The pairing of longtime industry rivals was poised for final clearance Thursday, four months after the proposal engineered by Kmart Chairman Edward Lampert was unveiled.
Shareholders of, first, Kmart and then Sears were expected to approve the merger at separate meetings at Sears' sprawling headquarters in suburban Hoffman Estates. Barring a last-minute hitch, the complex will now house a new retail titan named Sears Holdings Corp. with $55 billion in revenue, 3,800 stores and an uncertain future.
The merger will create the nation's third-biggest retailer behind Wal-Mart Stores Inc. and Home Depot Inc. and bring together Sears' top brands Craftsman and Kenmore with Kmart's successful Martha Stewart (news - web sites) and Joe Boxer product lines. It also furthers Sears' strategy of moving away from shopping malls to the more profitable off-mall sites that Kmart stores typically occupy.
But since each firm has struggled on its own, it remains to be seen whether the combined company can manage to keep up with thriving competitors.
Lampert, whose investment firm controls Kmart and is Sears' largest individual shareholder, has orchestrated a financial turnaround at Troy, Mich.-based Kmart since it emerged from bankruptcy in 2003. The discounter turned a $1.1 billion profit last year, although it was largely the result of selling off real estate as sales continued to decline.
He and Sears chairman and chief executive Alan Lacy, who will be CEO and vice chairman under Lampert at Sears Holdings, say the merger should save $500 million over the next three years. That means announcements of widespread store closings and staff cuts may be imminent.
After boosting profits at Kmart, Lampert faces a similar challenge at Sears, where sales have slipped lower for four consecutive years and the $1.9 billion acquisition of Lands' End three years ago hasn't worked out. He has already signaled a change in direction last month with the announcement that dozens of earlier-acquired Kmart stores would be converted to a new mid-sized store format called Sears Essentials.
Analysts are skeptical about prospects for a retail turnaround.
"We think Eddie has the Midas touch, and in the short term I expect him to cut costs out of the business and extract value from some of Sears' non-strategic assets," said retail analyst Kim Picciola of Chicago-based Morningstar Inc. "But over the long term, we just don't see this combined retailer effectively competing against the Wal-Marts and Targets of the world."
Retail consultant Howard Davidowitz expects Lampert to take the same approach at Sears to generate cash that he did at Kmart: sell assets, cut costs, reduce inventory and raise prices.
"He recognized Kmart was a cadaver and he monetized it," Davidowitz said.
"For the short term, it's very exciting. But for the long term, watch out," he said of the strategy, forecasting a "bleak outlook" for Sears unless the move away from malls is successful.
Independent retail analyst Richard Hastings thinks that by maintaining Sears' strength in appliances and adding Kmart's Martha Stewart tag, the new company can prosper.
"It's about profitability, it's not about sales," he said. "It may get smaller, but ... it's going to be more profitable, more stable, with a better strategy. And it'll be more competitive with Wal-Mart and Target."