The Sears Acquisition: A Retrospective Case Study of Value Detection

Abstract

Purpose: This paper introduces the base case valuation pattern, which is derived from the modern Graham and Dodd valuation methodology, and it demonstrates how that pattern could be utilized in M&A by way of a case study.

Design/methodology/approach: The paper presents a case study of the 2004 acquisition of Sears by hedge-fund manager Eddie Lampert. It draws on previously published Graham and Dodd methodological materials as well as Sears' publicly available financial information. The valuation calculations presented in the case are the sole work of the author.

Findings: The results of the case suggest that base case valuation could be practically utilized in M&A. Significantly, it could also be utilized in the formulation of an M&A negotiating strategy, shareholder communication plan, and performance improvement plan.

Practical and research implications: This case demonstrates the practical utility of base case value in M&A by way of the 2004 Sears acquisition. We demonstrate how that acquisition contained a reasonable margin of safety, or price discount to estimated value, even though it occurred at a multiple of 1.8x Sears' book value at the time.

Originality/value: This work introduces the base case valuation pattern, and it is the first work, as far as we are aware, that applies the Graham and Dodd methodology to the Sears acquisition even though Eddie Lampert is a noted Graham and Dodd-based practitioner.

Keywords: M&A, base case valuation, Sears acquisition

JEL Classification: G34, M29