Hedge fund investor Eddie Lampert's decision to take charge of managing Sears is fraught with risks.

Stakes are high at Sears

September 10, 2005|By David Greising | David Greising,CHICAGO TRIBUNE

When hedge fund investor Eddie Lampert decided to take over operating control of Sears Holdings on Thursday, he decided to take charge himself rather than leave the job to professional managers.

It was a decision fraught with risk: a financial investor with virtually no management experience taking control of one of the nation's largest retailers.

This sort of coup by bankroll happens rarely in business, and for good reason: It doesn't work.

Cable titan Ted Turner became so frustrated with the play of his Atlanta Braves that he donned a baseball uniform and managed from the dugout until Major League Baseball forced him to stop. The league didn't like seeing an owner sink to the low level of managing games.

When investor Laurence Tisch owned CBS, he meddled extensively with content and direction, though never formally seizing control of operations.

Perhaps the best-known investor flameout was Carl Icahn's failed effort to run TWA in the late 1980s and early 1990s. Icahn arrived as a hero at the company in 1985, saving it from a hostile takeover effort by Texas Air Corp. Chief Executive Officer Frank Lorenzo.

But after seizing both financial control and operating control in 1988, Icahn had nothing but trouble on his hands. After a series of labor fights, too-aggressive cost-cutting and many financial scares, TWA ultimately was forced in 1992 into bankruptcy and Icahn was forced out. Icahn called TWA "the worst investment I made in the last decade."

That is the history management experts have in mind when they appraise Lampert's decision to take charge at Sears.

"If he doesn't have management experience, then he's in deep trouble," said Robert Duncan, an expert on management-led strategic change and dean of the Broad School of Business at Michigan State University.

"What he'd better do is get people who understand their business and know the marketplace, because there are going to be pitfalls. He doesn't have the skills, so he'd better find top management who do."

Lampert has built a remarkably successful career as a hedge fund investor. His ESL Investments has averaged annual returns of about 30 percent since its founding in the 1980s. Even before he bought into Kmart and Sears, Lampert directed one corporate turnaround, at AutoZone Inc., after making a substantial investment in the company and closely directing the work of his hand-selected CEO.

But the Sears job is on a different scale from AutoZone.

After all, Sears is not just one big retailer. Because it just merged with Kmart Holding Corp., Lampert is really managing a merger. And since Kmart itself was less than two years out of bankruptcy, he is managing that company's strategic repositioning. And Sears is developing a new strategy of its own, so he really is managing two repositionings.

Howard Davidowitz, of the New York consultancy and investment banking firm Davidowitz & Associates, is skeptical that Lampert can handle such a multifaceted challenge. "The first question you ask with this change is, `What talent was added to fix the problems at Sears?'" Davidowitz said. "The answer is none."

John Edwardson, chief executive of computer retailer CDW Inc., notes that Lampert will be challenged just to decide how to manage his personal workload. Lampert's ESL Investments is based in Greenwich, Conn., Edwardson observes.

"Will he move here? Run the company from out there? By telephone? It's going to be tough," Edwardson said.

And it's a challenge that has ramifications beyond whether Sears shareholders benefit from the experiment. "We need Sears to be successful," Edwardson said. "Sears is just too important to the city of Chicago not to be successful."

According to sources at Sears, Lampert in the first few months since Sears and Kmart merged has managed small issues affecting cost control - everything from the expense of lighting certain parts of stores to the cost of Sears' sales fliers. He has rigorously reviewed the performance of key managers and executives, and made it clear that every person is expendable - a point forced home by the departure of Sears' former chief marketing officer, chief financial officer and other high-profile executives. In meetings with employees, and in interviews with the press, Lampert has talked about leveraging Kmart's good real estate with Sears' stronger name. He has focused on making certain that Kmart focuses on profit, and not market share, as it builds its merchandise selection.

Lampert is a fan of Warren E. Buffett. When he started out, he used to scour Buffett's famed annual report letters for Berkshire Hathaway for tips on Buffett's investment thinking.

And although Buffett is famous for a mostly hands-off attitude toward his investments, he has been known to step in aggressively when necessary.

Buffett came in at the Salomon Bros. brokerage firm after an ethics crisis, spent less than a year putting the company back in shape, then turned the job over to professional mangers. Buffett also has closely controlled strategic decisions at another of his key investments, the Coca-Cola Co., by vetoing the company's proposed purchase of Gatorade and helping to select a new CEO.

In making his move on Sears, Lampert appears not to be pulling a Buffett. His announcement Thursday implied a certain permanence to the move by taking charge of merchandising, marketing, the Lands' End catalog retailer and Sears' strategic positioning.

"My decision to become more deeply involved in certain aspects of Sears Holdings business reflects the Board's and my desire to make the company more responsive to our customers and to involve me more directly in the renewal of the company," Lampert said in a statement. He has not been available for interviews.

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