May’s Top Gun Making His Bid to Be No. 1

Why is St. Louis-based May Department Stores Co., owner of May Co., Kaufmann’s, Hecht, G. Fox and other department stores as well as Venture and Payless ShoeSource discount stores, offering $2.7 billion worth of its common stock to acquire Associated Dry Goods Corp., owner of such department stores as Lord & Taylor, J. W. Robinson, L. S. Ayres, Goldwaters, Hornes, Hahnes and Denver Dry Goods as well as Caldor and Loehmann’s discounters?

Well, for one thing, it acquires good properties. For another, it may have something to do with shielding itself from the kind of mischief that corporate raiders get up to--May Department Stores owns all or part of 26 shopping centers, a fat target for the financially adept. But clearly the big reason for the proposed acquisition is that Chairman David C. Farrell sees an opportunity to edge out Federated Department Stores as the largest department store owner in the country.

In that respect, Associated’s ownership of fashionable Lord & Taylor is the key to the deal. The elegant 44-store chain makes a good dollar. Last year, it may have produced close to $40 million in after-tax profit on $800 million in sales, or almost one-third of Associated’s earnings on less than 20% of its sales.

Recognizable Name

But even leaving aside such considerable earning power, Lord & Taylor has a name that’s recognizable nationwide, one that May can take into new markets without the expense of building up a reputation from scratch. There’s only a few such names around--Carter Hawley Hale’s Neiman-Marcus chain is one, Federated’s Bloomingdale’s is another. Therefore, says retailing analyst Joseph Ronning of the Brown Bros., Harriman investment firm, Lord & Taylor is “the crown jewel” that lends great value to the deal.

Associated’s only public response on Monday was to ask for more time to think over the offer. But Wall Street liked the deal from the start. That’s in part because Wall Street likes anything that promises fresh action, and a big merger in the retailing game could spark others. Accordingly, the money men kicked up the prices of almost all of the retailing stocks on Monday. A notable exception was May itself, which fell $4.75 a share to $83--the merger terms will reduce the earnings behind each of its common shares, a process called dilution, and the market therefore reduces its stock price.

Healthy Industry

But retailing stocks were strong to begin with. The industry stands to be a major beneficiary of new tax legislation if it passes this summer. For one thing, the bill now going through the Senate reduces taxes for retailers, who--lacking most of heavy industry’s investment tax credits--have been paying the full 46% corporate rate. More important, the new tax bill would put more spending money in people’s pockets, and retailers have been making their plans accordingly.

Just last Friday, May announced at its annual meeting that it would spend $2 billion over the next five years to build new stores. Farrell then flew to New York to present his offer in person to Associated Chairman Joseph H. Johnson. (They never met; Farrell sent a letter.)

So, is the deal a triumph all ‘round? Well, it’s a triumph for Associated stockholders for sure--a fact the market recognized Monday, lifting Associated’s price by almost $19 a share to $64.87 1/2.

But May stockholders will have to ask why it is such a good idea for their company, which earns around 18% on its stockholders’ investment, to pay out its common stock for a lackluster company that earns less than 13% on its shareholders’ equity. It’s a dilemma common to all mergers: Do the more profitable companies risk weakening themselves in acquiring the less profitable?

In Associated’s case, it has been underperforming in most of its divisions for the last two years, or ever since ill health forced its chairman, William B. Arnold, a gifted merchandiser, to resign. The light in the darkness through it all has been the jewel-like Lord & Taylor operation, which is led by 58-year old Joseph Brooks--another gifted merchant, from all accounts in the trade.

What, as they say, is the bottom line? Simply this: May Chairman Farrell, 53, has just placed a hefty bet that he can bring Associated’s operations up to the profitability of the company he has led since 1979 and ultimately make May Department Stores the biggest and most profitable chain in the country.

If things work out, he’ll ride out his years at the helm in glory. And if things go wrong, he’ll probably find his job under pressure from some corporate raider. About where the boss of Associated is today.