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Kmart-Sears Merger

~~ NARSE Survey Results ~~
March 18, 2005

During the ten days that the Kmart/Sears merger survey was posted on NARSE's web site, there were 1,060 responses. NARSE appreciates all of the input from retirees, family members of retirees and Sears employees who took the time to complete the survey. Almost 40% of the respondents identified themselves as "Sears employees."

The survey disclosed that 88.4% of the respondents are opposed to the Kmart Sears merger. This confirms NARSE's opposition to this $11 billion dollar takeover. NARSE has opposed this "merger" for a number of reasons: (1) we believe that this merger/ takeover will not result in a competitive, powerful, merchandising organization accepted by the shopping public; (2) this takeover is not a solid, attractive stock investment for investors, associates and retirees; and (3) it appears that Sears Holdings Corp. will not honor its commitments to both associates and Sears retirees. See our complete opposition statement elsewhere on this web site.

 In addition, the vast majority (86.9%) of the respondents are not satisfied with Sears' directors, executive leadership, performance, competitiveness and growth under the current Sears administration.

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SEARS SELLS-OUT
(Why NARSE Opposes the Kmart Takeover)

March 12, 2005

After the November 17, 2004 announcement about Kmart’s bid for Sears, the National Association of Retired Sears Employees (NARSE) sent a letter of introduction to Edward Lampert and Alywin Lewis. They were told that for an acquisition to succeed and be supported by NARSE, it must contain the following conditions: “(1) your efforts must result in a competitive, powerful merchandising organization accepted by the shopping public; (2) this merger must be free from any stock price manipulation and be a solid, attractive stock investment for everyone, including investors, associates, and retirees who are also shareholders; and (3) Sears Holdings Corp. must honor its commitments to both associates and Sears retirees.”

None of these conditions are “pie in the sky” demands. Rather, they are based upon what is needed to turn around a failing company. And, to quote an earlier respected Sears Chairman, General Robert E. Wood, “a corporation is judged in a number of ways. A business must account for its stewardship not only on the balance sheet, but also in matters of social responsibility.”

We concluded our letter by offering our assistance in any way to make this merger or any merger a success, but only “when it proves to be in the best interests of all shareholders, associates and Sears retirees.”

Even though the takeover has yet to be completed, none of the press releases from Kmart or Sears, nor any of the SEC filings or disclosure documents (proxy statements, annual reports, prospectuses, etc) by these two companies, nor statements made by Chairman Lacy at Sears Town Hall meetings, nor even the recommendation by a proxy advisory firm, has convinced us that this “merger” will be in the best interests of all shareholders, associates and Sears retirees.

Therefore, after careful consideration, NARSE must oppose this $11 billion dollar takeover between Kmart and Sears. In addition, the preliminary results of the survey we are now conducting on the NARSE web site discloses that only 3 percent of the respondents approve of the “merger". And, to date, 40 percent of the respondents identified themselves as Sears employees.

Our reasons for opposing the Kmart-Sears takeover are as follows:

Condition 1 requires a competitive, powerful merchandising organization accepted by the shopping public. The following was recently reported in Crain’s Chicago Business:

“Suspicions about the Sears-Kmart deal are looking increasingly accurate: more about turning assets into cash than building a powerhouse retailer.

“For evidence, look at the proxy (recently) filed with the U.S. Securities and Exchange Commission…detailing Kmart Holding Corp.’s agreement to buy Sears, Roebuck and Co. for $11 billion. It reveals a company controlled by Wall Street financiers experienced at making money through investments, not operations. And it foreshadows a piecemeal sell off of some of Sears biggest assets and payoffs for Sears top executives, most of whom have been with Sears less than five years.”

Since the announcement of the “merger,” our phones have been ringing off the hook. There has been an utter disbelief that Kmart, a recently bankrupt, troubled retailer could buy Sears, regarded for decades as the internationally recognized model for innovative marketing to millions. For years, foreign companies sent their key executives to Sears to train and learn their successful merchandising and marketing methods.

More importantly, will customers/shoppers be happy with this takeover? How long will it take for the new Kmart & Sears organizations to define themselves, develop effective buying and selling strategies, and decide how, where and what each store is selling? Based on past performance, there is little reason to expect that Kmart’s reputation for its stores, merchandise, value and service will enhance Sears reputation.

Sears Chairman recently said it may take up to two years to fully integrate the two stores. With so many other places to shop, will the shopping public have the patience to wait while the restructuring takes place?

