The Columbus Dispatch: Still a good catch?
media mentionBy Tim Feran
The Columbus Dispatch Sunday March 18, 2012 9:40 AM
When Ohio offered Sears big money in hopes the retailer would relocate its headquarters to central Ohio, it seemed like a rare chance to snag an iconic American company.
Sears dashed Ohio’s hopes in December by deciding to stay in Illinois. But in the months since, the company’s outlook has changed.
Sears is closing stores, including seven so far in Ohio, and laying off workers, including some of its headquarters staff.
Things have gotten so difficult that, in order to ensure that vendors continue to supply goods to Sears, the company’s top shareholder agreed a few days ago to pay some of those vendors.
These developments raise the question: Was it a good idea for Ohio to court Sears?
“I see them as shrinking maybe a little bit further, but they’re not going out of business,” said Paul Swinand, a stock analyst who covers Sears for Morningstar.
Given this, he still thinks “it would have been a catch” to land the company, which reportedly was offered
$400 million in incentives by Ohio to make the move.
“Clearly, in Illinois, it would have been a huge economic loss had they left,” Swinand said. “ Even if (Illinois) had to give out some tax revenue, it’s billions (the state) would have lost.”& amp; amp; amp; amp; amp; lt; /p>
Ohio officials initially were wary about bidding for Sears, said Alex Fischer, CEO of the Columbus Partnership.
“When this was a casual real-estate inquiry that included 100 cities around the country, we were probably one of the first to be cynical about it,” Fischer said. “We kept asking, ‘Are they serious? Are they playing the game?’?”
To answer such skepticism, Sears allowed Ohio officials to dig deep into the company books, and Sears offered some guarantees about employment levels, said Mark Kvamme, president and interim chief investment officer of JobsOhio. “We did a full analysis. It was structured to know the downside as well as the upside risk,” he said.
Why would Sears be interested in moving, and why central Ohio?
It wasn’t merely the lure of subsidies, Kvamme said, since the majority of the tax credits were “ job-creation tax credits, so they only get credit if you create the job. So even if it was half the number of jobs of what we thought it would be, it’s a significant benefit.”
The real lure was central Ohio’s reputation as a retail hub, along with its big pool of talented retail executives who could help Sears and Kmart return to preeminence.
“It was really about strategy and where the best place to execute that strategy was,” Fischer said. “Their guarantees were consistent with their overall strategy.”
As it turned out, that strategy apparently included further downsizing.
Only months after Sears received a $150 million tax credit to stay in Illinois, the company laid off 100 headquarters employees and said it would close six stores in its home state, too, part of a wave of store closings across the country.
If observers thought that Ohio had dodged a bullet, that Sears had come close to pulling a fast one on the state, Kvamme said such was not the case.
“We knew what was going to happen,” Kvamme said. “We looked at the Illinois tax credit very carefully. They needed to retain 4,250 workers, and when they were talking to us, they said they would bring around 4,500 jobs. Well, they have 6,000 employees, but they’ve always projected a need to become more efficient in their work force. So this is not unexpected.”
And the story isn’t entirely finished, Fischer said. “Candidly, I think there’s still an opportunity for us (in) … their long-term strategy.”
It was coming so close to getting Sears — and not what the retailer has done since — that left “ a bad taste in my mouth,” Fischer said. “The headquarters talks are done. But in situations like these, there are always opportunities in the future.”
“All the press we got put us on the map for other companies,” Kvamme said.
Sears made headlines nearly 30 years ago with another headquarters move that echoes the recent story in many ways.
In 1993, the company, which had been based since 1974 in a 110-story Chicago tower — still the tallest building in the United States — moved 29 miles out of the city to the suburb of Hoffman Estates, Ill.
Sears “blackmailed the state” into coming up with a package of financial incentives to keep the company in Illinois, said Greg LeRoy, the founder and executive director of Washington, D.C.-based Good Jobs First, a nonprofit organization aimed at promoting accountability when economic-development incentives are given.
“I understand department store retailing is a tough business, but we shouldn’t be subsidizing them,” LeRoy said.
By 2005, Sears was ripe for a takeover by billionaire hedge-fund manager Edward Lampert.
Lampert, who had bought much of Kmart during its bankruptcy and became chairman of the company when it emerged from Chapter 11 in 2003, joined the two retail companies to form Sears Holdings Corp. At the time, Lampert talked about having a company big enough and nimble enough to compete with Wal-Mart Stores.
However, the recession and changes in the retail business have meant that Sears and Kmart have continued to lose market share, pushing the company to close more stores and put off reinvestment in order to stay afloat.
Last month, the Chicago Tribune reported that investors have long expected Lampert to sell off portions of Sears, in particular its real estate, to raise money.
The maneuverings took on an Ohio angle even before Sears announced it was mulling another headquarters move. Early in 2011, it came to light that Lampert had bought a stake in Columbus-based closeout retailer Big Lots, which had been rumored to be up for sale. (Big Lots steadfastly refused to comment on those rumors.) The thought of combining Sears, Kmart and Big Lots seemed enticing to many investors.
Then, only a few months after that speculation began, Sears announced it was looking into a possible headquarters relocation, prompted in part by the coming end of subsidies it had obtained for the 1989 move as well as by Illinois’ income-tax increase last year.
“Sears saw an opportunity,” said Matthew Gardner, executive director at the Institute on Taxation and Economic Policy. “They realized that if they complained loud enough for a corporate income-tax break, they could get it.”
“If Sears had come, it was (a) half-a-billion-dollar payroll,” Kvamme said. “Imagine that coming to Columbus. I really wish we got it. And we would have gotten it if the Illinois legislature hadn’t stepped in.”