A Misguided Merger

Most mergers destroy shareholder value. There are stacks of research reports from academics and management consultants that demonstrate this with hard facts and concrete examples. In my opinion, the merger of Sears (NYSE:S) and Kmart (NASDAQ:KMRT), announced yesterday, will soon become the next example of a high-profile merger that failed.

Strategic mergers of public companies make sense under only one condition: The two companies can do things together to create shareholder value that they could not do separately. For example, FedEx's (NYSE:FDX) acquisition of Kinko's combined two different but complementary companies that are stronger together than they were as separate entities.

Where are the strategic synergies between Sears and Kmart? Company officials pointed to $500 million in annual savings in three years from a loosely defined combination of store conversions, back-office job cuts, more efficient buying of goods, and possible store closings.

I'm highly skeptical. To me the number sounds more like a ballpark estimate from an investment banker than a hard number based on clearly identified synergies that someone is responsible for delivering to shareholders. If I'm wrong, perhaps Edward Lampert, the new chairman of the combined company, would be willing to have his compensation based on achieving that $500 million in annual savings in the next three years. Somehow, I doubt he would agree to that.

The reality is that there are no real strategic synergies between these two struggling businesses. Both face uncertain futures and stiff competition from the likes of Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Motley Fool Stock Advisor recommendation Costco (NASDAQ:COST). Managers in both companies are undoubtedly daunted by the challenges they face, but rather than confront the fundamental issues facing the businesses, they turned to a high-profile merger as a panacea. Together, Sears and Kmart are no better strategically positioned against their stronger competitors than they were individually.

Warren Buffett, chairman of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), often cites a quote from Peter Drucker on this topic: "I will tell you a secret: Deal making beats working. Deal making is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work.deal making is romantic, sexy. That's why you have so many deals that don't make sense."

Add one more to the list.

Fool contributor Salim Haji lives in Denver and owns shares of Costco and Berkshire Hathaway. He does not own shares in any other of the companies mentioned.