Kmart, Sears and ESL: How a Hedge Fund Became one of the World’s Largest Retailers
1. Describe recent trends in the hedge fund and private equity industry and the growing overlap between the two.
A: Hedge funds, historically, were more interested in the buying and short selling of defaulted or near-default bonds within a few weeks or months. This strategy was more of a short-term, exit-focused strategy. Now, however, some hedge funds are becoming more interested in the restructuring and long-term controlling of attractive assets. Hedge funds’ stakes in these companies are then transformed into equity from the arising new entity. Private equity is split up into Venture Capital and Leveraged Buyout funds, with a little made up of
A: ESL was the controlling owner of Kmart, with Lampert as CEO. He wanted to start making changes to Kmart and provide it with additional stability through the selling of 50 store locations. ESL, as a 10% owner of Sears, made the connection that Sears and Kmart could mutually benefit from the selling and buying of these 50 more rural store locations. Sears needed the locations in order to attract the loyalty of customers moving out to such locations, while Kmart needed to find a buyer. With over 1400 stores nationwide, Kmart could sell even more locations to Sears and create value for both companies. Vornado was rumored to financially buyout Sears as a real estate investment. Lampert had to make a move to reduce the cost structure and attain economies of scale.
It’s very unlikely that Sears could have competed and succeeded as a standalone retailer: 1) Sears’ loyal customer base had begun moving out to more rural areas, away from Sears’ locations and into Walmart and Target store locations; 2) without the necessary capital and resources, Sears would have had to take the immense risk of leveraging more and building stores in more removed locations; and 3) Sears’s business revolved around mall shopping, an old and archaic way of shopping.
4. Evaluate Lampert’s strategy and the benefits for Sears’s shareholders.
A: Lampert saw synergistic opportunities with the M&A of Sears and Kmart. By so doing, Sears would reach its target audience, while