Monday, July 18, 2005

Memo to Kodak Shareholders: George Steinbrenner He is Not


Word flew around Wall Street last week that Hewlett-Packard was getting ready to buy Eastman Kodak.

This rumor—that a cash-rich-but-feeble company is going to buy an aging, used-to-be-something business seems to pop up about as frequently as news that the cash-rich-but-feeble Yankees have acquired yet another aging, used-to-be-something pitcher.

(Sure enough, three days later the Yankees bought the aging Al Leiter, who, for what it’s worth, used to be the young Al Leiter, before the Yankees traded him for Jesse Barfield in the kind of panicky deal that left the Yankees high and dry in the World Series-less 1980s and which brought A-Rod and a host of hitters-on-their-last-legs to the team in the 2000s, thus ensuring another World Series-less decade for the decrepit franchise. Not that I care about the Yankees.)

But getting back to the latest HP-for-Kodak rumor: the odd part of last week’s incarnation was that this time around, for some reason, people seemed to actually believe it: Kodak stock popped two bucks immediately—enough for a half-billion dollars worth of incremental market value—and never looked back the rest of the week.

Bizarrely, a half-billion dollars is roughly the amount of annual “non-recurring” charges the perennially restructuring Kodak has taken in each of the last four years…and for which the company is on track in 2005. (Kodak is one of the few companies left that takes recurring-non-recurring charges without any embarrassment whatsoever.)

So Wall Street’s traders, by valuing the rumor at roughly the amount of Kodak’s annualized, recurring-non-recurring charges, have apparently discovered an entirely different metric for discerning takeover value than most investment professionals, who tend to look at recurring cash flow and hidden assets when trying to assess undervaluation in the marketplace.

But it wasn’t just the traders who took the rumor seriously: at least one Wall Street firm felt compelled to put out an analysis of just what it would take for HP to buy Kodak. To that firm’s credit, the answer was “too much.”

And I am here to report to hopeful, “thank God I’m finally getting bailed out” Kodak shareholders as well as anxious, “I’ve seen this movie before and it ends badly” Hewlett-Packard investors, that the deal is not going to happen.

For starters, there are the three main obstacles HP’s new CEO would have when attempting to push the acquisition of an aging, market-share-losing technology-based company past the HP board of directors, and they are:

1. Compaq.

2. Compaq.

3. Compaq.

Secondly, what traders and hopeful Kodak investors don’t realize is this: Kodak has been trying to sell itself to HP for years—going back to the George Fisher days (Fisher was the ex-Motorola genius who blew into Kodak with high hopes and retired five years ago, with a whisper—not a bang.)

That’s right. Anybody with an ear to the ground in the Palo Alto area has heard about Fisher’s approach to HP towards the end of his disappointing tenure in Rochester in the late 1990s—an approach that fell flat and hasn’t gained any elevation since.

So, if anybody out there has Kodak shares burning a hole in their portfolio, I would suggest you not to expect the deal-shy folks in Palo Alto to relieve you of your burden.

Because, unfortunately for Kodak investors, the CEO of HP is now Mark Hurd, the ex-NCR turnaround guru and a smart, rational man dis-inclined to making panicky, overpriced acquisitions.

George Steinbrenner, he is not.


Jeff Matthews
I Am Not Making This Up



The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

1 comment:

Jim Chanos said...

Today's EK results, or lack thereof, should hopefully put this EK takeover "nonsense" to rest. BTW, the most interesting thing about today's EK results is that the digital business grew less than 10% yr/yr, ex-acquisitions! This business is supposed to be growing 30-40% yr/yr, BEFORE acquisitions, to offset the decline in traditional film sales.