Team Target Group
We are analyzing Target Corporation and Kmart, under the Sears holding company, in an attempt to determine whether or not Target should acquire Kmart and what strategy of acquisition is most preferable to Target. Target is the second largest discount retail firm in the nation and Kmart has approximately 1221 stores making it the third largest retail firm and creating an opportunity for Target to expand quickly and compete more effectively against Walmart which is the largest retail company in the country.
Target has a highly recognizable brand and a reputation for high quality products that Kmart sorely lacks. Kmart merged with Sears in 2005 and came under the umbrella of the Sears holding company. However, this company has not had a positive net profit margin in the last several years and allowing Kmart to be bought out may allow the company to focus on its existing Sears locations and increase their net profit. Kmart has an inefficient supply chain and could benefit from significant rebranding which a merger or acquisition by Target is capable of providing.
Target is considering two methods of acquisition. The first is an asset purchasing strategy that would cost Target approximately 3.7 billion dollars. The firm would buy Kmart outright and this is the method that would have the most benefit and least risk involved for Kmart shareholders and management. The acquisition could be funded by 35% cash, 65% debt and the remaining portion by issuing stock.
The second method is more preferable for Target and is a Stock for stock exchange strategy in which Kmart would be liquidated into the Target Corporation. This method would cost Target the current market value of the firms stock and shareholders would be offered shares in the acquiring company based upon a pre-specified exchange rate.