The Next Warren Buffett?
Business Week on Edward Lampert
If anyone is destined to inherit Buffett's perch as the leading investment wizard of his day, it just might be Edward S. Lampert. Since he started ESL in 1988 with a grubstake of $28 million, he has racked up Buffett-style returns averaging 29% a year. His top-drawer clients range from media mogul David Geffen and Dell Inc. (DELL ) founder Michael S. Dell to the Tisch family of Loews Corp. (LTR ) and the Ziff family publishing heirs. Only 42, Lampert has amassed a fortune estimated at nearly $2 billion. So focused is he on his goals that he was back at work negotiating a big deal two days after his kidnappers released him. Says Thomas J. Tisch, son of Loews's founder Laurence Tisch: "Eddie is one of the extraordinary investors of our age, if not the most extraordinary."
Like the 74-year-old Buffett, Lampert has built his success on some of the least sexy investments around. He searches for companies that are seriously undervalued, and he'll even risk jumping into ones that are reeling from bad management or lousy strategies -- because the potential returns are far greater. Right now, ESL has stakes in a grab bag of retailers. It holds 14.6% of Sears, Roebuck & Co. (S ), whose stock soared 24% on Nov. 5 after real estate investment trust Vornado Realty Trust bought a 4.3% stake. It also owns a big chunk of the No. 1 auto-parts retailer, AutoZone Inc. (AZO ), and the biggest national chain of car dealers, AutoNation Inc. (AN ), as well as a small stake in telecom giant MCI (MCIP ).
The key to his ambitions, though, is a 53% stake in Kmart Holding Corp. (KMRT ). If a fading textile maker in New Bedford, Mass., called Berkshire Hathaway Inc. (BRKB ) provided the launchpad for Buffett, then Kmart might do the same for Lampert. Much like the textile mill when Buffett got hold of it, the once-bankrupt Kmart is now throwing off far more cash -- it has $3 billion on hand -- than it can use in the business. It also has $3.8 billion in accumulated tax credits, which can offset taxes on future income, and a fast-rising stock that is valuable in deal-making. Those advantages make Kmart a perfect vehicle for bankrolling big acquisitions. They give Lampert "the ability to buy a lot of companies and shield a lot of income from taxes," says John C. Phelan, a former ESL principal who is now managing partner of MSD Capital, which also manages Dell family money.
Kmart is a classic example of how Lampert works. He got control of a $23 billion retail chain -- the nation's third-largest discounter, behind Wal-Mart Stores Inc. (WMT ) and Target Corp. (TGT ) -- for less than $1 billion in bankruptcy court. He emerged as the largest shareholder and became chairman 18 months ago as part of a reorganization in which virtually all of its debt was converted into shares. Lampert's goal is to keep Kmart humming so it can continue throwing off cash. Even if Kmart eventually fails, keeping it going as long as possible lets him extract top dollar for its valuable real estate by selling the stores over time. "We are going to have to generate traffic [in the stores]," says investor Whitman. "Even to this day, it is no slam dunk."
If anyone is destined to inherit Buffett's perch as the leading investment wizard of his day, it just might be Edward S. Lampert. Since he started ESL in 1988 with a grubstake of $28 million, he has racked up Buffett-style returns averaging 29% a year. His top-drawer clients range from media mogul David Geffen and Dell Inc. (DELL ) founder Michael S. Dell to the Tisch family of Loews Corp. (LTR ) and the Ziff family publishing heirs. Only 42, Lampert has amassed a fortune estimated at nearly $2 billion. So focused is he on his goals that he was back at work negotiating a big deal two days after his kidnappers released him. Says Thomas J. Tisch, son of Loews's founder Laurence Tisch: "Eddie is one of the extraordinary investors of our age, if not the most extraordinary."
Like the 74-year-old Buffett, Lampert has built his success on some of the least sexy investments around. He searches for companies that are seriously undervalued, and he'll even risk jumping into ones that are reeling from bad management or lousy strategies -- because the potential returns are far greater. Right now, ESL has stakes in a grab bag of retailers. It holds 14.6% of Sears, Roebuck & Co. (S ), whose stock soared 24% on Nov. 5 after real estate investment trust Vornado Realty Trust bought a 4.3% stake. It also owns a big chunk of the No. 1 auto-parts retailer, AutoZone Inc. (AZO ), and the biggest national chain of car dealers, AutoNation Inc. (AN ), as well as a small stake in telecom giant MCI (MCIP ).
The key to his ambitions, though, is a 53% stake in Kmart Holding Corp. (KMRT ). If a fading textile maker in New Bedford, Mass., called Berkshire Hathaway Inc. (BRKB ) provided the launchpad for Buffett, then Kmart might do the same for Lampert. Much like the textile mill when Buffett got hold of it, the once-bankrupt Kmart is now throwing off far more cash -- it has $3 billion on hand -- than it can use in the business. It also has $3.8 billion in accumulated tax credits, which can offset taxes on future income, and a fast-rising stock that is valuable in deal-making. Those advantages make Kmart a perfect vehicle for bankrolling big acquisitions. They give Lampert "the ability to buy a lot of companies and shield a lot of income from taxes," says John C. Phelan, a former ESL principal who is now managing partner of MSD Capital, which also manages Dell family money.
Kmart is a classic example of how Lampert works. He got control of a $23 billion retail chain -- the nation's third-largest discounter, behind Wal-Mart Stores Inc. (WMT ) and Target Corp. (TGT ) -- for less than $1 billion in bankruptcy court. He emerged as the largest shareholder and became chairman 18 months ago as part of a reorganization in which virtually all of its debt was converted into shares. Lampert's goal is to keep Kmart humming so it can continue throwing off cash. Even if Kmart eventually fails, keeping it going as long as possible lets him extract top dollar for its valuable real estate by selling the stores over time. "We are going to have to generate traffic [in the stores]," says investor Whitman. "Even to this day, it is no slam dunk."
