An American Fail: The Eastman Kodak Tragedy

Remember that girl from high school who was so hot and so out of your league back then that you would’ve jumped out of a plane without a parachute just to get her attention?  Yeah, me neither.

But now imagine that this girl walks by you on the street and you barely recognize her.  That lustrous mane of blond hair has thinned out and turned green from repeated dye jobs.  The long, tan pair of legs you remember have been replaced with two gnarled and knotty sycamore trunks, latticed with spider veins, thickened from repeated exposure to the Colonel’s secret blend of 11 herbs and spices.  And the face that launched one thousand parking lot fist fights?  Weathered like a backyard deck.

It is not until you have experienced an encounter like this that you can truly appreciate the decline in fortunes, condition and stature of one of the greatest American companies of all-time, Eastman Kodak (EK).

Look at this horror show:

120 Years of Greatness, Squandered in a Decade

120 Years of Greatness, Squandered in a Decade

Before I continue, let me remind you that I do not make buy or sell calls on this site for any stock, so please do not take action based on what I’m about to discuss one way or the other.

This post was instigated by a story I read on The Deal‘s site about private equity deals when I came across this transaction that you may or may not have heard about:

The PIPE deal KKR struck with Eastman Kodak Co. last month, which closed Sept. 29, is a variant of (KKR’s deal with) Legg Mason, though more favorable to KKR. Technically, it wasn’t a PIPE. KKR’s $288 million injection is in secured, nonconvertible notes, a higher and safer perch than the Legg Mason notes. KKR took advantage of Kodak’s dicey financial health, exacting a 10.5% interest rate. What’s more, KKR’s equity kicker — 40 million warrants exercisable immediately at $5.50 a share and entitling KKR it to an 11% stake in Kodak — was less than 60 cents a share out of the money the day the deal closed.

George Eastman is rolling over in his grave right now.  Where do we begin?

George Eastman (left) with Thomas Edison

George Eastman (left) with Thomas Edison

Let’s start with the 10.5% interest rate.  10.5%?  When did Kodak become so desperate?  The answer is that it didn’t happen overnight.

We were first told years ago about the company’s strategy to run the film business as a legacy asset in run-off while investment was made in digital photography.  We figured it would be awhile before profit would ramp up to replace the end of developing negatives.  ‘So what?’ went the conventional wisdom – Kodak had the prestige and the brand name to one day dominate digital, so it would be worth the wait.  The deep value managers parked themselves in the stock and watched as a parade of executive losers missed every single opportunity to leverage the brand and technology into a profitable business for the digital age.

And getting into bed with KKR to the tune of 40 million warrants exersizable at 5.50 a share?  Very pathetic when you consider that Kodak was a Dow component for over 70 years (1930 to 2004).  The company is 130 years old and still has one of the most highly-recognized brands in the nation (although it just slipped from the top 100 this year).

I should also note that KKR couldn’t care less about the outcome here, according to the article:

Even though Kodak is ailing and some analysts have prophesied default, KKR has a solid chance of scoring a strong profit. It remains to be seen whether Kodak-style debt deals become the norm in PIPEs. What’s clear is that KKR has made a constructive contribution to the playbook.

My, how this once great company has fallen.

Now fans will say that Kodak may survive with its at-home photo printing equipment (good luck competing with HP) or its online photo sharing site (like there aren’t 20 of those) and maybe they’re right.  But still, this thing is in the toilet, and since when was the mission to “survive”?

For millions and millions of Americans, the name Kodak means something.  Their wedding album photos, graduation snapshots and baby pictures were taken with Kodak cameras and Kodak film.

Unlike the tragic demise of our auto manufacturers, Kodak can’t blame health care costs, they can only look inwardly and blame their own lack of imagination and innovation.  They’re out to lunch in Rochester, NY.

I’d also mention that unlike Circuit City or Countrywide, two deceased companies that no one will miss because they always sucked, Kodak was special.

At its peak, Kodak employed almost 80,000 workers, mostly in America.  If it does die of neglect, it will be truly sad.

