Case Detail

Case Summary

Kmart, Sears, and ESL: How a Hedge Fund Became One of the World's Largest Retailers

Case Number: 5-205-250, Year Published: 2005

HBS Number: KEL133

Request PreviewBuy

Authors: David Stowell; Paul Stowell

Key Concepts

Investment Banking, Corporate Finance, Corporate Restructuring, Investment Management, Financial Instruments, Mergers and Acquisitions, Financial Strategy, Real Estate, Hedge Funds


Within eighteen months of exiting bankruptcy, Kmart’s position was sufficiently strong to launch an acquisition of Sears, once the nation’s largest retailer, and also a core holding of ESL. This case touches on a number of compelling issues related to Kmart’s bankruptcy, restructuring, and rebirth under the control of ESL, a large hedge fund. The case can be used to outline the explosive growth in assets and influence of alternative investment managers, particularly LBO funds and hedge funds and the transition of some larger hedge funds from shorter-term trading strategies to longer-term plays on distressed debt, restructurings, and turn-arounds. The case lays out some of the key metrics that Eddie Lampert, head of ESL, had available to him as he made two decisions: first, in 2002, to amass a controlling stake in Kmart’s defaulted debt during the restructuring; and second, in 2004, to launch a takeover of Sears. The first deal illustrates the decision-making process for a financial buyer, including the downside protection of Kmart’s real estate holdings, while the second deal represents a traditional strategic acquisition, as Lampert in his new role as chairman and majority holder of Kmart sought out synergies in everything from the supply chain to human resources to cross-selling. The case illustrates the innovative use of real estate as a “hedge” for ESL in the event that the retail combination does not produce the required financial results. It also focuses on the role of investment bankers and the increasingly important position that hedge funds and LBO funds have carved out in the M&A market.

Number of Pages: 22

Extended Case Information

Teaching Areas: Finance

Teaching Note Available: Yes

Geographic: United States

Industry: Hedge Funds/Retail

Organization Name: ESL/Kmart/Sears

Organization Size: Large

Decision Maker Gender: Male

Year of Case: 2005