In a stunning move that alters one of Chicago's most enduring business icons, Kmart Holding Corp. pounced on Sears Roebuck and Co. yesterday in a merger valued at $11 billion.
The new company, which will be called Sears Holdings Corp., will become the nation's third-largest retailer. It will continue to occupy Sears headquarters in suburban Hoffman Estates, Ill.
But it will be controlled by Kmart's chairman, Edward J. Lampert, a 42-year-old Connecticut investor who made his name buying Kmart out of bankruptcy last year and raising almost $1 billion in a matter of months by selling many of its stores to other retailers, including Sears.
Lampert and Sears Chairman Alan Lacy said yesterday that the idea behind the merger is to build up a new company, not tear down an old one. But they also said that as the new management team tries to forge a single, lower-cost competitor out of two perennial laggards, it likely will sell off some stores and cut redundant operations.
"This is going to be an enormous undertaking," said Lampert, who owns 52.6 percent of Kmart and 15 percent of Sears. "We'll need the best of the Kmart team and the best of the Sears team."
The new Sears will marry the originator of the "blue light special" to a retailer that has been an essential part of the Chicago business fabric since it was founded as a scrappy catalog company in 1886. Both have been in decline for decades. Industry giants such as Wal-Mart Stores Inc. and Home Depot Inc. passed them years ago.
But the new company will have greater scale - about $55 billion in sales and almost 3,500 stores. Among other advantages, that will help it negotiate lower prices from suppliers.
Lampert and Lacy plan to put Kenmore appliances, Craftsman tools and DieHard batteries into Kmart's discount outlets while they spruce up Sears' stores with Kmart's popular Martha Stewart line of linens, kitchenware and garden tools.
Lampert said he has identified ways to wring almost $500 million in savings from combining such things as distribution and purchasing.
He pointed out that the company buys $40 billion worth of goods a year, leaving plenty of room to drive down costs by working with suppliers to be more efficient.
Neither Lampert nor Lacy gave an estimate of how many jobs might be lost in this process. But they made it clear that one idea behind the merger is to cut costs and eliminate redundant operations.
"By and large, most companies our size have a lot of duplication," Lampert said.
Watching Sears get gobbled up by a once-bankrupt competitor gave many Chicagoans a chill yesterday.
"It's so much a part of Chicago," said June Rosner, owner of a public relations firm that bears her name. "It would be like losing Lake Michigan."
But economic development officials were breathing a sigh of relief that the company will remain based in Hoffman Estates.
"The No. 1 issue is where the headquarters is," said Paul O'Connor, executive director of World Business Chicago. "That's the ultimate pelt in the economic development business."
Investors in Sears and Kmart stock were much less sentimental. "Christmas came early this year," said Chicago investor Jeffrey Maillet, whose Noble Asset Management LLC owns shares of both companies.
Sears finished 17 percent higher, at $52.99 a share. Kmart, up 355 percent this year, added $7.78 to finish at $109.
The deal will pay Sears shareholders $50 in cash or half a share in the new company for every share they own.
Sears stock, which languished 29 percent below its one-year high as recently as late October, has been on the move since Nov. 5. That's when real-estate investment firm Vornado Realty Trust revealed that it had bought 4.3 percent of Sears the Big Store and gave the stock a 23 percent boost in one day.
Vornado's move, coupled with Lampert's 15 percent stake, highlighted a fundamental shift in the way the market values retailers. With a shortage of new retail space available, prime store properties occupied by sluggish retailers such as Sears or Kmart can sometimes be worth more if they are sold to growing rivals such as Target or Nordstrom Inc.
Lampert has raised more than $1 billion selling off assets at Kmart, sending its stock price soaring. When Vornado bought into Sears, it raised the question of whether the company's vast real estate portfolio might be worth more than the market value of its stock. The expectation on Wall Street was that Vornado, Lampert or both would eventually buy the company and "unlock" this hidden real estate value.
At the very least, it put heavy pressure on Lacy, the Sears chairman, to justify the company's weak profits and outmoded merchandizing strategies. Sears sales have fallen every year since Lacy took the helm in 2000.
Yesterday, Lampert tried to play down the real estate angle. But he did say that after decades of wasteful spending on stores and other operations, Sears needs to look at all of its assets and determine whether they provide an adequate return on the amount of capital invested.