That “Kodak Moment” Could Be a Thing of the Past

An American icon is on the verge of bankruptcy. The 131-year-old Eastman Kodak Company — long-time manufacturer of cameras and film — whose highly recognizable “K” logo is a universal symbol around the world, is preparing to seek bankruptcy protection in the next weeks.

The venerable firm could be saved if it sells its valuable digital patents very quickly, but Kodak officials are preparing for the worst, and talking to banks about the possibility of borrowing $1 billion to keep the company in business during bankruptcy proceedings.  Their plan is to sell some 1,100 patents through a court-supervised auction.

Kodak is estimated to employ 18,800 people. Benefits and pensions are of great concern to retirees and employees.   George Conboy of Kodak tweeted, “In bankruptcy, Kodak will cut all costs possible. My opinion: health care goes.” Robert Kravetz, senior vice president and financial adviser, explained: “Most likely the health insurance will just go away. This is common in the United States, based on the rising cost of health care and the squeezing economic cycle and the profitability of large corporations.”  For those with pensions, Conboy tweeted, “Pension is slightly underfunded but our opinion is that gets fixed in bankruptcy.  No losses for Kodak retirees.”

Kodak, which has seen its stock value tumble as digital imagery fast replaced film, is selling off its patents to avoid a Chapter 11 filing.  Once the unchallenged manufacturer of photographic film, Kodak helped invent the digital camera in 1975 but could not capitalize on the technology, especially when compared with Canon or Nikon.  Foreign competitors and the popularity of cell phones with built-in cameras and sharing capabilities also harmed the company.  Kodak tried to compensate with a printing business, bringing in former HP printing chief Antonio Perez to head the company, but it was unable to pull off a turnaround.

“Chapter 11 is not the end of the world at all. It’s not uncommon for companies in financial distress to sell off assets to try to raise some money. They could be talking to major lenders and saying, ‘We want to restructure’ and talking about options such as extending debts or giving stock to lenders,” John A.E. Pottow, professor of law and a bankruptcy expert at the University of Michigan, said.  Without a viable business plan or innovative idea about how to assure investors that with a little time and money, the company will be back to its old self, Pottow believes that it’s possible it could face a future closer to that of Borders.

Rochester, NY-based Kodak lost an astonishing 88 percent of its market value last year. Five-year credit-default swaps related to Kodak’s debt climbed 2.9 percent to 70.4 percent upfront, according to data provider CMA. That means it would cost $7.04 million initially and $500,000 annually to protect $10 million of Kodak’s debt.  Single-year protection soared adding a record 8.2 percent to 66.2 percent, according to CMA, which compiles prices quoted by dealers in the privately negotiated market.  Credit-default swaps pay the buyer face value if a borrower is unable to meet its obligations, minus the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climb as investor confidence deteriorates.

Several board members resigned last month, including Laura D. Tyson, a director since 1997, Tyson said that her 2012 schedule made it “virtually impossible” to continue to serve, and she resigned to help the company reach an “optimal” board size.  “It’s not a statement about the firm’s strategy or the firm’s leadership,” Tyson said. “I was part of the board for a long time, I was part of the strategy to transform the company, then part of the strategy of choosing the company CEO, I’ve worked closely with him and with the other members of the board.”

Tyson, a professor at University of California Berkeley’s Haas School of Business, declined to comment on what Kodak will do next.  She has advised Presidents Barack Obama and Bill Clinton and sits on the boards of at least five companies, including Morgan Stanley and AT&T, Inc.

Writing in Forbes, contributor Larry Magid says that “Like a silent movie star who never quite made the transition to talkies, the once venerable Eastman Kodak company could fade from the picture. There was also a time when I purchased a lot of Kodak film and developing services.  As a kid I even bought flashbulbs from Kodak.  But the glory days of Kodak’s supply business are long gone.  When people buy a Kodak digital camera, they have little reason to return for additional supplies.  Sure Kodak sells paper and even printers and that highly profitable printer ink, but —despite some valiant efforts and a pledge to turn inkjet sales into a profitable business, — they haven’t been able to make a serious dent in that market.”