Not Exactly A Kodak Moment

Investors are split over CEO Carp's digital plan. And now Carl Icahn is in the picture

In its 111-year history, the once-mighty Eastman Kodak Co. has rarely known such turmoil. Since CEO Daniel A. Carp unveiled his risky new strategy of investing $3 billion in emerging digital technologies, dissident shareholders have been mighty worked up. They're arguing there must be a better way to mend the ailing icon -- and probably one that doesn't include Carp's plan to cut Kodak's dividend by 72%. Bert Denton, President of Providence Capital, who attracted shareholders representing nearly a third of Kodak stock to an Oct. 22 meeting, is pushing for radical cost cuts to quickly boost earnings. With the stock now trading at $25 -- the same level it traded at in the early 1980s -- corporate raider Carl Icahn has just received clearance to buy up to 7% of Kodak. Many figure he wants to break it up and sell off the pieces. "This company is in danger," warns Denton.

Carp has been working overtime to quell the revolt. He insists the company is already making strides. One sign of progress: On Nov. 12, Kodak announced agreements with Cingular Wireless and Nokia under which it will provide services that will help their customers store, share, and print the digital images they take with popular new camera cell phones.

Moreover, Carp contends that recent meetings he has held with roughly 35 investors to explain his vision for Kodak's digital future are turning the tide. He argues that the swift decline in traditional film markets leaves Kodak no choice but to slash the dividend and pour its resources into digital. The alternatives being bandied about, he says, "really aren't viable, practical options." Carp argues that many investors are now convinced the strategy is correct, though he concedes that questions remain over whether Kodak's management team can pull it off.

Little wonder: Kodak has struggled to transition to digital for close to a decade now. While it has had some success, many investors say it isn't enough, given the billions spent. Meanwhile, costs remain too high in film, given the rapid sales drop. "It's all about execution," says Joan Lappin, chairman and chief investment officer of Gramercy Capital, which hold Kodak shares. "This company has a clearly defined set of problems. If this group doesn't fix it, the board will find one that will."

For the moment, Carp may have bought himself some breathing room. The stock has bounced back from the low of $20.40 it hit after he unveiled his plan. Yet that recovery may have been fueled by news of Icahn's interest. Others, sensing opportunity, are also piling in. Legg Mason Funds, Kodak's largest shareholder, reported on Nov. 12 it upped its stake from 8.6% in June to 10%, or 28.7 million shares, at the end of October.


So far, Carp's critics have not yet coalesced around an alternative plan. Icahn isn't revealing his intentions, but the veteran raider and greenmailer isn't known for his patient investing. Other investors figure he's likely to use the approach at Kodak he took at RJR Nabisco Inc., where he got the conglomerate to split its tobacco and food groups -- and made $1 billion in the process. "In general, when he goes after something, he believes the breakup value is higher than what he's paying," observes Wilbur L. Ross Jr., chairman and CEO at W.L. Ross & Co., another investor in distressed companies.

Denton argues that Kodak can only ward off such raiders by taking aggressive actions "that give long-term shareholders reason to hang on." He wants to slash spending on executive perks and other operating expenses by $550 million a year, or 5%, and then use the savings to pay down debt. Denton says Carp rejected his cost-cutting plan as excessive.

For now, Carp isn't buying any of this. While conceding Kodak needs to cut costs further, he contends any breakup that tried to capitalize on the film business would only accelerate Kodak's decline. That's because many of the retailers, photo shops, and radiologists Kodak supplies would abandon it for suppliers better able to help manage the transition to digital. "You can't pick a strategy to target a selected set of investors," says a defiant Carp. "You turn yourself into a pretzel, and you kill your company." Carp's strategy may be correct. Trouble is, investors may run out of patience before he can prove it.

By William Symonds, with Faith Arner, in Boston

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