Updated from 3:05 p.m. EST

What a journey it has been for

Kmart

(KMRT)

.

Since emerging from bankruptcy in May 2003, the company has undergone a dramatic turnaround, seen an almost eightfold increase in its stock price and now plans to buy department store operator

Sears, Roebuck

(S) - Get Report

for about $11 billion.

After surging 20% earlier, shares of Kmart ended up $7.78, or 7.9%, to $109, while Sears added $7.79, or 17%, to $52.99.

But as investors were busy celebrating, some analysts were busy criticizing.

"We do not believe that combining two failed retailers will make a viable challenge to

Wal-Mart

(WMT) - Get Report

," said Goldman Sachs analyst George Strachan in a research note.

Sears, which has seen sales slump over the past four years, lost 29 cents a share in the third quarter and warned that the fourth quarter would fall short of expectations. Meanwhile, Kmart said same-store sales fell 12.8% in the third quarter while total sales slid 13.7%. About 90% of its quarterly earnings came from asset sales.

Gary Balter, an analyst at UBS Investment Research, said it isn't clear that the combination makes sense for Kmart shareholders.

"The hope in Kmart was that ESL

Investments would take a bold move and start to invest in future growth opportunities," he said. "This is not the type of move that we were looking for to create the next leg of value."

ESL Investments Inc., headed by Edward Lampert, owns 52% of Kmart and a 15% stake in Sears. Lampert is chairman of Kmart and will be the chairman of the new company, if the deal is approved.

Balter and Strachan said they question whether the merger will create enough value and synergies to make it worthwhile. The companies said they expect to yield $500 million in annualized cost and revenue synergies by the end of the third year after the deal closes.

"We are skeptical of the company's ability to deliver...and we do not believe that adding Sears appliances to Kmart or Joe Boxer apparel to Sears will turn either company around," said Strachan.

From a retail perspective, Strachan advised investors to cash out of Sears but said "believers that Eddie Lampert could be the next Warren Buffett might want to hold stock in the surviving company."

Richard Hastings, a retail analyst at Bernard Sands, was more sanguine on the merger, however.

"The combination will help Sears where they are weakest, in moderately priced apparel, and it could help Kmart with utilization of the enormous amount of space in their stores not currently taken up by softlines and hot-selling items," he said. "Throw in some gigantic grills, electronics and appliances and the rest of the Kmart store space gets filled up with good-selling merchandise."

Other analysts say Lampert could help to turn Sears' business around -- or at least boost its share price -- by selling underperforming stores. Kmart's stock price has risen almost fivefold this year after the company announced it would sell 68 stores to Sears and

Home Depot

(HD) - Get Report

. Same-store sales, which are considered key to a retailer's health, have remained disappointing for months, however.

In early November,

Vornado Realty Trust

(VNO) - Get Report

made a 4.3% investment in Sears, sparking talk that the firm's real estate could be worth more than the operating business. On a conference call Wednesday, Lampert commented on the speculation.

"I don't think any retailer should aspire to have its real estate be worth more than its operating business," he said.

"I think there is some truth to the notion that there are certain retailers whose real estate is worth more than its operating business. I think that while that may have been true at Kmart at one time, we've worked very, very hard to improve the profitability of each of our stores and to make those stores worth a lot more as an operating business than as real estate."

Still, he added, "to the extent that we have stores that can't produce the type of profit we are looking for, we'd have to consider other alternatives."

Executives also mentioned on the call that jobs could be lost as a result of the merger. Under the terms of the deal, Kmart shareholders will get one share of Sears Holdings for each Kmart share, while Sears holders can choose between $50 in cash or half a share of Sears Holdings, worth about $50.61 based on Kmart's Tuesday close.

The deal will be prorated so that 55% of Sears, Roebuck shares will be converted into Sears Holdings shares and 45% will be converted into cash.

Viewed as an acquisition of Sears, the cash purchase price is a 10.6% premium to Tuesday's close while the stock component is valued at a 12% premium.

According to a release, the merged company will be the nation's third-largest retailer, with $55 billion in annual revenue, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores. While the combined companies will be headquartered in Sears' hometown of Hoffman Estates, Ill., Sears and Kmart will continue to operate separately under their respective brand names.

In addition to Lampert, the new company will be run via an office of the chairman that includes Sears CEO Alan J. Lacy and Kmart CEO Aylwin B. Lewis. Lacy will be CEO of the new firm while Lewis will be president. Sears' CFO Glenn Richter will hold the post with the combined firm.