Alan Lacy: Let’s Rock the Vote

Brent Felgner, March 14, 2005

New York — With less than 10 days before the vote, Sears Chairman and CEO Alan Lacy is leading a full-bore campaign — worthy of almost any political analogy — to win ratification of the merger with Kmart.

The campaign, which has unfolded in letters to shareholders and employees, postings on the company’s internal Web site, and live and videotaped “Town Hall” meetings, includes an overt “GOTV” push to get out the vote on March 24 — the proxy vote — amongst Sears’ stockholders and associates. It’s an effort that could be critical to the merger’s success.

Although no strong opposition is appearing to block the merger, success in the Sears’ vote is far less assured than at Kmart, if only by the numbers and structure: Sears, in which investor Eddie Lampert holds a 14 percent stake, requires a two-thirds vote to approve the agreement. On the other hand, Kmart, where Lampert controls about half the stock, requires a simple majority approval, and ratification there is considered a foregone conclusion.

The effort also offers some insight into the pressures that drove Lacy to agree to the merger — not the least of which were two consecutive years of poor financial performance, references he makes throughout his campaign.

So Lacy is on the stump, evidence of which may be seen in multiple disclosure filings with the Securities and Exchange Commission. His campaign seems even to have aroused the ire of some Sears’ retirees, who have protested that he’s using company resources to talk up the merger. Sears has defended his actions as entirely appropriate.

Like any good political campaign, the Lacy effort repeatedly urges action, and uses a carrot-and-stick approach to making the case.

“The Sears board of directors and I strongly urge all shareholders to vote for the merger,” Lacy said in a March 1 letter to employees. “The merger represents a compelling roadmap for growth,” the letter continued.

Although Sears was making progress with its off-mall strategy before merger talks began, it would have taken the company years and a huge investment to achieve the market penetration it will realize next year, Lacy said.

Sears can achieve that market penetration more efficiently by converting Kmart locations where appropriate and learning from its experience with convenience items, “a skill Sears has not yet adequately developed,” Lacy said. Moreover, Kmart “brings a ‘can do’ spirit and a sense of urgency” that will help drive results for the new company.

But if those reasons aren’t compelling enough, Lacy also points out the downside to a defeat, particularly after a disappointing 2004: “Without this merger, we would be forced to consider dramatic steps to compete without the locations and advantages Kmart brings to us. These changes would not be attractive for the company or for our associates.”

In apparently more extemporaneous remarks in a “Hoffman Town Hall” meeting with associates March 2, Lacy laid out at length some of the considerations leading up to the merger, as well as management’s current thinking and plans for the combined companies.

He drew a picture of a mature, limited-growth company beset by competition it couldn’t adequately address.

“We’ve been around for 119 years,” he said. “It’s a wonderful thing. That said, we’ve been in 870 stores for the last 35 years plus. As a retailer, we really have not grown at all for the last 35 years and, needless to say, what’s happening in the retail industry more broadly — we’ve got many best in class, newer competitors that have grown to be very substantial enterprises and continue to grow while we’ve been, roughly speaking, standing still.

“Our best-in-class competition last year added 800 stores on a base of 8,000,” Lacy told employees. “If you take Wal-Mart, Home Depot, Best Buy, Kohl’s, Lowe’s, etc., they’ve got 8,000 stores out there compared to our 870. They added 800, 10 percent unit growth. We were doing everything we could possibly do getting 6 or 7 percent unit growth, etc.”

That was particularly devastating in light of Sears’ second consecutive year of poor financial performance, he added.

Progress is already in the works, Lacy said. Conversions on five Kmart stores began several weeks ago, and the first 25 conversions will be completed between February and March, with another 25 converted between April and June, he explained.

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