December 28, 2018
Update, February 8, 2019:
On February 7, the bankruptcy judge overseeing the Sears Holdings case accepted Eddie Lampert’s $5.2 billion bid and allowed him and his ESL hedge fund to buy back the department store chain they had driven into bankruptcy. Nearly 200,000 jobs have been lost at Sears and Kmart since Lampert and ESL acquired the chains in a leveraged buyout in 2005.
Lampert and ESL have shown little interest and less aptitude for turning around the fortunes of what had once been the largest retail chain in the US. Their actions in selling off Sears’ prime real estate (to a real estate company that is also under their control) for the benefit of ESL’s investors suggests that their goal is making money for the fund, not turning the remaining 425 Sears stores into a profitable enterprise. Lampert and his hedge fund investors profited as Sears closed stores, laid off workers, and spiraled into bankruptcy. Can they be trusted to focus on turning Sears into a successful retailer, capable of meeting customers’ expectations and providing secure employment for the chain’s remaining employees? Or, will they continue their pattern of slowly liquidating Sears’ stores and pocketing as much as they can from stripping its remaining assets?
The Sears saga is far from over. Stay tuned for what is sure to be the next episode in the Sears version of the Perils of Pauline.
Update, January 16, 2019:
In the latest installment of the Sears edition of the Perils of Pauline, Eddie Lampert’s ESL hedge fund — Sears largest shareholder and its largest creditor — has won approval for its sweetened bid ($5.3 billion) for 425 Sears stores. As Sears largest creditor, Lampert’s ESL has a big say in the outcome of the bankruptcy proceedings. Negotiations over final details of this latest deal continue, and the deal could still fall apart.
Shareholders are supposed to lose the companies they drive into bankruptcy, but Lampert’s ESL hedge fund, like Marc Leder’s Sun Capital private equity fund, has learned to use loans to its failing companies to have an upper hand in resolving the bankruptcy. Managers who drive companies into bankruptcy that threatens workers’ jobs and pensions should not have a say in the bankruptcy proceedings regardless of their position as creditors. Congress needs to act on corporate bankruptcy reform.
Update, January 8, 2019:
Hedge fund “king” Eddie Lampert’s bid to buy Sears Holdings out of bankruptcy, and again own more than 425 Sears and Kmart Stores, bit the dust when Sears refused his offer of $4.4 billion — much of it in the form of forgiveness for loans his hedge fund, ESL, had advanced to the department store chain. Lampert and ESL also wanted to be released from any potential liability associated with its 2015 sale of prime Sears real estate to a real estate investment trust that Lampert also controlled. Creditors question whether Lampert had cheated them out of $2.6 billion in this and other deals he made for Sears’ assets.
Sears employed 68,000 workers in October, when it first declared bankruptcy. The closing of stores in the three months since then has whittled the number of Sears employees who will lose their jobs down substantially to an estimated 50,000. Sears does not plan to make severance payments to its former employees. The workers and their families are just collateral damage in Lampert’s quest for returns for investors in his ESL hedge fund.
But, shed no tears for Lampert and his wealthy investors. Their back-up plan is to buy selected Sears real estate and intellectual property, such as the Sears brand, for $1.8 billion, with much of the purchase price funded by forgiving some of the Sears debt ESL holds. If the bankruptcy court approves, Lampert and his hedge fund investors can be expected to turn a hefty profit reselling or developing the real estate.
At 4 pm ET today, the remaining 68,000 employees at Sears and Kmart stores will learn their fate. Will the company be rescued from bankruptcy? Or, will the retail chain be liquidated, its stores shuttered, its workers out on the street without a job?
In 2004, Sears was bought by financial wunderkind Eddie Lampert and ESL, the hedge fund he founded, and merged with Kmart. In 2006, the combined company, now known as Sears Holdings, had more than 3,500 stores and a workforce totaling 355,000. Lampert’s hedge fund attracted a who’s who of investors — among them Robert Rubin, David Geffen (billionaire entertainment chief), and Steven Mnuchin, who became Donald Trump’s Treasury Secretary. Mnuchin, who was on the Sears Board for 12 years before joining the Trump administration, disclosed in 2016 that he held an investment of $26 million in ESL, which he later divested.
