CHICAGO - Trying to rally employee support for a merger with Kmart Holding Corp., the chief executive officer of Sears, Roebuck and Co. said a "return to the status quo" would be unacceptable.
"Without this merger, we'd be forced to consider dramatic steps to compete without the locations and advantages that Kmart brings to us," Sears CEO Alan Lacy said in a letter to employees last week.
Thanks to Kmart's locations, the deal turbo charges Sears' efforts to add stores away from shopping malls. The new Sears Holdings Corp. will have about 3,500 stores, including about 870 Sears' mall locations and 1,100 specialty stores.
The Kmart merger, however, is proving unpalatable in some quarters.
Lacy acknowledged during a meeting with workers in Hoffman Estates last week that jobs will be cut and that compensation and benefits might be reduced to levels more in line with what Kmart offers. Sears has about 4,400 workers in Hoffman Estates but Kmart runs with a leaner operation, with about 2,000 in its Troy, Mich., headquarters.
"Largely speaking, this is a Hoffman Estates and Troy issue," Lacy said of looming job cuts. Both the letter to workers and a transcript of the meeting were filed Monday with the Securities and Exchange Commission.
Lacy acknowledged worker anxiety over benefits-and conceded it wasn't completely unfounded.
"I know there's an assumption that everything is going to drop to the Kmart level, because, generally speaking, not totally true, but generally speaking the Kmart benefit structure is lower than the Sears structure," Lacy said during the meeting. But "we've not made these decisions yet. Whatever changes we make are most likely not to impact 2005."
Even as Lacy reaches out to workers, one retail industry observer said Monday that Sears managers "want out in droves."
That's partly because of a tighter-fisted stock option policy but also because of the power that Lampert will wield and uncertainties about whether he wants Sears to be more of a real estate broker than a retail operator.
Middle management at Sears is "a nervous group" right now, the observer said.
Sears also announced Monday that senior executives, beyond the previously announced chairman's office consisting of Edward Lampert, Lacy and Kmart Chief Executive Aylwin Lewis, will be named at or shortly after the merger closes.
But other top executives are "keeping their job options open," the retail observer said.
In particular, Luis Padilla, a former Target Corp. and Marshall Field's executive, is being courted by other retailers for a top job. Padilla joined Sears in August to oversee marketing and merchandising.
While acknowledging employee angst over the new company, Lacy also encouraged support for the merger. Two-thirds of Sears' outstanding shares must be voted in favor of the merger for it to be adopted.
Lacy said Sears' stock would be trading at about half its current price of about $50 were it not for the merger.
"We earned a little less than $2 per share last year," Lacy said during the meeting. "That means we're trading between 25 and 30 times earnings. Typically mature mall-based department stores trade at something like 12 to 15 times earnings…were it not for the merger, we would have a stock that would be $25, $30 a share."
Howard Davidowitz, of New York investment banking firm Davidowitz & Associates, believes that Lampert, the Kmart chairman who'll hold the same job at the Sears Holdings, already has Sears Roebuck's institutional investors lined up behind the deal.
Lampert will own about 40 percent of Sears Holdings, Lacy said. He called Lampert "a brilliant investor" whose "track record is better than Buffett's," referring to Berkshire Hathaway's legendary Warren Buffett.