MACY'S/FEDERATED
IT'S A DEAL

Byline: DAVID MOINWith contributions from DIANNE M. POGODA

NEW YORK--Allen I. Questrom must be a happy man this morning.
The Federated Department Stores chairman emerged triumphant Thursday, wresting a merger deal from R.H. Macy that will trigger sweeping changes in the retail and fashion industries.
The combined companies will be a $13.5 billion retail operation ranking as the nation's largest department store group.
Macy chairman Myron E. Ullman, who put up a monumental effort in his struggle to keep Macy's independent, will stay on--at least for a while--as deputy chairman of the merged company.
The mammoth merger, announced Thursday by both companies, ends an almost-seven-month, tension-filled fight over the bankrupt Macy's, which in the final analysis simply couldn't top Federated's offer to creditors.
By Aug. 1, the companies will file a $4.1 billion consensual plan of reorganization in bankruptcy court, subject to a definitive agreement.
Federated was able to galvanize support from all major creditors, and finally from a resistant Macy management. It's now almost certain the consensual plan will be confirmed in bankruptcy court. The retailers project emerging from Chapter 11 in January 1995.
Bondholders leaned toward Federated in the past week, but didn't officially come out in support until 11:30 p.m. Wednesday night. That day, Federated sweetened its payout offer to bondholders for a second time this month, to $500 million. Earlier, it raised its offer to $475 million from $400 million.
Without the bondholders, Macy's found itself without any support for its stand-alone plan and capitulated to Federated.
But the deal has a lot of people spooked, namely thousands of suppliers to both chains
and the hundreds of employees at Macy corporate offices. Hundreds, perhaps thousands, more at the store level stand to lose jobs through consolidations. Macy's employs 50,000 workers, while Federated employs 67,000.
"The new company will carry such clout and will demand reductions in prices, and nobody will be able to say no to them," said one SA executive.
As late as last week, the majority of the Macy board was against the merger and was not fully confident Federated could smoothly blend its operations with those of Macy's. There were reports that some directors felt the whole enterprise could unravel in a couple of years. Federated's own sales have been weak, and the company has experienced difficulty merging A&S into Jordan Marsh.
Others believe in the merger.
"Questrom is too smart to bite off more than he can chew, and there are too many people looking at these deals much more carefully now," said Allan Ellinger, a partner in the consulting firm Marketing Management Group,
"The debt is not being piled up the way it was in the [Robert] Campeau deal, and second, we are in an economic upturn, unlike the downtrend that was happening when Campeau was happening," said Isaac Lagnado, president of Tactical Retail Solutions, a consulting firm.
Federated's stock has been slipping, hovering at 21 after a high of 25 1/4 in the past year. Federated shares, traded on the New York Stock Exchange, closed Thursday at 20 5/8, up 3/8.
"Strategically, the merger makes a lot of sense," said Kenneth Londoner, vice president of J&W Seligman & Co., investment advisers. "However, Federated has been aggressively trying to improve its own EBITDA. Digesting Macy's would disrupt that process, and Federated's sales have been lackluster, not as healthy as the competition's. With the additional responsibilities of a merger comes a heightened level of risk."
On Thursday, the leaders of both retail organizations embarked on a campaign to alleviate concerns.
While Ullman, who led the store's battle to stay independent, is said to be very disappointed by the outcome, he put on a brave front Thursday in a speech on Macy's video broadcast system. Reportedly, he told employees about the virtues of the plan, and was besieged by questions about jobs. After the broadcast he flew to his vacation house in Colorado.
Questrom conducted a conference call with Federated principals, telling them to spread the news, while Karen Hoguet, Federated's senior vice president of planning and treasurer, engaged in one with Wall Street analysts.
In his statement Thursday, Questrom said, "A combined Macy's and Federated will offer enhanced value and long-term growth potential to Federated's shareholders, as well as to Macy's creditors."
He added that customers of both companies will "benefit significantly from the enhanced value opportunities that can be derived from a larger, more efficient and synergistic retail operation."
Federated will gain enormous buying clout, with 341 department stores--111 from Macy's and 230 from Federated--in virtually every major market in the U.S. It becomes the sixth largest retailer in the U.S., behind Wal-Mart, Kmart, Sears, J.C. Penney and Dayton Hudson. In terms of its size and finances, most observers believe the merger is manageable, and more a question of method execution.