So congratulations to the bankers at KKR for getting the last chunks of gristle off of the carcass.  Someone’s got to be the loan shark, I suppose, even if the helpless borrower is Eastman Kodak.

For a glimpse at this once mighty company’s 130 year history, I’d suggest checking out their milestones on Kodak.com.  Your mind will be blown at how deeply entrenched Kodak is in American history:

Kodak Milestones 1878 – Present

Sources:

New Plumbing (The Deal)

Kodak Targets Soccer Moms (Bloomberg)

Full Disclosure:  I have no positions long or short in shares of EK, please do not treat the above as advice, research or an invitation to buy or sell any securities.  See my Terms & Conditions page for a full disclaimer.

What's been said:

Discussions found on the web
  1. Jay @marketfolly commented on Oct 09

    Ya know I was looking at this a few weeks back and was amazed at the chart. They got completely sideswiped by the digital movement and it’s hard to think how they were so dominant and then lost. They have huge brand equity so it’s a shame. Had seen a few hedge funds pick up puts on them past few quarters, but stock has been ripping as of late (along with rest of market).

    Jay
    @marketfolly

    TRB: The photo sharing is worth something, public company comp would be shutterfly i suppose. the brand name is probably worth more than that. but you look at the interest rates on the debt and its sickening. I’m a spectator on this one.

  2. Jay @marketfolly commented on Oct 09

    Ya know I was looking at this a few weeks back and was amazed at the chart. They got completely sideswiped by the digital movement and it’s hard to think how they were so dominant and then lost. They have huge brand equity so it’s a shame. Had seen a few hedge funds pick up puts on them past few quarters, but stock has been ripping as of late (along with rest of market).

    Jay
    @marketfolly

    TRB: The photo sharing is worth something, public company comp would be shutterfly i suppose. the brand name is probably worth more than that. but you look at the interest rates on the debt and its sickening. I’m a spectator on this one.

  3. Nimo commented on Oct 10

    that intro was riveting..and hilarious..and eerily enough reminded me of how badly i wanted a digital camera a few years ago and rejoiced when Kodak decided to fill the low-end digital camera supplier shoes. It was a C series and lasted me all of 4 months..I didn’t even attempt to send it in for repair.

    If it’s not failing management, its financial ruin..what’s happening to the legends?

  4. Nimo commented on Oct 10

    that intro was riveting..and hilarious..and eerily enough reminded me of how badly i wanted a digital camera a few years ago and rejoiced when Kodak decided to fill the low-end digital camera supplier shoes. It was a C series and lasted me all of 4 months..I didn’t even attempt to send it in for repair.

    If it’s not failing management, its financial ruin..what’s happening to the legends?

  5. Aldebert commented on Oct 11

    I just returned from “Meliora Weekend”, a unique annual 3-day education/music/arts event, at George Eastman’s other major legacy – the University of Rochester. At least I have confidence that this great institution is thriving and will endure.

  6. Aldebert commented on Oct 11

    I just returned from “Meliora Weekend”, a unique annual 3-day education/music/arts event, at George Eastman’s other major legacy – the University of Rochester. At least I have confidence that this great institution is thriving and will endure.

  7. hello?mcfly? commented on Oct 12

    the digital age snuck up on them??

  8. hello?mcfly? commented on Oct 12

    the digital age snuck up on them??

  9. A Kodak snapshot « Harmon Drive commented on Oct 14

    […] A Kodak snapshot Jump to Comments Check out this timeline on the history of Kodak. Here is another story, I find it depressing. Click here. […]

  10. A Kodak snapshot « Harmon Drive commented on Oct 14

    […] A Kodak snapshot Jump to Comments Check out this timeline on the history of Kodak. Here is another story, I find it depressing. Click here. […]

  11. Former Kodaker commented on Nov 17

    As a former Kodak employee of 22+ years, the demise of EK saddens me greatly. As others here have said, Kodak was special. The inside culture was one of excellence, amazing innovation, pride…and uncompromising ethics. The superority of Kodak film products is well-known. The list of Kodak inventions is staggering. As for ethics, let me illustrate: at the end of WW1, George Eastman asked his chief accountant to tally the profits made on government war contracts. The total was $14 million. When informed of the figure, Eastman instructed his treasurer to write the U. S. Government a check for the entire amount, saying he did not wish to make money from war! Can you imagine ANY company doing that today?

