Due 04/14/16 2pm CT Advanced Accounting Discussion 1

Due 041416 2pm Ctadvanced Accounting Discussion 1please Perform Y

Perform your own research regarding the Kmart/Sears merger and answer the following questions: a. What major event for Kmart occurred in 2002? How was that issue resolved? b. What form of business combination brought Sears and Kmart together, and what was the resulting corporate structure? c. In the business combination involving Sears and Kmart, which company acquired the other? On what basis was this determination made? What accounting implications did the choice of acquirer have? d. Perform some internet research and comment on how successfully or unsuccessfully the merger of the two companies has been viewed. The original Form S-4 relating to the transaction filed with the SEC can be found here. Please include the reference.

Paper For Above instruction

The merger between Sears and Kmart, two iconic American retail giants, represents a significant event in the landscape of corporate restructuring and strategic business combination. Analyzing this union involves understanding the context of Kmart’s major challenges in 2002, the nature of the business combination, the identification of the acquirer, and the overall success or failure of the merger from a financial and strategic perspective.

Major Event for Kmart in 2002 and Its Resolution

In 2002, Kmart faced a major financial crisis characterized by impending bankruptcy, declining sales, and mounting debt. This crisis culminated in Kmart filing for Chapter 11 bankruptcy protection in January 2002 (Kmart Corporation, 2002). The bankruptcy was driven by several factors, including fierce competition from other retailers such as Walmart and Target, mismanagement, and an inability to modernize its stores effectively. The resolution to this crisis involved restructuring Kmart’s debts, closing unprofitable stores, and seeking strategic partnership opportunities to regain financial stability.

Ultimately, Kmart's bankruptcy was used as a platform for a strategic reorganization. While Kmart continued to operate during the bankruptcy process, it sought a merger or acquisition to strengthen its market position. The bankruptcy was successfully resolved when Kmart emerged from bankruptcy in May 2003 as a reorganized entity, which set the stage for its subsequent merger with Sears (Kmart Corporation, 2003). This process involved substantial debt forgiveness and a restructuring plan approved by the bankruptcy court.

The Form of Business Combination and the Resulting Corporate Structure

The merger between Sears and Kmart was executed through a stock-for-stock transaction, categorized as a merger of equals. Sears Holdings Corporation was established as the parent company, consolidating both entities into a single corporate structure. The transaction was structured as a reverse Morris Trust merger, which allowed Sears to acquire Kmart while maintaining its own corporate existence (Sears Holdings Corporation, 2005). This approach facilitated tax advantages and avoided immediate adverse tax consequences.

Under the terms of the merger, Kmart shareholders received Sears Holding stock, effectively making Sears the surviving entity. The corporate structure post-merger comprised Sears Holdings as the parent, with Kmart and Sears retail operating entities under its umbrella. The combined entity aimed to leverage synergies, optimize supply chains, and cross-promote retail brands to improve competitive positioning.

Which Company Acquired the Other and the Basis for This Determination

The merger was essentially a merger of equals, with Sears and Kmart exchanging stock to form Sears Holdings. However, from an accounting perspective, Sears was the accounting acquirer based on the analysis of the business combination and the emergence of Sears as the primary entity. This conclusion was supported by the fact that Sears was a larger, more diversified retailer at the time, and the acquisition was structured such that Sears issued stock to Kmart shareholders (Sears Holdings Corporation, 2005).

The determination was primarily based on the accounting fair value of the companies involved and the decision to recognize Sears as the acquirer in the financial statements. This choice had significant implications, including the application of purchase accounting, which required the recognition of assets acquired and liabilities assumed at fair value, and the recording of any goodwill arising from the combination (FASB, 2009). The selection of Sears as the acquirer also influenced subsequent financial reporting, including the way revenues, costs, and intangibles were consolidated.

The Success or Failure of the Merger

The merger of Sears and Kmart has been widely viewed as largely unsuccessful from both strategic and financial perspectives. Initially, the merger was posited as a way to revitalize both brands through combined resources, expanded reach, and operational efficiencies (Hitt et al., 2011). However, several factors contributed to its underperformance.

Post-merger, Sears struggled to adapt to changing retail landscapes, including the rapid growth of e-commerce and shifting consumer preferences. The company experienced declining sales, store closures, and massive losses over subsequent years (Klein, 2018). Despite efforts to modernize and diversify its product offerings, Sears’s financial deterioration continued, culminating in bankruptcy filings in 2018.

Critics argued that cultural clashes, poor strategic execution, and underinvestment in stores prevented Sears from realizing the synergies envisioned at the time of the merger. The loss of market share to competitors like Amazon and Walmart further eroded the combined entity's viability. Consequently, the typical benchmarks of a successful merger—synergy realization and value creation—were not achieved (Baker & Powell, 2019).

In conclusion, while the merger initially aimed to create a retail powerhouse, it ultimately became a case study in the challenges of integrating major corporations in a rapidly evolving industry. The merger’s failure highlights the importance of strategic alignment, innovation, and adaptability in the competitive retail environment (Ghemawat & Nueno, 2006).

References

• Baker, M., & Powell, M. (2019). The decline of Sears and the retail landscape. Journal of Retailing & Consumer Services, 50, 203-211.
• FASB. (2009). Accounting Standards Codification (ASC) 805: Business combinations. Financial Accounting Standards Board.
• Ghemawat, P., & Nueno, J. L. (2006). Tarzan Management: The key to success in retail. Harvard Business Review, 84(5), 105-115.
• Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2011). Strategic Management: Competitiveness & Globalization. Cengage Learning.
• Klein, M. (2018). Sears' last years: Decline, bankruptcy, and liquidation. The Wall Street Journal.
• Kmart Corporation. (2002). Annual Report. Kmart.
• Kmart Corporation. (2003). Reorganization Plan. Kmart.
• Sears Holdings Corporation. (2005). Merger Agreement and Financial Disclosures. Sears Holdings.
• Sears Holdings Corporation. (2005). Annual Report. Sears Holdings.
• U.S. Securities and Exchange Commission. (2005). Form S-4 for Sears-Kmart merger. Available at https://www.sec.gov