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Big, Bigger, Biggest: More Retail Mergers Seen in Mega Era

There’s a new climate for merger activity following a flurry of deals, such as Kmart buying Sears, Jones taking Barneys and May Co. buying Field’s.

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“The retail business generates so much cash. Now companies are looking at what to do with it,” added Hal Kahn, the former Macy’s East chairman and ceo, currently a consultant.

“Wall Street demands growth from these [vendor] brands and they’re not going to get it with organic growth from existing labels,” said one venture capitalist. “Wall Street sets you up for continued consolidation, which is good for the bankers. They have a vested interest.”

Recently, there have been rumblings about Federated Department Stores and May Department Stores reopening merger talks, with Federated and its ceo, Terry Lundgren, on a performance high, and May remaining sluggish and its chairman and ceo, Gene Kahn, under pressure. Last summer, Federated was outbid by May for Marshall Field’s, but Federated may be ready to reel in a bigger fish.

In a Federated-May merger, there would be significant geographic overlap. Retailers said that roughly 30 percent of the two retailers operate stores in the same markets. However, one former Federated official said it’s possible to get around the overlap issue in some markets by keeping May stores in the moderate price zone and Federated stores better and higher priced.

On the other hand, some said that Lundgren wants to focus on improving Federated’s newly centralized home business, planting the Macy’s nameplate on all regional operations, and sustaining strong earnings rather than getting distracted by a megadeal.

Another problem: “Gene Kahn wants to paddle his own canoe,” said a Wall Street source. “The only way Federated can make it happen is to make a hostile offer, but that’s not really in their culture.”

Neiman Marcus is showing an increasing “open-to-buy” attitude after recently hiring Steven Dennis, a former Sears, Roebuck executive, as senior vice president of strategy, business development and multichannel marketing to explore new avenues of growth. Neiman’s has little room left for expansion considering it already has stores in most of the nation’s affluent markets. The company has been content to generate growth primarily through existing stores, and has done little to advance the previously stated strategy of seeking emerging brands to buy. Burt Tansky, chairman and ceo of NMG, has been shown scores of properties to buy, even reportedly Harrods, but Harrods is said to be priced very high.
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