Eastman Kodak: The Least Surprising Bankruptcy in History

by Jeff Reeves | January 19, 2012 8:52 am

Eastman Kodak: The Least Surprising Bankruptcy in History

Early Thursday, investors woke to learn that Eastman Kodak (NYSE:EK[1]) is filing for Chapter 11 bankruptcy protection. It will go down as one of the least surprising bankruptcies in history.

It’s not just because Kodak’s troubles are a poorly kept secret. The clearest sign the end was nigh came back in September, when it was clear Kodak was headed to zero[2] after a panicked move to tap its credit line. But those who have been watching the company for a long time understand that a stubborn culture, a lack of innovation and more than a decade of playing catch-up to the digital revolution doomed the company long ago.

One reader even sent InvestorPlace a fascinating Kodak newspaper clipping from 14 years ago[3] that predicted the company was doomed way back then, with a columnist opining that, “The solution to Kodak’s problems is deceptively simple, but thwarted by a culture of fear in which management cannot afford the risk of ‘looking bad.”

Most recently, rumors leaked last week[4] that the iconic photography company was talking to Citigroup (NYSE:C[5]) to finance a bankruptcy — and today we indeed learned it secured $950 million in financing from stay afloat during Chapter 11 proceedings. Kodak did a song and dance about a corporate restructuring[6] around the same time that was akin to rearranging the deck chairs on the Titanic, which fooled no one.

No bankruptcy comes out of nowhere, since Chapter 11 is prompted by high debt loads that creditors think will not be satisfied. Anyone with an Internet connection can easily find out how much a company has borrowed. But that’s not to say investors aren’t surprised sometimes. Lehman Brothers was in trouble, yes, but many expected help was on the way. The troubles of airlines are obvious, but American Airlines parent AMR Corp. (PINK:AAMRQ[7]) had muddled through for long enough that some expected it to stay airborne for longer than it did.

But Kodak? Come on. Who didn’t see this one coming?

If you haven’t learned by now, the steady march of technology is the embodiment of “creative destruction” in the global economy. Borders was left behind by the move away from brick-and-mortar bookstores and the rise of Amazon (NASDAQ:AMZN[8]) and e-books. Blockbuster was killed by Netflix (NASDAQ:NFLX[9]). There are countless other companies that have disappeared as their technology has been mothballed.

It’s evolve or die on Wall Street. And Kodak never evolved.

This isn’t necessarily the end for Kodak. The company can theoretically emerge from Chapter 11 much like a defunct General Motors (NYSE:GM[10]) did. Of course, whether the company cuts enough cost, restructures enough debt or has enough growth to remain viable is another story. The company is banking on inkjet printer growth and modest improvement in the digital arena to remain relevant. Dominic Di Napoli, vice chairman at FTI Consulting Inc., has been appointed “chief restructuring officer” to manage Kodak’s transformation with the help of bankruptcy courts — but satisfying creditors and thinking about sustainable growth are frequently mutually exclusive.

Besides, studies out there show Kodak already might be a pariah in the consumer technology space. An Interbrand analysis of brand value shows the Kodak name peaked long ago, and continues to slide[11]. The name used to be synonymous with photography, and now it’s a stand-in for your grandmother’s clunky camera and weeklong waits for 3×5 prints.

Bankruptcy tarnishes the nameplate even more, as evidenced by GM’s sharp sales slide during a government bailout. Consumers are wary of buying a product from a company that might not exist in three months, and they question the quality.

Whatever happens to Kodak, management cannot say they didn’t see this coming. From its refusal to push forward with digital technology after creating one of the first digital cameras in the mid-1970s through its continued troubles recently, Eastman Kodak has not done enough to remain competitive in a changing world.

Let that be a lesson to other companies. The default setting in the business world is a decaying operation that eventually fails. You have to work just to stay relevant on Wall Street — something Kodak refused to do.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

Endnotes:
  1. EK: http://studio-5.financialcontent.com/investplace/quote?Symbol=EK
  2. it was clear Kodak was headed to zero: http://investorplace.com/2011/09/eastman-kodak-credit-ek-shares/
  3. fascinating Kodak newspaper clipping from 14 years ago: http://investorplace.com/2012/01/proof-kodak-was-doomed-14-years-ago/
  4. rumors leaked last week: http://investorplace.com/2012/01/eastman-kodak-ek-citigroup-bankruptcy/
  5. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  6. a corporate restructuring: http://investorplace.com/2012/01/kodak-ek-stock-refocuses-to-avoid-bankruptcy/
  7. AAMRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAMRQ
  8. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  9. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  10. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  11. the Kodak name peaked long ago, and continues to slide: http://investorplace.com/2011/11/eastman-kodak-bankruptcy-ek-stock-kodak-gallery/

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