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Source: Wall Street Journal, October 21, 2003 article

THE WALL STREET JOURNAL.  |  Business


Heard on the Street  

Investors Seek to Rewind Kodak

Providence Capital-Led Group Wants Company to Roll Back Big Plans for Digital Technology


Talk about a Kodak moment.

A 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.

Now a 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 plot strategy.

Among 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."

Kodak 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 spokesman.

It 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 participate.

Mr. 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.

At 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.

Some 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.

Some 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 drying up.

Mr. 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.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and James Bandler at james.bandler@wsj.com

 

 

 

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