Kmart-Sears Merger of 2005.(instructor's Note) (2007)

CASE DESCRIPTION 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. CASE SYNOPSIS In November 2004, retail giants Kmart and Sears announced plans to merge their operations. The 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. INSTRUCTORS' NOTES Teaching Objective This case is intended for use in a business policy and strategy class. In terms of its length, writing style and content, the case should be relatively facile for any undergraduate senior to read and comprehend. The authors wrote the case in a style that overviews the situation but intentionally avoids guiding students through specific application questions or any analytical framework. Subject style enables the instructor to adjust class discussion to accommodate students with a broad range of abilities. Specifically, instructors can invite more experienced students, including graduate students, to reason through a situation where uncertainty exists and speculation may be required. Case Use Course: Business Policy and Strategy (Undergraduate or Graduate) Suggested Position in Course: Corporate Strategy Case The case can be targeted as a corporate strategy case; helping students to understand the various issues associated with strategic change. After completing this case, students should recognize an impetus for changing a corporate strategy--including why firms choose to find partners for mergers and other strategic moves to adapt to changes in the industry environment, how firms identify the necessity to change their corporate strategy, and how they implement change. The case of the Kmart/Sears merger illustrates two retail giants merging to reposition themselves in response to competition in the retail environment (Textbook Chapter: Corporate Strategy), declining profits related to lack of internal growth issues at each respective organization (Exhibits 1 and 2), and historical problems with brand identity. Kmart and Sears have joined forces to create a global retail giant to better compete with market discount leader Wal-Mart and other leading mass merchandisers such as Target. The fate of the individual brands that made both Sears and Kmart popular--Martha Stewart, Jaclyn Smith, Lands End, Kenmore, Die Hard, Craftsman, etc.--are still to be determined. However, the Sears name will live on and the Kmart name will likely fade away. This will be important in terms of brand identity and customer loyalty. Of interest, opinion polls and analysts clearly point to a more positive connotation with the Sears name than the Kmart name, justifying the new entity's name: Sears Holding Company (SHC). It should be noted that the Sears name is more popular with male consumers than female consumers based on the strength of their tools, equipment, automotive and home improvement lines. Both Sears and Kmart have never been viewed as fashion-forward entities by female shoppers. Of greater interest, however, is that while Kmart was more financially stable than Sears pre-merger (i.e., Kmart had less shares outstanding, higher earnings-per-share, higher stock prices, lower long term debt, less liabilities, higher return on equity, higher return on assets, higher return on investments, higher net profit margins, and lower debt-to-capital ratios), Kmart continued to be viewed as a damaged brand name in consumer polls. …