THE WALL STREET
Heard on the Street
to Rewind Kodak
Capital-Led Group Wants Company to Roll Back Big Plans for Digital
about a Kodak moment.
group of restive shareholders aims to upend
Eastman Kodak Co. 's newly announced strategy to move away from
its traditional film business by slashing its dividend and spending $3
billion on digital-technology purchases. Late last month, Kodak
unveiled the significant shift in focus of the 122-year-old company
toward the faster growing digital printing world.
Investors, surprised by the radical plan, have trampled Kodak stock.
Kodak shares are down about 14% to $23.12 in New York Stock Exchange
composite trading at 4 p.m. since the announcement. The shares
recently hit 15-year lows amid Wall Street worries that Kodak will run
into tough competition as it focuses on digital cameras and
cutting-edge ink printers.
group of high-profile investors, led by investment firm Providence
Capital Inc., is joining forces to prod Kodak to roll back its plans,
and perhaps even shake up management. The group will meet Wednesday to
those at the meeting will be a member of the investment team of Bill
Miller, the star mutual-fund manager who runs the $10 billion Legg
Mason Value Trust, according to a spokeswoman for the firm. Mr.
Miller's fund owns 13 million Kodak shares, or about 4.5% of Kodak's
shares outstanding, as of June 30 of this year, and Legg Mason is
Kodak's largest shareholder. Mr. Miller wasn't available for comment.
Kodak's acquisition strategy is "challenging at best," says Herbert
Denton, president of Providence Capital, a New York-based firm that in
the past has pressured Aetna Inc., Digital Equipment Corp. and Walt
Disney Co. Mr. Denton says the group will consider "alternative
strategies to maximize shareholder value."
officials so far are standing pat. They say the company considered
every reasonable alternative to its digital strategy, and determined
that digital expansion is the most promising. "The one we announced is
one we think offers investors the best opportunity for growth and to
maximize value of their investments," said Gerard Meuchner, a Kodak
isn't clear how far Mr. Denton's group will get. Usually it is
difficult to round up enough large investors to force management to
drop a strategic move, analysts note, though the inclusion of Mr.
Miller would aid Providence's cause. Mr. Denton says about 60
institutional shareholders, controlling about 25% of Kodak's stock,
have said they will participate in the meeting, to be held at the
firm's New York offices. Some major hedge funds are expected to
Denton sent a letter dated Oct. 8 to Kodak Chairman Daniel Carp urging
the board to reconsider its new strategy. In the letter, Mr. Denton
said that based on conversations with some of Kodak's largest
shareholders, he was "confident these concerns resonate across a very
broad body of Kodak's institutional (and retail) shareholder base."
Either way, the unrest signals a growing view among some investors and
industry members that Kodak likely will have a tough time making its
new strategy work. "We're pretty skeptical" about the plan's success,
says Benjamin Reitzes, an analyst at UBS Warburg in New York.
issue is Kodak's plan to slash its dividend by 72%, to 50 cents, to
pay for an estimated $3 billion in acquisitions, including a recent
purchase of a dental software and imaging company. The buying spree
would fund new digital initiatives including a new ink-jet printer
business. Some investors say they are concerned Kodak won't be able to
successfully compete in this market, which already faces heated
competition from the likes of Hewlett-Packard Co., Lexmark
International Inc. and Canon Inc. Acquisitions are hard to pull off
successfully, these investors note, and Kodak's track record in the
area isn't without missteps.
investors argue the better route would be for Kodak to conserve cash
by slashing research and other costs, keep or even raise the dividend,
and then milk Kodak's dominance of the traditional film business, even
as business slows.
Robert Jaffe, a managing director with the investment fund Force
Capital in New York, said Kodak' s plan to grow through acquisition is
an "inefficient use" of the company's cash flow. Mr. Jaffe says he
likely will attend the meeting Wednesday.
of the dissident investors believe Kodak's management could alter its
strategy amid the investor pressure. "Mr. Carp and management are
flexible enough that they will listen," said Mr. Jaffe. "If they
understand that shareholders are unhappy, they're going to do the
right thing and not pursue this plan."
Meanwhile, credit-rating agencies have downgraded Kodak's debt
recently, out of fear that the traditional film business is quickly
Denton said Providence acquired its stake in Kodak soon after the
company announced its new digital strategy and shares tumbled 18%. He
said his firm bought the shares when they fell below $21, and
Providence saw value, if the plan could be altered. In the past,
Providence had been able to put some pressure on some companies. Mr.
Denton was an outside adviser to HealthSouth Corp.'s governance
committee earlier this year, and helped put together new guidelines
governing the company's board.
Providence has been criticized for sometimes receiving fees and other
payments from companies he has targeted for change. "We have done a
lot of good work for shareholders and on occasion companies have paid
us fees," Mr. Denton said. He argues that the fees Providence received
were the same as those paid to other advisers.
Wednesday, Kodak is scheduled to release third-quarter earnings. While
analysts expect the company to earn 57 cents a share, some investors
in recent days have begun to anticipate better earnings, thanks to
recent cost-cutting moves by the company.
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