Friday, August 12, 2011

Kodak: Patent vs. Market Value

I haven't written many posts involving Kodak. The first, in 2007, contended,

"The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google."

IBM seems to have averted death, although it's hardly a 'tech bellwether' anymore. But Kodak and Xerox are now just, well, also-rans in every sense.

The two posts I've written solely on Kodak, here and here, from late 2009, opined that the firm should just dissolve itself. In that second, most recent piece, I wrote,

"The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.

You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?

Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return."

Yesterday's Wall Street Journal featured the firm's failing fortunes on its front page. With the recent equity market gyrations, Kodak's market value has now fallen below what many observers believe is the value of its patent portfolio. Amazingly, that market value was now less than $500MM.

The nearby price chart for Kodak and the S&P500 Index over the past two years, just about when the KKR financing deal was struck, paint a catastrophic picture.

Despite CEO Perez' comments about remaking Kodak into a printing giant, the firm has lost half its value while the S&P posted modest gains. Meanwhile, KKR is sucking out those nice 10% interest payments.

I was shocked to read in the Journal piece that one of my most admired businesspeople, Rick Braddock, is an outside director at Kodak. At least he qualified his commitment to the firm's "turnaround" by adding,

"I am not going to rule anything out."

If that chart is Perez' idea of a turnaround, I'd hate to see his notion of failure.

According to the charts accompanying the Journal's article, sales at the firm have fallen from slightly over $10B in 2006 to an expected less than $3B this year. Kodak lost money in each of the past three years and is forecast to do so again this year.

Can there really be that much juice in a hoped-for dominance of printers to justify these losses? The PBGC will have to absorb what Kodak can't fund, Chapter 11 or not, so that's moot. The question has to be whether the present value of the still-to-turn-a-profit printer business really can exceed that of the firm's patent portfolio, assuming, of course, Kodak will have enough cash to make it that far.

As I did in 2009, after reading of Perez' sellout of shareholders to KKR, I continue to believe that Kodak's senior management and board are acting at cross purposes to their shareholders' interests.

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