Synergism

Synergism!

Jim Oesterreicher's favorite word was the Eckerd deal driver. Why, just look: Penney knew the catalog business, and there was a huge amount of new business just lying there in every one of Eckerd's 2,800 drugstores! Just put a catalog desk in all those stores and double profitable inventory overnight! Add health- related items too big to stock in a drugstore, like walkers and hospital beds! And, while we're at it, how about some high- turn apparel and soft home items! At the same time, expand Penney's own catalog to include drugstore items! Add the fact that most Eckerd stores are in the Sunbelt, where everybody retires to play shuffleboard, live longer, and buy more prescription pills, and this deal cannot miss !

It was obviously a seductive rationale. And was Oesterreicher alone in his specious thinking? Hardly. The assumption-of-efficiencies lesson is evidently one that must be learned again and again. In late 2002, a notable example surfaced right in JCPenney's own backyard. Tom Hicks of Dallas, acknowledged as a brilliant financier, had successively bought the National Hockey League Dallas Stars and the Major League Baseball Texas Rangers. Immediately, the operations of both clubs were combined except for player matters. Synergylike combining broadcasting rights to leverage lucrative dealswas expected to reap wonders.

For the most part, it didn't work. As Stars president Jim Lites said in March 2002, "The process is completely logical. It looks like you can throw things together and get these efficiencies. [But] there just weren't efficiencies in many of the areas we tried." ^[3]

The Eckerd deal eventually went through. Penney paid a pretty price, and the Hutchens due diligence effort never uncovered what St. Petersburg Times investigative reporter Mark Albright later referred to as the deal's "dirty little secrets." ^[4] Here were two big ones:

1. Eckerd's " shrinkage " (shoplifting, employee theft, etc.) had been significantly underreported. "Once Penney began accounting for losses at the rate Eckerd actually had been experiencing for years ," Albright wrote, "it added a $74-million ball and chain to Eckerd's annual expenses in 1999."

2. Ten percent of Eckerd's stores were unprofitable and had to be closed. Eckerd officials said the stores were marked for closing before the company was acquired by Penney. But the deal, Albright reported , "went through so quickly that nobody had time to sort out the losers. Now it's become painfully obvious that JCPenney really was not buying profitable stores, just real estate." Asset write-down: $110 million.

As Albright wrote, "Such things happen when companies stray too far from what they know best."

^[3] Reprinted with permission of The Dallas Morning News.

^[4] This was of interest in the Tampa Bay area because of Eckerd's headquarters in Largo, a St. Petersburg suburb. This quote, along with the Albright quotes that follow, are reprinted by permission. Copyright St. Petersburg Times , 1999, 2000, 2001.