Mama Don't Take My Kodachrome Away!: Kodak's Chapter 11 -- A Bridge Over Troubled Water
Eastman Kodak Company’s bankruptcy is another in a string of recent chapter 11 filings by established brand names that lack a clear exit strategy (others are Borders, Hostess, AMR ... Europe!). So much for the "end of bankruptcy"!
As noted in Matt Daneman's article this week in the Rochester Democrat & Chronicle (quoting me, thanks Matt!), a Creditors’ Committee was recently formed, with the U.S. Pension Benefit Guaranty Corp. and trustees of its UK pension plan representing two of its seven members. The Committee appointed Milbank Tweed as its bankruptcy counsel.
Kodak’s CFO, Antoinette McCorvey, submitted a first-day supporting affidavit which is selectively long on history and short on prospects for the future. In the 8 years preceding the bankruptcy filing, Kodak shed 50,000 jobs and closed 13 of 15 film plants and 130 photo labs. It also exercised unilateral rights to reduce or eliminate some retiree benefits to its 65,000 retirees worldwide, resulting in about $100 million of savings annually, but retiree benefits still consumed about $250 million of cash in 2011. Silver commodity prices also are an astounding 200% higher than 2008 (thank you Chairman Bernanke!). Bankruptcy provides Kodak with an opportunity to accomplish many cost cutting objectives, including its behemoth $2.5 billion in legacy costs.
Notably absent from the affidavit is Kodak's staggering losses in the past decade. Buried deep in the affidavit is a balance sheet from which one can derive that Kodak lost about $700 million in the nine months ended September 30, 2011, but nowhere in the affidavit can you find that Kodak lost another $1.5 billion in the 4 preceding years! And the two years before that were anything but banner, too ($1.9 billion loss in 2005 & 2006 - p.60).
Kodak is like a Rubik’s Cube. Its corporate chart shows 120 foreign and domestic subsidiaries. It has three gargantuan business segments, R&D activities averaging $300-500 million per year in expense, 13,000 foreign patents and trademarks and pending registrations in 160 countries, and 8,900 U.S. patent and trademark registrations and applications. This case is about not only whether the sum of the parts are worth more than the whole, but whether some of the parts have any tangible value at all.
Trying to predict the value of nearly 23,000 patent and trademark registrations and applications is a monumental—if not entirely unfeasible—task in a chapter 11, particularly given the right of licensees to compel specific performance (see my IP in Bankruptcy Outline). And given Kodak’s accelerating losses through the past decade, one has to wonder whether a real buyer will ever emerge for Kodak or whether the patent trolls will pick it apart like rabid Orcs. In sum, Kodak’s footing in this chapter 11 seems as unsure as that of a Mississippi lawyer running to a Rochester court on a winter day.
Alas, in the end, we reminisce over Paul Simon's all-too-prescient Kodachrome, but view Kodak’s chapter 11 as a Bridge Over Troubled Water. Time will tell whether those waters will wash out the bridge.