While iProceed is saying that we typically do not support mergers and acquisitions, and definitely not of this magnitude. The reason: Study after study has suggested that mergers simply destroy value most of the time.
AT Kearney has found that 58% of mergers and acquisitions did not result in a stock exchange price increase. Robert W. Holthausen, a Professor of Accounting and Finance and Management, says, "Various studies have shown that mergers have failure rates of more than 50 percent. One recent study found that 83 percent of all mergers fail to create value and half actually destroy value. This is an abysmal record. What is particularly amazing is that in polling the boards of the companies involved in those same mergers, over 80% of the board members thought their acquisitions had created value."
Why Sears and KMart marriage might work?
AT Kearney has found that 58% of mergers and acquisitions did not result in a stock exchange price increase. Robert W. Holthausen, a Professor of Accounting and Finance and Management, says, "Various studies have shown that mergers have failure rates of more than 50 percent. One recent study found that 83 percent of all mergers fail to create value and half actually destroy value. This is an abysmal record. What is particularly amazing is that in polling the boards of the companies involved in those same mergers, over 80% of the board members thought their acquisitions had created value."
Why Sears and KMart marriage might work?
- When two desperate companies come together they might work harder to make it work. Bain & Company’s survey of 250 global executives involved in mergers and acquisitions indicates that two of the top four reasons for failed corporate marriages relate to poor integration. Both Sears and KMart bring to the marriage what each lacks. For instance, the home/garden appliance business (particularly the service component of it) and apparel (now that Sears has a broad product line) will be great additions to K-Mart which had always been a store without any value creation mechanism until Martha Stewart came along.
- While Sears had a privileged position because of its presence in malls, it was not able to capitalize on it because of its low-end merchandise. iProceed believes that the combined company should take a segmentation approach by placing high-value merchandise in stores in malls while pushing low-end products through K-Mart stores in the suburbs. It is fine to carry both names but this segmentation approach can be reinforced by emphasizing the premium position of mall stores and value position of suburban stores. If the company tries to make all stores the same, they are in trouble.
- In today's competitive dynamics in the retail sector, size matters, particularly when one needs to compete with Wal-Mart. The combined company might also be in a better position to expand overseas in high-growth markets like China and India (where retail stores like these are practically unknown and can create a lot of value to price-conscious consumers who do not want to shop in malls that are slowly emerging).