The Latest Moment of Kodak Hubris

The bigger they are, the harder they fall. And the bigger your ego, the more ornery your denial.

Consider the case of Eastman Kodak (OTCBB: EKDKQ). Hot on the heels of a supposedly dramatic restructuring, the storied photography firm filed for Chapter 11. And I mean right away, just a couple of days after the reorg that was supposed to save its bacon.

The company sits on a wealth of patents in film-based and digital photography, which still could turn this sad story around. Supposedly, tech giants didn't bid on the patents for sale just because a bankruptcy was coming like a freight train -- where they would receive a court blessing for the transaction and the patents would likely go on deep discount.

And that's where Kodak's latest act of hubris comes in. Management wants between $2.2 billion and $2.6 billion for that treasure trove of intellectual property.

Let that sink in for a second. Then consider that the company sports a market cap of less than $100 million and an enterprise value of $749 million. So in management's eyes, the lifesaving patents are worth at least 22 times the company's market value or three times its buyout price tag.

I don't think so, pal. CEO/Chairman Antonio Perez (who may have too much clout attached to his inflated expectations) needs to wake up and smell the napalm. This will be a fire sale.

If Perez bases that silly estimate on bidding wars of recent years like the $4.5 billion Nortel bonanza, that particular auction contained a ton of mobile technology patents and it happened just as the infringement lawsuits started flying across the smartphone sector. Sure, cameras are an important part of any modern phone, but still a relatively minor component of a very complex system.

What makes Kodak think that Apple (Nasdaq: AAPL  ) , Google (Nasdaq: GOOG  ) , or perhaps Microsoft (Nasdaq: MSFT  ) would be willing to overpay for its camera patents today? They were all supposedly holding out for a better deal in the first place. It would be cheaper just to buy Kodak than to haggle over its patent filings, even at a massive buyout premium.

These are some of the wealthiest companies on the planet but they didn't get that way by throwing their cash away. And it's getting easier every day to argue that they all have the patent weaponry they need for going on litigation rampage (in the cases of Microsoft and Apple) or raising a shield against such campaigns (hello, Google). The Kodak moment for patent sales has passed, so to speak.

Mobile computing is a trillion-dollar revolution. Sadly, it's killing Kodak. Find out the name of perhaps the biggest winner in a special report, 100% free, but only for a limited time.

Fool contributor Anders Bylund owns shares of Google but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Microsoft, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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  • Report this Comment On January 20, 2012, at 1:59 PM, Mikey925 wrote:

    You clearly are the FOOL here.

    The puny $100 million dollar market-cap that you cite is meaningless!

    The reason that someone like Apple or Goggle or Rimm doesn't come swooping down to buy out Kodak for its micro market cap is because Kodak has Billions of dollars in Liabilities on its balance sheet!

    Kodak lists $6.8 BILLION in debt in their recent Chapter 11 Bankruptcy filing.

    Duh!

  • Report this Comment On January 20, 2012, at 2:26 PM, TMFZahrim wrote:

    Yes Mikey, and that's accounted for in the enterprise value. Still a ridiculous value proposition.

    Anders

  • Report this Comment On January 20, 2012, at 2:28 PM, KaptKos wrote:

    Are all the writers here and SuckingBeta vucking RETARDS!???!!????

  • Report this Comment On January 20, 2012, at 3:32 PM, Mikey925 wrote:

    Anders,

    You still have an awful lot to learn about the DI Patents that Kodak controls, not too mention that potential bidders were scared off by the possibility that such a transaction would result in fraudulent conveyance, should Kodak file for BK.

    You should try being a lot more thorough in your analysis, Sir.

  • Report this Comment On January 20, 2012, at 3:51 PM, EnigmaDude wrote:

    ... should Kodak file for BK

    Hey Mikey - did you know that Chapter 11 is BK?

    Kodak is toast and they should have tried harder to negotiate a deal to sell their patents before they filed.

  • Report this Comment On January 20, 2012, at 6:17 PM, Mikey925 wrote:

    Enigma,

    You obviously do not understand what Chapter 11 is all about. It's designed to help a company buy time and reorganize.

    Given the assets and liabilities, the common stock is probably not worth anything... but the Bonds are certainly a realistic bet since they are first in line to be paid off. The 7.25% Kodak bonds due in 11/2013 that are currently trading at .27 cents on the dollar are probably a great speculative trade here.

    I guess you have no idea why Citicorp just loaned Kodak $950 million in "debtor-in-possession" financing. If Kodak is "toast" like you claim, then why do you think Citicorp did that, genius?

  • Report this Comment On January 24, 2012, at 7:36 AM, TMFZahrim wrote:

    @Mikey, Chapter 11 is indeed meant to give troubled companies some room to reorganize and maybe get back on its feet. Sometimes it works (GM, nearly every airline in history), sometimes it doesn't (Borders, Blockbuster, any company that ever went out of business). Betting on bankrupt stocks or bonds is a huge gamble, not investing.

    The DIP loan Citi provided is an asset-based debt that takes priority over all other claims in case Kodak moves on to Chapter 7 liquidation. Basically, Citi would immediately own a large chunk of Kodak's factories, office supplies, and yes, maybe even patents that were used as collateral to the loan. The bonds are now second in line, not first.

    Hope that helps,

    Anders

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