As President of Sears since 2013 and Chairman of its board for longer than that, Lampert reportedly ran the company like a hedge fund, selling off valuable assets like its credit card business and brands like Land’s End and Kenmore rather than investing in the stores and focusing on retail. Borrowing from private equity’s standard ploy, Lampert loaded the chain with debt and sold off its stores for the benefit of his hedge fund investors. Under ESL’s ownership and Lampert’s leadership, Sears may best be described as a slow-paced liquidation.
In its most egregious real estate deal, Lampert’s hedge fund in 2015 created a publicly traded real estate investment trust called Seritage Growth Properties. Lampert then had Sears sell 266 Sears and Kmart properties to Seritage for $3 billion. Many of these stores occupied prime real estate in Santa Monica, CA, Long Island, NY, and Aventura, FL. What made the sale suspect is that Lampert was Sears’ chief executive and largest shareholder and, at the same time, was chairman of Seritage’s board of trustees.
By the beginning of 2018, Sears had fewer than 900 stores and employed fewer than 90,000 workers. When the company filed for bankruptcy protection in October, the number of stores had fallen below 700 and just 68,000 workers remained on Sears’ payroll.
Sears went from employing 355,000 workers in 2006 to just 68,000 a dozen years later. What made selling off or shuttering stores and terminating workers — hundreds of thousands of workers over 12 years — Lampert’s go-to move whenever things got tough for the mismanaged chain? The answer is shockingly simple: In America, it costs an employer nothing to terminate a worker.
Let that sink in.
Now imagine how differently things might have turned out if Sears workers, and not just its high-paid executives, were entitled to a severance payout proportional to their years of service. If getting rid of workers carried a price tag, employers might suddenly find alternative options more attractive. Lampert might have decided it was cheaper to take steps to improve a store’s competitiveness rather than terminate workers’ jobs and pay them severance. Especially if dozens, or even hundreds, of stores were on the line. Facing high payouts to workers that threatened the chain’s ability to meet its debt payments, creditors might have called for Lampert’s resignation and replacement by a corporate president that understood retailing.
The Sears workers are taking a page from the Toys “R” Us playbook and organizing a national campaign to press for severance pay from the hedge fund investors who got rich while they ended up with nothing. But, this is an inefficient and, often, ineffective approach to getting severance pay. And, for most workers, it’s just not practical. Moreover, campaigning for severance after the jobs have been eliminated doesn’t provide employers with an incentive to spend money to improve business operations and avoid letting workers go.
The problems created by the ease with which employers can rid themselves of workers at no cost to the business crop up in many places. When employers consider the adoption of robots or artificial intelligence technologies, they often focus on the technologies’ potential to reduce the number of workers on the firms’ payroll. Employers may be reluctant to spend money to upgrade workers’ skills so that the technology can be deployed most effectively. A national severance pay requirement might make it cheaper for firms to train workers, rather than pay them severance. And, it would make the technology more productive.
Part of the rise of domestic outsourcing — companies contracting out key parts of the production process to vendors or other domestic suppliers — is driven by the desire of lead firms to shed labor and shift the employment relationship to smaller firms that often operate on thin margins. The result is higher profits for the outsourcing company and increasing economic insecurity for a large and growing group of workers employed in standard jobs by employers unable to provide decent wages or benefits. This is a rearrangement of claims on the fruits of production (what economists refer to as “value-added”) and a transfer from workers to the 1 percent, but no increase in production.
Similarly, a requirement that workers be paid severance when a business is downsized would put a crimp in private equity, which loads companies it acquires with debt and gets rid of workers to save on pay and free up cash for debt payments. Private equity firms whose “secret sauce” simply consists of reducing payroll will be exposed, while those truly able to improve operations and business strategy will continue to thrive. The result? Greater economic security and improved productivity.
Requiring firms to make severance payments to workers terminated through no fault of their own benefits workers. But, as these examples illustrate, requiring severance makes the economy more productive as well.
It is unfortunate that it is necessary for Sears workers, like the Toys “R” Us workers before them, to launch a national campaign to get the severance payments that are due to them. A Congress that is committed to good jobs and economic security for middle America should end the ability of employers to get rid of workers without incurring any costs and should enact a national severance law.