J.C. Penney Considered Purchasing MSLO Before Settling on Minority Stake

Martha Stewart Expected to Take the Stand Tuesday

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Ron Johnson outside court
Ron Johnson outside court
It was revealed in court today that J.C. Penney considered buying Martha Stewart Living Omnimedia outright before settling on a 16% stake instead.

Ron Johnson resumed his testimony today in the trial between Macy's, J.C. Penney and MSLO. Martha Stewart is expected to take the stand tomorrow.

In an email introduced in court, Mr. Johnson played out a variety of scenarios regarding a deal with MSLO. One email from the CEO said, "We could either get [Macy's] to release the agreement prior to purchase...ideal...or we could simply buy Martha and trust that over time they will move somewhere else. Also we could make an offer to Martha..."

Ultimately, however, MSLO raised $38.5 million by selling a 16% stake to J.C. Penney, a deal that also provided the retailer with two board seats.

It was also revealed that MSLO asked Mr. Johnson to reach out to the CEO of Home Depot, Frank Blake, and let him know about the impending agreement. The planned J.C. Penney line and Home Depot would have some overlap and MSLO wanted J.C. Penney and Home Depot to work together. No such consideration was given to Macy's by MSLO.

Mr. Johnson hammered home that, while he went back and forth on the issue of whether he wanted MSLO to be exclusive to J.C. Penney, he ultimately thought it would be better for MSLO products to be available in both Macy's and J.C. Penney.

"I hope Macy's stays on as well from her perspective. Winning partners helps us in the long run," wrote Mr. Johnson.

He continued to refer to his experience at Apple to support the idea that broader distribution would be beneficial to all partners. The technology brand and all of the retailers that sold it including Best Buy, he said, saw sales grow as distribution of the products grew.

Justice Jeffrey Oing, however, was quick to point out--through this own line of questioning--that the Apple analogy doesn't quite work because Apple was the sourcing agency, unlike MSLO. Apple would sell products to retailers at a set price, and then the retailers could choose how to price the products, but the sourcing agent was singular. In this case, both Macy's and J.C. Penney would be sourcing agents and set their own prices independent of each other.

Mr. Johnson confirmed, "It's a very different situation."

Still, Mr. Johnson looked much more relaxed today as J.C. Penney's lawyer questioned him. He addressed some of the emails that were brought to light when Macy's lawyer grilled him for nearly four hours on Friday.

"In some ways I regret the choice of words," said Mr. Johnson, referring to several emails that were unflattering to the J.C. Penney CEO.

In one email, for instance, he said that Macy's CEO Terry Lundgren's headache after the announcement of J.C. Penney's deal with MSLO would turn into a migraine after he rolled out his plan a month later. Mr. Johnson clarified that email has a tendency to be like conversation and he was doing some boasting.

In another email, he wrote, "Terry now has to work again." Mr. Johnson explained that what he meant was that when a primary competitor does something new and exciting, you have to try to decide how to respond. And it's likely that Mr. Lundgren would have to turn up his activity level to compete, he added.

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