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Letter to the editor

Detail, not retail, drives Lampert

The man behind the country's biggest retail merger is best known for being secretive - and successful.

By JEFF HARRINGTON
Published November 18, 2004

Edward S. "Eddie" Lampert, the secretive and savvy 42-year-old financier behind the merger of Kmart with Sears, Roebuck & Co., has a habit of surprising people.

Kidnappers, for example. Last year he was nabbed at gunpoint in his Greenwich, Conn., office parking lot and held for two days. He talked the kidnappers into letting him go.

At the age of 25, he quit a well-paying job reporting directly to Goldman Sachs' Robert Rubin to strike off on his own.

On Wednesday, the hedge fund manager pulled off another shocker when he announced that he was merging Kmart, a company he controls with a 53 percent stake, with fellow struggling retail icon Sears. It would be the country's biggest retail combination ever.

"It's not clear if they are merging to make them more able to stand up to Wal-Mart's greater strength or if this is a real estate deal," said longtime retail consultant Kurt Barnard, who was among those surprised at the news.

Many expected Lampert would use Kmart strictly as an investment vehicle, tapping its $3-billion in cash and its growing cash flow to fund other acquisitions - much as Warren Buffett uses cash flow from the hodgepodge of companies within Berkshire Hathaway to buy stakes in other companies.

By spending on a Sears' integration, "this really has other implications beyond just a financial play. It's a retail play," said Bart Weitz, who heads the retailing research and education program at the University of Florida. "There's a really nice fit between Sears and Kmart strategically.

"If you wanted to create a vehicle like Berkshire Hathaway," Weitz added. "I don't think you'd do this deal with Sears."

In addition to Kmart, Lampert's investment vehicle, ESL Investments Inc., already is Sears' largest investor with a 15 percent stake. ESL also has sizable minority stakes in such enterprises as AutoNation and AutoZone.

Yet, even as a combined Kmart/Sears would become the country's third-largest retailer, Lampert is rarely mentioned in the same breath as, say, Sam Walton when it comes to retail tycoons.

Indeed, with his track record as an investor extraordinaire, he's more likely to be viewed as the next Buffett, a comparison made with a question mark in Business Week's current cover story.

As the Business Week story details, a young Lampert was driven to succeed at an early age growing up in Roslyn, N.Y. When he was 14, his father, Floyd, a lawyer in New York City, died from a heart attack at 47. Financial security became a big issue and a young Eddie "assumed the responsibility" to help the family, Eddie's mother, Dolores, told the magazine.

Lampert's interest in investing began at about age 10 when he and his grandmother would sit and talk about stock tables and her investments, his mother recalled in Business Week. By high school he was reading corporate reports and finance textbooks, a friend told the magazine.

Lampert enrolled at Yale University, majoring in economics.

After a stint at Goldman Sachs, he went to Fort Worth, Texas, in 1988 to create an investment fund using his own initials. With Lampert relying on investor Richard Rainwater as a mentor, ESL Investments began building a long list of well-heeled clients.

ESL, now based in Greenwich, has since swelled into a $9-billion investment fund touting a 29 percent average return through the years. Reports place Lampert's net worth between $1.5-billion and $2-billion.

One media observer dubbed ESL essentially a private investment club for wealthy people. According to the New York Times, his clients in the past 10 years have included David Geffen, the media mogul, and Michael Dell of Dell Computer. ESL investors are asked to put up at least $10-million and lock up their money for at least five years.

Lampert gained a reputation as brilliant and detail-oriented, and a quick study on complicated financials. He was a risk-taker, buying large positions in a small number of companies and using those stakes to influence management. He liked to push for big stock buybacks. At AutoZone, he wielded his stockholder influence to install a new chief executive.

Though well-known among the wealthy, Lampert didn't truly emerge on the national scene until he set his sights on Kmart.

With the tarnished Kmart in bankruptcy reorganization, Lampert invested less than $1-billion to maneuver into control of what was a $23-billion retail chain.

Enthused by the track record of Kmart's new majority shareholder, investors drove up the company's stock price. Lampert nearly quintupled his money in less than two years, boosting his fund's stake in the giant discounter to about $4.2-billion.

As chairman of the highly scrutinized Kmart Holding Corp., Lampert maintained his trademark, secretive style.

Under his oversight, Kmart didn't hold conference calls for analysts and investors after releasing quarterly financial reports. Lampert eschewed holding investor days or attending investor conferences to explain the retailer's strategy and results. Unlike most in its industry, Kmart did not even issue monthly sales updates.

In using Kmart's cash to buy Sears, Lampert plans to keep both brands operating independently.

Retail observers offered several possible synergies in the merger: Sears is expected to move into "off-mall" stores in property now owned by Kmart; Sears can bring its tool line into Kmart; Sears may even push into the discount business.

Yet, it's hard to convince some in the retail industry that this means Lampert has suddenly shifted from an investor's viewpoint to that of a retailer.

"None of this has to do with retailing because Kmart sales are still going down," said Erik Gordon, a marketing professor at Johns Hopkins University. "There is no retailing logic to it. There is no synergy between Kmart and Sears stores."

Gordon predicted Lampert will continue to be stingy on investing in Kmart, liquidating its real estate and milking its cash flow to fund other acquisitions. That would mean strong short-term returns for ESL investors, Lampert said, with little long-term benefit for Kmart employees and customers.

"None of this has anything to do with two retail chains that are going down the tubes," Gordon added. "The fact they are now combining at a holding company level doesn't, in my opinion, make Kmart any better than it was yesterday."

- Times wires and files were used in this report. Jeff Harrington can be reached at harrington@sptimes.com or 813 226-3407.

[Last modified November 18, 2004, 00:13:08]