By and  on July 14, 2005

CINCINNATI — The absorption process has already begun.

Shareholders of Federated Department Stores Inc. and May Department Stores Co. approved the $17 billion merger of the two retailers on Wednesday. But Federated is already deep into planning the integration, details of which surfaced at the firm's annual meeting here and include:

  • Folding in Federated's private label goods into May Co. stores;
  • Possibly rebranding May nameplates;
  • Overlap-related store closings representing $4 billion in sales;
  • "Reinventing" May Co. stores with improved fitting rooms, sight lines and technology.
According to Terry J. Lundgren, chairman, chief executive officer and president of Federated, customer surveys about how well nameplate changes would go over, and interviews with May executives about joining Federated, have already begun.

"Our transition team, composed of key executives from both Federated and May, has begun a process of planning for the integration of our two businesses," he said.

Federated is paying $17.75 in cash, and 0.3115 of a Federated share, for each May share. The transaction is valued at $17 billion, representing $11 billion in equity and $6 billion in May debt.

Lundgren said due to government regulatory reviews, he couldn't go into great detail of how the company would be structured post-merger. "That will come as the closing date draws closer." The closing is expected by the end of the third quarter.

Lundgren, during a press conference after the meeting, said the Marshall Field's division of May Co. will feel the Federated Merchandising stamp by fall of 2006. He pointed out that Marshall Field's is already very similar to better, high-end Macy's stores, particularly Macy's West.

Lundgren expects to fold Federated's private labels into May's divisions. He said 13 percent of May's volume is private label. At Federated, it's 17.5 percent. He also said that May's poor comp-store performances lately were partly due to lack of a strong private label.

As far as changing the names of any May divisions, he said, "Anything is possible," but added no names would be changed until next year.

Following the closing of the deal, "almost immediately, we would like to reinvent May stores," Lundgren said. He added that 70 percent of the Federated business will have been touched by the reinvent program by the end of this year. Federated's reinvent program involves emphasizing juniors; improving fitting rooms, sight lines and adjacencies, and adding new technologies and amenities to enhance the shopping experience."Nothing will get in the way of the program advancing," he said.

Lundgren said past surveys indicated that store nameplates didn't make much difference to customers. However, he called the retail giant's current consumer research "a very broad process," using an outside firm that conducts thousands of interviews online, by mail, by telephone and at malls. Federated will have the results of these latest consumer surveys in late fall, if not earlier.

"The biggest resistance to changing the names came from our own employees. They were so connected to the store names."

Asked about the toughest challenges in integrating the two companies, Lundgren responded, "I'm very focused on the people subject — to seek and attract and retain talented people. If we don't strengthen the Federated team, that will be most disappointing for me."

During the meeting, Lundgren characterized Federated as a company with "a depth of exceptional management talent, and we will become even stronger in this regard by incorporating key individuals who joined our company from May Co."

Lundgren said Federated would consider two former May directors to become Federated board members, but he didn't name them.

"In the near term, we cannot and will not be distracted from delivering a successful fall season in 2005. A very large majority of our people will not be impacted by the merger prior to March 1, 2006, so our eyes must and will remain focused on execution in the all-important fourth quarter."

Lundgren said there already have been meetings with management of the Robinsons-May division and May Merchandising in St. Louis. Although analysts expect there will be a huge number of layoffs — in the thousands — Lundgren said he does expect to add people from May to Federated's Cincinnati and New York headquarters, and to add planning and distribution personnel to May's Famous Barr division in St. Louis.

May operates 487 department stores under the names Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, Lord & Taylor, L.S. Ayres, Marshall Field's, Meier & Frank, Robinsons-May, Strawbridge's and the Jones Store, as well as 243 David's Bridal stores, 453 After Hours Formalwear stores and 11 Priscilla of Boston stores in its Bridal Group. May operates in 46 states, the District of Columbia and Puerto Rico.Asked if there's been an exodus from May, Lundgren replied, "Not really. There's been people here and there [leaving], but not really." The second-biggest challenge he cited was systems integration. "It's always a challenge. But the good thing is, we've been through this before," he said, referring to past consolidations by Federated, including Liberty House, Broadway Stores and Macy's.

The May-Federated combination is expected to create a $30 billion retail giant; however, Lundgren said store divestitures will lead to a $4 billion reduction in sales. There is believed to be about a 25 to 30 percent overlap in stores. In addition, Federated expects to save about $450 million a year through the merger.

Divestitures will be determined on a store-by-store basis, and there are no plans to unload anything wholesale.

The 40-minute annual meeting went along without a hitch, but would have been shorter without a barrage of questions and ruminations from corporate gadfly Evelyn Davis, who asked whether Federated overpaid for May. Lundgren replied, "The financial community would disagree with you. We paid a fair price for May." Federated stock has gone up almost $20 since the announcement.

Davis appeared in the same bright floral print jacket that she wore to the Procter & Gamble annual meeting the day before. One Federated executive pointed out that Davis is petite, but she was wearing a misses' size, since her cuffs were rolled up. Davis told Lundgren she bought the jacket from a new designer in the bridge department at Bloomingdale's in Chicago and tested him to see if he could identify the label. Without a blink, Lundgren said David Meister, and Davis replied, "Oh, my God."

Davis' proposal to have annual board of directors elections, eradicating the staggered system of elections that has been in place, was passed. "It's a not a huge deal as to what you gain or lose, but in the end, shareholders felt very strongly about the subject," Lundgren said. Davis applauded the news by giving Lundgren a big hug.

In other news, Lundgren hinted at the possibility of expanding overseas, having visited Shanghai, Beijing and Hong Kong in the past year. "We've had invitations [to open stores], but we're not really ready to do that," he said.Meanwhile, in New York, at the Pierre Hotel, only a handful of May Co. shareholders showed up for the May vote; most votes were submitted and tallied prior to the meeting. John L. Dunham, chairman, president and chief executive of May, chaired the meeting and referred to the merger as a "good, bold and exciting move."

Dunham told attendees that "retailing always has been recognized as a competitive business." He briefly highlighted the benefits of the merger for both retailers, noting, in part, that the combination of Federated and May would provide "strength and national presence" needed to succeed in such a competitive environment.

Dunham said the deal would result in the creation of an organization that would be a "stronger company than either of us could have been on our own. We'll be able to grow sales, store-for-store sales and profits faster than either company could do on its own."

While he couldn't provide details about how the companies would be merged, other than to say that there would be no layoffs until after March 1, he noted that the new entity would be able to "offer a national bridal and gift registry."

One shareholder asked about the fate of the Lord & Taylor Fifth Avenue flagship and whether it would close. Dunham said, "That's a question Federated Department stores will have to answer, and I don't think they have the answer to that."

After the meeting adjourned, Dunham referred to the event as a "bittersweet day" during a brief question-and-answer period.

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