According to Questrom, the increased buying power and the $100 million in annual cost savings the company hopes to realize through consolidations will help drive consumer prices down and spur sales.
Others say a mightier Federated will squeeze more out of vendors and force many out of business, with Federated coming out with better margins.
To date, the executives have provided few insights on how the companies will be combined. In a statement, they said the details will be provided "at an appropriate time when the managements have concluded the formulation of a specific plan." Information contained in the consensual plan as well as a disclosure statement to be filed 60 days later should clarify matters.
There has been speculation that Federated's Abraham & Straus/Jordan Marsh division in New York and New England will be converted to Macy's, and that Federated has already contacted May Department Stores and Dillard Department Stores regarding selloffs. Deals could be in the works, and intense bidding for properties is inevitable.
There has been speculation that the A&S unit on West 33rd Street in Manhattan--only a block away from Macy's Herald Square flagship--could be sold off and operated by another owner, or perhaps converted into a Macy's annex for men's or home goods. That would free up space at the flagship for more productive women's apparel, cosmetics and accessories departments.
Federated is also expected to relinquish stores in the Atlanta market--a natural for Dillard's, which has stores surrounding, though not yet in, the market there.
Federated also gains instant access into California in a major way with the addition of Macy's West, Bullock's and I. Magnin. The merger also presents real estate opportunities that could accelerate the expansion of Federated's Bloomingdale's division on the West Coast, a stated goal of the Cincinnati-based company.
I. Magnin's future is up in the air. Though still not profitable, its performance has improved under the leadership of Joseph Cicio, whose last day as ceo was Thursday.
"Federated's Burdines is very strong, and it would most likely stay," Lagnado said.
But chains like Lazarus and Goldsmith's might be turned into Macy's, because Macy's is a stronger name. When Macy's tried to take over Federated in 1988, there were reports that Macy's was lining up a deal to sell off Lazarus in Ohio to Dillard's. Macy's lost in its quest for Federated, when Canadian real estate developer Robert Campeau came through with a higher bid.
At Macy's, several marquee names in retailing could be out of work after contracts expire or settlements are reached. Among them: Roger N. Farah, president and chief operating officer, who is a highly regarded merchant, but was the center of a bitter contract dispute after he deserted Federated to join Macy's. He is presumably not one of Questrom's favorite people. Still, he's financially protected by a clause entitling him to $10 million if Macy's management changes and he's out of a job. That wouldn't be a bad severance considering he's been on the job less than a month.
Art Reiner, Macy's East ceo, is said to be admired by Questrom and under consideration to run a Federated division.
Bigger plans could be in the cards for Hal Kahn, chairman of the A&S/Jordan Marsh division, a former Macy division head, who could run a combined Macy/A&S division. Questrom tapped him for the A&S job before Federated announced its merger plans in January.
Ullman's new role is to help in the transition. The three-member office includes Questrom and James Zimmerman, Federated's president and chief operating officer. Ullman will be nominated to the Federated board, and Federated's nominating committee is expected to name four other Macy directors to its board. The company did not identify them.
Macy's $1 billion corporate private label program, which is strong in moderate-priced men's, women's, children's wear and home goods, will likely be retained by Federated. Macy's does the product development and sourcing for its private label. That raises questions about Federated's contract with Associated Merchandising Corp., which does the sourcing for Federated's private label. Federated does its own product development.
As Federated merges with Macy's, it is likely that Federated Merchandising Services would be the predominant buyer for all the stores, a move that would eliminate a level of Macy buyers. Terry Lundgren, the former chairman of Neiman Marcus, joined Federated as chairman of FMS, succeeding Farah, and is considered Questrom's protÄgÄ. His future seems secure.
However, the team buying process, where top merchants and principals work together to shape the buying, which Lundgren oversees, may be re-evaluated in light of the buyer-planner system that Macy uses. Federated has also been narrowing its vendor list since it emerged from bankruptcy in February 1992.
TV Macy's, the home shopping network Macy's hoped to launch this fall, has lost steam. Federated executives have visited QVC, but have not shown the same level of enthusiasm for home shopping as other retailers.
Right now, they have other concerns.

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