Keeping Kmart in Business

Part of the reason Kmart became the largest retailer in history to file for Chapter 11 bankruptcy protection in 2002 was the company’s bid to sell all 8,000 items it stocked for the lowest possible price. It did not generate incremental traffic, and Kmart’s liquidity suddenly evaporated, said Derex Walker, MBA ’92, JD ’95. A principal at Miller Buckfire Ying & Co., Walker was among financial advisors called in to save the store.

Probably the biggest factor was that Kmart has 3,000 vendors who got very nervous, and they either stopped shipping or cut credit. The company ran out of money and was concerned about making payroll, Walker told nearly 100 students gathered for the presentation January 25 the University of Chicago Law School in a panel discussion hosted by the JD/MBA Association.

What helped Kmart rise from bankruptcy relatively quickly was that hedge fund investor Edward S. Lampert got involved, Walker said. The hedge fund morphed into a private equity venture, he said.

Part of the strategy was to close 600 of Kmart’s 2,000 stores and sell 50 of the leases for the real estate. Another part was to renegotiate contracts with vendors ranging from the pharmaceutical provider to Sesame Street, a nonprofit organization. As unpleasant as it may seem, it’s your obligation to get the best deal for your company, Walker said.

The other panelist was attorney Mark McDermott of Skadden, Arps, Slate, Meagher & Flom LLP; the event was moderated by University of Chicago law professor Douglas Baird.

 

Patricia Houlihan