The range of options available for addressing a problem is directly correlated to the amount of time available. As the amount of time available to address a problem shrinks, so does the universe of options. Eventually, the options all start to look painful. Followers of Eastman Kodak are currently learning this lesson in corporate turnaround dynamics.
News that Kodak is looking to shop a portfolio of 1,100 patents (with the help of Lazard) had excited investors. The $2.4 – $3 billion an IP sale would fetch would be a welcome cash infusion for a company with cumulative operating losses of $1.2 billion over the last three years.
But the market is fickle, and when Kodak drew down its $160 million revolving line of credit earlier this week, sentiment turned strongly negative. Moody’s downgraded the company’s bond ratings to Caa2 from Caa1 (way to be ahead of the curve, guys). Alarmed at Kodak’s cash burn, Scott Dinsdale of KDP Investment Advisors noted: “They could run out of cash in early 2012”.
Taking a look at Kodak’s financials, I think that analysis is fair. It does not take much of a leap, given a continuation of the company’s recent poor performance, to see Kodak having burned through its current cash balance of $957 million by this time next year, if not sooner.
Given this situation, Bloomberg notes that Kodak may need to file a chapter 11 bankruptcy in order to ensure that bidders for its intellectual property are not liable for a fraudulent conveyance claim. With the patents now for sale expected to yield several times the current market cap of the company, and additional patents that may offer further opportunities to reap some return on years of R&D (Kodak holds a total of 7,600 patents), any roadblocks to the sale of intellectual property clearly must be dealt with.
This is a sad development for a company that has seen change coming for a long time, but has been unable to make the necessary adjustments. A 1995 Fortune article highlighted issues facing Kodak that are depressingly familiar today: managing a mature business in decline, building a business around digital imaging, right-sizing the cost structure. The difference is that in 1995 Kodak had many more options than it does today. After spending so much time searching for the optimal strategy, it may be that Kodak will have to settle for the least bad option of a chapter 11 filing and the sale of IP that it was never able to fully utilise.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].