    The really sad part of the sorry state in which Kodak finds itself is that it can be directly attributed to Kodak management. Those running Kodak’s film busineses failed to recognize that analog, chemical-based photography would one day be replaced by digital. I personally attended meeting after meeting after meeting in which Kodak managers stated emphatically that digital photography would never rival or surpass analog in terms of quality! No one at top levels in Kodak could be convinced that Moore’s Law would one day apply to photography. In fact, most Kodak managers had never even heard of Moore’s Law!

    Kodak’s current attempt to market home ink jet photo printers is truly a “hail Mary” pass. For the sake of those remaining Kodak employees, I hope it works. Frankly though, I don’t hold out much hope.

    As for Kodak’s other business, the Graphics Communications Group, the earnings from which from which Kodak hoped to use to finance it’s foray into consumer ink jet printers, this Division too is suffering a rapid and messy decline at the hands of incompetent and uninformed management. Having used the majority of profits from graphics consumables to finance the sale of graphics imaging hardware, GCG is doing little more than treading water at this point. In December of 2009, Kodak will close the plant and lay off the individuals who were reponsible for the invention and development of the Kodak digital thermal printing plate…a product that quite literally revolutionized the worldwide graphic arts industry and generated 100s of millions of dollars in earnings over the past 15 years. Over 40 R&D scientists and manufacturing engineers from this plant have received their walking papers so far. More layoffs of individuals with critical skills are to come. Given such actions, it is a mystery how Kodak expects to compete with Fuji’s 300+ member graphics R&D group?

    Given all this, I have no hope that Kodak will survive as an intact organization. Sad times indeed.

  12. Former Kodaker commented on Nov 17

    As a former Kodak employee of 22+ years, the demise of EK saddens me greatly. As others here have said, Kodak was special. The inside culture was one of excellence, amazing innovation, pride…and uncompromising ethics. The superority of Kodak film products is well-known. The list of Kodak inventions is staggering. As for ethics, let me illustrate: at the end of WW1, George Eastman asked his chief accountant to tally the profits made on government war contracts. The total was $14 million. When informed of the figure, Eastman instructed his treasurer to write the U. S. Government a check for the entire amount, saying he did not wish to make money from war! Can you imagine ANY company doing that today?

    The really sad part of the sorry state in which Kodak finds itself is that it can be directly attributed to Kodak management. Those running Kodak’s film busineses failed to recognize that analog, chemical-based photography would one day be replaced by digital. I personally attended meeting after meeting after meeting in which Kodak managers stated emphatically that digital photography would never rival or surpass analog in terms of quality! No one at top levels in Kodak could be convinced that Moore’s Law would one day apply to photography. In fact, most Kodak managers had never even heard of Moore’s Law!

    Kodak’s current attempt to market home ink jet photo printers is truly a “hail Mary” pass. For the sake of those remaining Kodak employees, I hope it works. Frankly though, I don’t hold out much hope.

    As for Kodak’s other business, the Graphics Communications Group, the earnings from which from which Kodak hoped to use to finance it’s foray into consumer ink jet printers, this Division too is suffering a rapid and messy decline at the hands of incompetent and uninformed management. Having used the majority of profits from graphics consumables to finance the sale of graphics imaging hardware, GCG is doing little more than treading water at this point. In December of 2009, Kodak will close the plant and lay off the individuals who were reponsible for the invention and development of the Kodak digital thermal printing plate…a product that quite literally revolutionized the worldwide graphic arts industry and generated 100s of millions of dollars in earnings over the past 15 years. Over 40 R&D scientists and manufacturing engineers from this plant have received their walking papers so far. More layoffs of individuals with critical skills are to come. Given such actions, it is a mystery how Kodak expects to compete with Fuji’s 300+ member graphics R&D group?

    Given all this, I have no hope that Kodak will survive as an intact organization. Sad times indeed.