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HP-Kodak: An Image That Isn't Forming

By Ben Elgin and William Symonds Call it the rumor that won't quit. Every couple of months, speculation bubbles up that Hewlett-Packard (HPQ) is poised to acquire Eastman Kodak (EK). The chitchat erupted again on Sept. 1, helping drive up Kodak's stock 5%, to $25.50 -- its largest single-day jump in over a year. The stock climbed another 3%, to $26.24, on Sept. 2.

It's possible that Kodak is open to buyers. But don't bet on HP as a potential suitor. Sure, the $80 billion computing colossus, which boasts over $14 billion in cash, could seemingly afford to snap up the $8 billion Kodak. The companies have partnered in the past, teaming up a half-decade ago to launch ill-fated joint venture Phogenix, which sought to develop digital inkjet photofinishing labs for retail outlets. And, yes, Kodak's CEO is Antonio M. Perez, the one-time boss of HP's printing and imaging division.

Moreover, HP has been opening its wallet to beef up its digital imaging business. In March, HP purchased online photo service Snapfish for an estimated $300 million. And in August, it shelled out $230 million to acquire assets of Scitex Vision, a market leader in superwide digital printing.

"IT WOULD DEFY COMPREHENSION." But the Kodak speculation doesn't hold water upon closer scrutiny. Indeed, two HP insiders have told BusinessWeek Online at various times over the summer that there's nothing to the oft-surfacing Kodak rumors, saying it isn't even being discussed at HP.

That would spell relief to some analysts who think Kodak's long migration from silver halide to digital imaging could burden HP's own imaging efforts. "It would defy comprehension to me," says SG Cowen analyst Richard Chu. "HP is on the offensive right now. [Acquiring Kodak] would bring all of these legacy constraints into place." (See BW Online, 9/1/05, "HP Says Goodbye to Drama").

The timing of any such deal for HP would also be difficult. With new CEO Mark V. Hurd five months into his tenure, the company is relentlessly zeroing in on cost cutting and improved execution (see BW Online, 9/1/05, "The Word From Hurd"). HP handed out 14,500 pink slips in July -- roughly 10% of its entire workforce. And Hurd has been tweaking the organizational structure to boost performance of its business units.

DIGITAL PHOTOGRAPHY GIANT. Acquiring Kodak, which boasted 55,000 employees at the end of fiscal 2004, would throw HP's organization into greater disarray. "People are looking for ways to drum up interest in the stock," says Richard Stice, an analyst at Standard & Poor's Equity Research, "but it doesn't seem all that logical that HP would go after this company." Both Kodak and HP won't comment on rumor and speculation.

Kodak does have some appeal. Despite the beating it has taken in recent years, it still has one of the world's best-known brand names. To many consumers, Kodak is synonymous with photography. And despite a slow start, Kodak has become a major player in consumer digital photography.

"They were asleep in 2001," says Ulysses Yannas, a broker at Buckman, Buckman and Reid, who has followed Kodak since 1967. "But now they're No. 1 in digital cameras in the U.S. and No. 3 worldwide."

HEFTY PREMIUM. Kodak is also the dominant player in the burgeoning market for storing and processing photos online, through its Kodak Easyshare Gallery. And it is successfully convincing consumers to print digital images at its growing network of kiosks, a business that produces much higher margins than selling digital cameras.

Beyond consumers, Kodak also has a big stake in commercial digital printing and in health imaging, a highly profitable business. In addition, the company is expected to unveil a consumer inkjet printer next year. "They're putting a lot of money into inkjet printing," says Yannas, who notes that this would be of interest to HP.

But these assets would come at a major price. Kodak has a market value of over $7 billion. Some analysts and investors expect that any successful bidder would pay a substantial premium. Anthony Maramarco, managing director at Babson Capital, which owns some 2 million shares of Kodak stock, believes the company would fetch $35 to $40 per share, or $10 billion -- a hefty premium above today's price.

NOT MUCH SENSE. Even more forbidding, perhaps, would be the hefty liabilities and risks. Kodak is embroiled in a vast downsizing and restructuring of its traditional film business. On July 20, the day it announced a loss of $146 million in the second quarter, Kodak announced plans to lay off an additional 10,000 employees, on top of the 15,000 it had previously planned to eliminate. These additional cutbacks will push the cost of its ongoing restructuring close to $3 billion, in a process that's expected to run through 2007.

Given these problems, says Standard & Poor's Stice, the idea that someone will make a run at Kodak right now "doesn't make a lot of sense" -- especially for a company going through a major transition of its own.

With contributions from Peter Burrows in Silicon Valley

Elgin is a BusinessWeek correspondent in Silicon Valley, and Symonds is BusinessWeek's Boston bureau chief

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