic, disparate organizations to successfully perform as one unified business firm.


In late 2004, two giant U.S. retail corporations--Sears, Roebuck and Co. and Kmart Holding Corporation--announced that they would merge operations to form the Sears Holding Company (SHC). In terms of how the new entity's name was selected, the Sears name was apparently held in higher esteem by consumers than the Kmart name. Based on a survey conducted by Rivkin & Associates, Opinion Research Corp. (of 1,050 U.S. adults), 75% of Americans preferred the "Sears" name over "Kmart."

Under the terms of the merger, SHC became the third largest retailer in the U.S. with approximately $55 billion in annual revenues and 2,350 full-line and off-mall stores and 1,100 specialty retail stores in the U.S. Kmart shareholders received one share of SHC common stock for each Kmart share. Sears shareholders had the right to elect $50 in cash or 0.5 of a share of SHC for each share of Sears's common stock. At the time of the merger, it was estimated that the former shareholders of Kmart would have an approximate 63% interest in SHC and former shareholders of Sears would hold a 37% interest in SHC. On the morning of March 24, 2005, the merger approval date, Sears shares fell $6.06 (about 11%) to $50.74 (NYSE) and Kmart shares rose $1.19 (about 1%) to $126.02 (NASDAQ).

Twelve teams--comprised of members from both companies--were created to ease the merger process. According to Alan Lacy, former President and Chief Executive Officer of Sears and new Vice Chairman of SHC, one post-merger goal is that "Kmart will benefit from the planned cost sharing of several of Sears leading proprietary brands" as well as present opportunities "to capture significant revenue and cost synergies, including merchandise and non-merchandise purchasing, distribution and other SG&A expenses." Ultimately, the goal of the merger, according to Edward S. Lampert, former Chairman of Kmart and new Chairman of SHC, was to "seek to leverage the combined strengths of Sears and Kmart to obtain greater long-term value than either could have generated on a stand-alone basis. SHC plans to offer customers a new, more compelling experience with a differentiated and expanded product range" (SHC Press Release, 2005).

These changes are the first of many for these historic and somewhat disparate companies, both of which were founded in the late 1800's and are woven in American culture. The newly merged entity--SHC--will face challenges of marrying two distinct retail entities in terms of their unique cultures, in order to create requisite synergies to keep pace with (or surpass) the competition. …

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