As the engineer of the $11.5 billion planned purchase of Sears, Roebuck & Co. by Kmart Holding Corp., Edward Lampert is stepping out of the shadows of Wall Street to make a highprofile bet that the fortunes of not just one but two retailing giants can be turned around. He keeps his strategy close to the vest, and his fortune is uncertain, though it was estimated at $2 billion ahead of the acquisition news. Mr. Lamperts hedgefund firm, ESL Investments inc., which owns 43 million shares of Kmart, and 31 million shares of Sears, recorded paper gains of nearly $600 million in the wake of the takeover news. He knew that was a spectacular oneday return given that market interest rates were 6%.

Shortsellers have been wary of Kmart ever since it emerged from bankruptcy in early May 2003. After Mr. Lampert bought up some $1 billion of Kmarts distressed debt in 2002, he kicked off an aggressive restructuring campaign that included closing stores and selling off real estate to competitors. Investors were so enamored of his results that they helped to double Kmarts stock price in the past 18 months from $58 per share to the current value of $120 per share.

The SEC filing also included a new employment contract for Sears chief executive Alan Lacy, who is slated to be CEO and vice chairman of the combined company, Sears Holdings Corp. Under the employment pact, which runs for 5 years after the mergers effective date, Lacy is entitled to a minimum base salary of $1.5 million a year and a target annual bonus of 150% of the base salary.

An acquirers brand typically is the one that goes forward, but companies have been known to flout the rule based on whose brand is stronger in the marketplace. When Nations Bank bought Bank of America, the merged company took the Bank of America name and rebranded all the Nations Bank branches.

Asked to comment on the Kmart / Sears deal, an analyst said I dont think the combined company will be a much more significant challenge to WalMart. Consumers think that when they want price they go to WalMart. When they want value a little fashion they go to Target. After hearing this, Mr. Lampert began to wonder if he had made the correct decision. I wonder, he thought to himself, would I have been better off buying Target instead? Although it was too late, he began to look at the financials for Target to see if he would have been better off buying Target.

Assume you had sold short 20,000 Kmart stock 18 months ago and you had to cover your position immediately. What would be your total gain or loss (ignore the time value of money).

(All numbers in thousands) Sales Cost of Sales Gross Profit Administrative Expenses EBIT Interest Taxes (@ 35 %) Net Income Wal-Mart 258,681,000 198,747,000 59,934,000 44,909,000 15,025,000 996,000 4,910,150 9,118,850 Kmart 23,253,000 17,846,000 5,407,000 4,998,000 409,000 162,000 86,450 160,550 Sears 41,124,000 26,231,000 14,893,000 9,111,000 5,782,000 1,025,000 1,664,950 3,092,050 Target 48,163,000 31,790,000 16,373,000 11,534,000 4,839,000 559,000 1,498,000 2,782,000 Balance Sheets as at January 31, 2004 (All numbers in thousands) Cash and cash equivalents Receivables Inventory Total Current Assets Wal-Mart 5,199,000 1,254,000 26,612,000 33,065,000 Kmart 2,088,000 301,000 3,238,000 5,627,000 Sears 9,057,000 3,397,000 5,335,000 17,789,000 Target 816,000 5,776,000 5,373,000 11,965,000 Property, Plant & Equip. Other Assets Total Assets 58,530,000 6,079,000 97,674,000 153,000 120,000 5,900,000 6,788,000 908,000 25,485,000 16,969,000 1,495,000 30,429,000 Accounts Payable Other current Liabilities Total current liabilities 31,051,000 6,367,000 37,418,000 1,772,000 1,050,000 2,822,000 7,582,000 5,194,000 12,776,000 7,448,000 866,000 8,314,000 Long term Debt Common stock Retained Earnings Total Liabilities & Equity 20,099,000 431,000 39,726,000 97,674,000 2.297,000 208,000 573,000 5,900,000 4,718,000 823,000 7,168,000 25,485,000 10,217,000 96,000 11,802,000 30,429,000 (All numbers in thousands) Sales Cost of Sales Gross Profit Administrative Expenses EBIT Interest Taxes (@ 35 %) Net Income Wal-Mart 258,681,000 198,747,000 59,934,000 44,909,000 15,025,000 996,000 4,910,150 9,118,850 Kmart 23,253,000 17,846,000 5,407,000 4,998,000 409,000 162,000 86,450 160,550 Sears 41,124,000 26,231,000 14,893,000 9,111,000 5,782,000 1,025,000 1,664,950 3,092,050 Target 48,163,000 31,790,000 16,373,000 11,534,000 4,839,000 559,000 1,498,000 2,782,000 Balance Sheets as at January 31, 2004 (All numbers in thousands) Cash and cash equivalents Receivables Inventory Total Current Assets Wal-Mart 5,199,000 1,254,000 26,612,000 33,065,000 Kmart 2,088,000 301,000 3,238,000 5,627,000 Sears 9,057,000 3,397,000 5,335,000 17,789,000 Target 816,000 5,776,000 5,373,000 11,965,000 Property, Plant & Equip. Other Assets Total Assets 58,530,000 6,079,000 97,674,000 153,000 120,000 5,900,000 6,788,000 908,000 25,485,000 16,969,000 1,495,000 30,429,000 Accounts Payable Other current Liabilities Total current liabilities 31,051,000 6,367,000 37,418,000 1,772,000 1,050,000 2,822,000 7,582,000 5,194,000 12,776,000 7,448,000 866,000 8,314,000 Long term Debt Common stock Retained Earnings Total Liabilities & Equity 20,099,000 431,000 39,726,000 97,674,000 2.297,000 208,000 573,000 5,900,000 4,718,000 823,000 7,168,000 25,485,000 10,217,000 96,000 11,802,000 30,429,000