Sears is a prime example of how hedge funds and private equity companies take over retailers and gradually bleed them dry for their own benefit.
By Robert Kuttner and cross-posted from Huffington Post
If you’ve been following the impending bankruptcy of America’s iconic retailer as covered by print, broadcast and digital media, you’ve probably encountered lots of nostalgia and sad clucking about how dinosaurs like Sears can’t compete in the age of Amazon and specialty retail.
But most of the coverage has failed to stress the deeper story. Namely, Sears is a prime example of how hedge funds and private equity companies take over retailers, encumber them with debt in order to pay themselves massive windfall profits, and then leave the retailer without adequate operating capital to compete.
Part of the strategy is to sell off valuable real estate, the better to enrich the hedge fund, and stick the retail company with costly rental payments to occupy the space that it once owned.
In the case of Sears, the culprit is a hedge-fund operator named Edward Lampert, once a senior merger guy at Goldman Sachs. In 2005, Lampert merged Sears with Kmart, loaded both up with debt, and used some of the debt on stock buybacks to pump up the share price and enrich shareholders, notably himself and his hedge fund.
In a decade, 175,000 people at Sears/Kmart lost their jobs and revenue was cut in half. Various pieces of Sears were sold off. Lampert did just fine.
Lampert’s hedge fund also became a prime a lender to Sears, making money off of commissions and interest charges as well as being a prime shareholder. The strategy ensures that the fund and its beneficiaries (including Lampert himself) get rich, even if they run Sears into the ground. For the most part, the nostalgia coverage of the demise of Sears has missed this…