And, Sears Holdings Corporation (SHC) has yet to announce its “new team.” Does this new team consist of more operators? Are they more financiers or are they real merchants with a vision of where the shopping public will be in the future? True visionary merchants don’t try to merely duplicate what the Wal-Marts and Targets of the industry are doing. We hope that this is not the Sears “Grand” plan for the future! Since we don’t know where SHC intends to go, we cannot place the future of the Company in the hands of a tight-mouthed organization that likes to keep the public guessing before the takeover is completed.

So, on the First Condition, it is a definite VOTE AGAINST THE MERGER.

Element 2 requires a solid, attractive stock investment for everyone. Since the announcement of the proposed “merger” last November, NARSE has been tracking the stock prices of Kmart and Sears. Consistently, Sears has traded over $50 per share exchange price. In recent days, Kmart shares have risen, but whether this is a market reaction or manipulation by certain Kmart shareholders remains to be seen.

Based upon our analysis of the stock prices of Kmart and Sears since the announcement, it appears likely that the conversion to Sears Holdings will be detrimental for Sears shareholders. However, this is an individual decision that each shareholder must make for themselves

And, since SHC will not be paying dividends for the foreseeable future, the potential for Sears shareholders and retirees is, to say the least, not encouraging. Just do the math!

And speaking of math, another $11 billion dollar merger was recently announced between two much smaller retail organizations – Federated Department Stores, Inc. and May Department Stores Co. This merger will consist of a combined 950 department stores. Federated has annual sales of $15.6 billion; and May’s has annual sales of $14.4 billion.

If $11 billion dollars is the right price for two smaller retailing organizations, how can it possibly be the right price for Sears?! And when you do the math, something smells fishy in Troy, Michigan and Hoffman Estates, Illinois. Where’s corporate governance when you need it?

Is anyone happy about this takeover? Can the institutional investors really be happy? How can individual investors be happy with this deal? How secure will currently employed associates feel about the dismantling of their company? In and event, Lampert, Lacy and Lewis appear to be very financially happy with this arrangement.

So, on the Second Condition, it is again a definite VOTE AGAINST THE MERGER.

And finally, we come to Condition 3 that requires Sears Holdings Corp. to honor its commitments to both associates and Sears retirees.

Sears has already publicly acknowledged that there will be significant layoffs, but as Sears CEO Lacy has said, we cannot “return to the status quo.” We certainly hope not! The “status quo” under Chairman Lacy and his Board for the past five years has been a series of costly, failed ventures and concepts. The American shopping public votes everyday and is spending their money elsewhere.

And what about the currently employed associates? Chairman Lacy has already acknowledged that worker anxiety over benefits and jobs is not completely unfounded. He has said that jobs will be cut and the compensation and benefits might be reduced to levels more in line with what Kmart offers. Such statements have never built strong morale in any company. And stress levels have climbed knowing the power that Eddy Lampert will yield and the uncertainties about whether he views Sears to be more of a real estate broker rather than a premier retail entity.

Associates are being treated as a commodity, not as part of a family that should be pulling together to improve Sears problem performance. Such a mentality does not create a sense of loyalty between employer and employee. But maybe they don’t care. Would you?

And then there are the Sears retirees -- folks that helped make the company a premier American retailer. It appears that they will be tossed along the wayside, with many Sears “duplicative” associates. The medical benefits for Sears retirees will probably be secure for 2005 but all bets are off for future years.

Retirees are also customers and shareholders, who have family and friends who are customers and shareholders. So, the takeover team should realize that the potential impact of Sears retiree benefit decisions will be far greater than the actual number of Sears retirees.

Of course, it is the company’s prerogative to do whatever they want to do regarding retiree benefits. But, taking away medical benefits is a real slap in the face to all retirees who are not only customers but also shareholders. We sincerely hope that these retirees will remember this “slap” when they cast their vote on the “merger” issue. And if the takeover is approved, through no fault of retirees, these retirees should remember this slap when they decide where to shop.

So, on the Third Condition, it is once again an affirmative VOTE AGAINST THE MERGER.

What has happened to a once great American retailer? How has this retailer lost touch with the American shopping public during the administrations of recent Chairmen and their Boards of Directors? What has happened to corporate governance?

Unless SHC intends to bring in top-notch merchants after the merger is approved, the executives who are now tapped to run this new entity --- Chairman Eddy Lampert, Co-Chair Alan Lacy, President Alywin Lewis, Chief Financial Officer William Crowley and all of the directors – are not merchants who know anything about turning around a stagnant retailer and making it a premier American store again. (See pages 78 & 79 of the proxy booklet.) What a sad day for Sears!

