Eastman Kodak's (NYSE:EK) announcement yesterday that it will spend $250 million to buy the digital printing unit of Scitex Corp. is the latest step in management's new strategy, disclosed in September, to go digital in a big way. But the news appeared to fall flat with investors, who remain wary of management's broad vision for the future.
Growth for growth's sake is never a good thing. While photography revenue over the past nine months has shown a meager 0.2% gain versus the same period in 2002, the margins in that segment have crashed from the 8%-9% range to 4%. That's no surprise, because the digital push is positioning the staid old film company in the consumer electronics industry, renowned for its low margins and intense competition. Even with the considerable resources at its disposal, Kodak likely will struggle to establish itself as a major player in this segment, given competition from the likes of Sony (NYSE:SNE) and Hewlett-Packard (NYSE:HPQ).
Nevertheless, the acquisition of the Scitex business makes some sense. The purchase will add to Kodak's presence in commercial digital printing, a higher margin and less cut-throat segment than consumer electronics. The same rationale also follows for the recent acquisition of Algotec Systems, since that deal adds to Kodak's medical imaging business, its most profitable unit.
The company had no choice but to radically change its business in light of the trend toward digital. But it would be wise to choose its battles. The plan to compete against established players in consumer electronics has divided investors and attracted the interest of corporate raider Carl Icahn, who thrives on corporate controversy. Before burning through piles cash, hopefully Kodak will recognize it's not too late to abandon its push into consumer electronics and focus on businesses that are the most promising for the firm's long-term growth.
Brian Gorman is a freelance writer in Chicago. He welcomes your feedback at [email protected] .
