Welcome to The Business Buying Academy with Sieva Kozinsky. Here's what we have in store for you today:

• Want to get your business in front of my audience?
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• He combined 2 failing businesses. Here's what happened.
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• How to do $400 million a year in revenue

🔑Market your business to Sieva's Business Business Academy audience

We began testing with our first advertisers last year, and it turns out this community is incredibly engaged. With 70,000 operators, investors, and "acquisition curious" reading this letter each week, we drove customers for advertisers ranging from Vesto (treasury management platform) to Mainshares (sourcing investors for SMB acquisitions).

We are looking for a couple new advertisers to partner with this year as we launch a few new products.

Interested in marketing your business to this audience? Just respond to this newsletter and say hi.

🔑 What happens when you combine 2 iconic but struggling brands

What happens when two iconic American brands need saving?

One investor tried, but ultimately failed to turn both around.

Today, we're breaking down the 2005 merger between Sears and Kmart.

Let's take a look at the deal, how it was structured, and what went wrong.

Pre-merger

Sears, Roebuck and Company, founded in 1886 as a mail-order watch business by Richard Sears and Alvah Roebuck, grew into an American retail powerhouse.

By the early 1900s, Sears expanded from mail-order watches to physical stores, selling everything from utensils to insurance.

But by the end of the century, Sears faced intensifying competition from big-box rivals like Walmart (which overtook Sears as the largest U.S. retailer in 1991).

Sears' revenue peaked at $59 billion in 1992.

The company began divesting non-core assets, including its credit business to Citigroup in 2003 amid economic pressures. Sears also lagged in e-commerce; its early venture Prodigy, a precursor to the internet, was sold at a loss in 1996 after a $1 billion investment.

By 2004, Sears was a fading icon with declining sales and a need for reinvention.

Kmart, meanwhile, was doing even worse. Originally a discount chain, it filed for Chapter 11 bankruptcy in 2002, the largest retail bankruptcy at the time.

Enter hedge fund manager Eddie Lampert and his firm ESL Investments.

He acquired a controlling stake by purchasing Kmart's debt for under $1 billion, emerging with 53% ownership in 2003.

Lampert, a former Goldman Sachs trader who started ESL at age 25, focused on selling the company's real estate to stabilize Kmart.

Initially, the stock soared.

By late 2004, Kmart had a market cap of $8.6 billion and seemed to be recovering strongly.

Then he merged Kmart with Sears.

Merger Terms

Here are the key terms and details of the merger:

• Announced on November 17, 2004
• Kmart agreed to acquire Sears in an $11 billion deal, primarily in stock and cash.
• Shareholders approved the deal in March 2005, creating Sears Holdings Corporation.
• The deal combined 3,500 stores and about $55 billion in annual revenue.

Eddie Lampert became chairman of Sears Holdings; Alan Lacy, former Sears CEO, served as vice chairman and CEO; and Aylwin Lewis, Kmart's president, joined the leadership team.

The deal promised $500 million in annual cost savings by 2007 through synergies like cross-selling brands (e.g., Craftsman at Kmart) and store optimizations.

Another key piece of the deal: The combined real estate portfolio served as a safety margin, ensuring the company could sell off some properties to generate cash if needed.

Attempted Turnaround

Post-merger, Lampert's strategy emphasized financial maneuvers over retail reinvestment.

The term financial engineering was tossed around in the postmortem analysis of the merger.

A few examples:

• In 2005, Sears Holdings spent heavily on share buybacks, repurchasing $5.8 billion worth from 2005 to 2010, which enriched early shareholders but drained resources.
• Capital expenditures remained chronically low - about 1% of revenue annually.
• Lampert restructured the company into 30 autonomous divisions by 2008 (expanding to 40 by 2009), each competing internally for funding. This led to infighting, higher costs, and cannibalization. Goodbye, synergies.
• Efforts like the Sears Essentials hybrid store format were launched but abandoned due to poor performance.
• The company lagged in e-commerce as Amazon surged ahead.
• Asset sales accelerated. In 2015, 200 properties were spun off into Seritage Growth Properties; Lands' End was divested in 2014; and Craftsman was sold to Stanley Black & Decker in 2017 for $900 million. Lampert loaned the company over $1 billion through ESL to stave off collapse.

Results

The merger did not go as planned.

The first year actually went well.

Sales rose modestly in 2006 to a peak profit of $1.5 billion.

But then everything fell apart. Profit declined for 27 consecutive quarters after 2006.

From 2011 to 2016, Sears Holdings lost $10.4 billion.

The 2008 financial crisis erased 85% of the stock's value, and by 2014, debt surpassed market capitalization.

Store count plummeted from 3,500 in 2005 to about 700 by 2018, with over 200,000 jobs lost.

In October 2018, Sears filed for Chapter 11 bankruptcy with $6.9 billion in assets against $11.3 billion in liabilities.

A bankruptcy judge approved Lampert's $5.2 billion bid through ESL to acquire remaining assets in early 2019, keeping around 425 stores open and preserving 45,000 jobs initially.

Some critics accused Lampert of asset stripping for personal gain. He reportedly earned nearly $1.4 billion from fees and early stock gains despite the company ultimately failing.

Lessons for Business Buyers

This merger serves as a cautionary tale for acquirers in distressed investing. Here's my main takeaway:

This deal's focus on real estate and buybacks neglected store investments, accelerating decline amid rising competition.

You can’t cut your way to long term sustainable profits. Early cost cuts are often critical for a distressed business, but you need a sustainable business strategy you can invest behind.

🔑 He Does $400 Million a Year in Revenue

Want to understand how to buy and operate businesses like a pro?

Then you need to listen to this conversation.

I spoke with Bryan Rand, CEO of Rand & Co, who owns 9 platform businesses with $400 million in total revenue.

Bryan told me how he buys businesses, the wild story of how he started a fuel delivery business, and how he teaches his kids entrepreneurship and investing.

This is a fascinating conversation. Watch it if you want to build a holding company

​Watch on YouTube​

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Have a great day,

Sieva

P.S. - Are you hiring? Get started with top global talent from Somewhere (I'm a customer and investor)

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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