Finally, Sears has recommended to its shareholders in a booklet sent to them about this proposed merger that they “should carefully consider the following risk factors in deciding whether to vote for adoption of the merger agreement.”

And what are these risk factors that Sears Board of Directors felt should be rejected since they believed that “overall, the potential benefits of the mergers to Sears and Sears stockholders outweighed any of the risks”?

Let us count the 13 risks (underlined) that Sears has set forth:

1. Sears stockholders may not receive the form of merger consideration that they elect for all of their shares and may receive in part a form of consideration that has a lower value. Because the ”merger” agreement requires 45% of Sears shares be converted into cash and 55% of Sears shares be converted into Holdings common stock, it is “likely” that a substantial number of Sears stockholders will not receive a portion of the “merger” consideration that they elected and the consideration they do receive will have a lower value than what they elected to receive.

2. Because the exchange ratios are fixed, the market value of Holdings common stock issued to you may be less than the value of your shares of Kmart common stock or Sears common stock. NARSE’s tracking of the share prices of Kmart & Sears has shown this to be true. Contrary to what the proxy advisory firm, Institutional Shareholder’s Services has said, the premium offered by Kmart IS NOT REASONABLE!

3. If you deliver your Sears shares to the exchange agent to make an election, you will not be able to sell those shares unless you revoke your election prior to the election deadline or the merger agreement is terminated.

4. We may fail to realize the anticipated synergies, cost savings and other benefits expected from the mergers, which could adversely affect the value of Holdings stock. Why could this be? There are many reasons, but Sears has set forth several: (1) there is a risk that national brands may not sell to the combined companies; (2) expanding the offering and distribution of proprietary brands may impact the value of those brands and lead to cannibalization of sales from either Kmart or Sears; and (3) Holdings may be unable to realize the value it expects from the combined real estate portfolio, including being able to differentiate product offerings at its various locations.

5. The failure to integrate successfully Kmart’s and Sears’ businesses and operations in the expected timeframe may adversely affect Holdings’ future results. Integration of two separate companies has never been an easy task. And, as Sears has said, such bringing together “will be costly, complex and time consuming, and the management of Kmart and Sears will have to devote substantial resources and efforts to it.”

6. Directors of Kmart and Sears may have potential conflicts of interest in recommending that you vote in favor of the adoption of this merger agreement. This sounds very serious! As the proxy statement says, a number of directors of Kmart and Sears who recommend that you vote for the adoption of the “merger” have employment or severance agreements, equity compensation and other benefit arrangements that provide them with interests in the “mergers” different from the shareholders.

7. Affiliates of the Chairman of Holdings (Eddy Lampert), whose interests may be different than your interests, will have substantial influence over Holdings. After the mergers, Lampert’s ESL Companies would be expected to own between approximately 40% and 44% of the outstanding shares of Holdings common stock. Therefore, Lampert, an investor and not a person with retail experience, would have significant influence over many if not all actions to be taken by Holdings stockholders after such “mergers,” including the election of directors to the Holdings board and transactions involving a change of control.

8. Following the mergers, Holdings will have significantly less cash on hand than Kmart and Sears prior to the mergers, which could adversely affect its ability to grow and perform.

9. Certain rating agencies have assigned Holdings below-investment grade debt ratings, which could adversely affect its ability to access financing on terms acceptable to it and, consequently, its ability to grow and perform.

10. Holdings does not expect to pay dividends for the foreseeable future, and you must rely on increases in the trading prices of Holdings stock for returns on your investment. For retirees, many rely upon dividends from their portfolio to supplement their pension and social security.

11. The loss of key personnel may adversely affect Holdings. Since a lack of key merchandising personnel at Sears resulted in the situation they are in today, i.e., the “status quo,” this may really be a benefit, not a risk!

12. Former Sears stockholders who become stockholders of Holdings will be governed by the restated certificate of incorporation and restated by-laws of Holdings. What this means is that there will be material differences between current rights of Sears stockholders and the rights they can expect to have as Holdings stockholders.

13. We are parties to pending lawsuits in connection with the mergers.

So, based upon all of the above, we recommend that you vote AGAINST the takeover, known in nicer circles as a “merger,” of Kmart & Sears. It is our opinion that it is bad for the associates. It is bad for the shareholders. It is bad for the retirees. It is bad for the American shopping public. It is only great for Lampert, Lacy and Lewis.

YOUR VOTE IS VERY IMPORTANT.
YOUR NEGATIVE VOTE AGAINST THIS TAKEOVER IS CRITICAL FOR THE SURVIVAL OF SEARS, ROEBUCK AND CO.!

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