Current bankruptcy proceedings of Kodak are the end game of almost
thirty years of failing health of a once great corporation, third largest in
the world in 1972. When I went to work
there in 1965, there were 88,400 employees, up from 81,500 a year earlier. At the peak in 1982, there were more than 60,000
in Rochester, NY, alone and, I think, more than 120,000 worldwide.
Current employment is a fraction of the 1980’s level and
dropping fast, and the retirement pensions and health care benefits of
thousands of retirees are in jeopardy. The
damage has already been done to the pension funds, university endowments, IRA’s
and 401k’s that held the stock. Kodak is
struggling to stay alive based on exploitation of its patents, but the outcome is
looking doubtful.
Kodak was a pioneer in the digital technology that put it
out of business, but was unable to successfully exploit that technology
alongside the traditional silver halide technology that had served it so well
and was so ingrained in the company culture. Photographic film and paper were commonly
referred to as “the family jewels,” the possible mortality of which was not a
subject to be discussed. Kodak chose to
continue to try to maximize revenues from the old technology and simultaneously
develop the new, always looking for opportunities such as the short-lived Photo
CD to have the two complement each other.
At the same time, the company purchased Sterling Drug and expanded its
health care business.
With knowledge of that history and the current situation, it
is interesting to speculate about whether “private equity,” the kind practiced
by Mitt Romney’s Bain Capital, would or could have made a difference. Private equity investors bring to the table a
dispassionate assessment of businesses and their prospects and a set of tools
designed to separate the unfavorable from the favorable, get rid of or change
the former, and invest appropriately in the latter. Such actions often result in immediate
termination of businesses and employees, a sort of corporate euthanasia, with
transplant of usable organs to the surviving parts of the business or, as for
gall bladders and appendixes, removal to the trash heap. Human euthanasia, most of us agree, is
immoral, but corporate euthanasia is often an economic necessity. Corporations, in spite of recently expressed legal
opinion, are not people and have no inherent right to life.
Such a ruthless approach may seem heretical and cruel in light of all the
talk about job creation and whether President Obama or Governor Romney is the
better “job creator.” I’m guessing the
President Obama is the better job
creator, but created jobs are patronizing, unchallenging, unsatisfying,
demoralizing, unnecessary, and generally unwanted. With a generous supply of borrowed money,
it is easy to create jobs. Just tell a
group of people to move a pile of dirt from point A to point B. Then tell them to move it back to point A. It is like producing pennies that we don’t
need at a cost we cannot afford or maintaining USPS employment at unaffordable
levels to provide services we do not need and are unwilling to pay for or funding
a solar panel start-up that has no hope of competing with producers in China. What we need, rather than created jobs, is
meaningful work that is economically justified because it provides products and
services that people are willing and able to pay for or infrastructure needed
for such work.
And that is what private equity does. It structures businesses to provide products
and services that can be sold at market prices while paying investors in the
business a satisfactory return on their investments. And, in the process, it provides meaningful
employment to those qualified to work in the enterprise. And, if successful, all the entities, investors,
employees, and the corporation, earn money and pay taxes on those earnings.
If a group of private equity investors had read the
handwriting on the wall in 1980, Kodak stock down 65% from its peak, and had
coughed up about $15B to buy the outstanding shares, what might they have done
to maximize the value of the company and keep it off of life support? I think the Chemicals Division would have
been spun off or sold almost immediately rather than a dozen years later. Kodak would never have bought a floppy disc
company to make a product doomed to obsolescence in the near future. I think Sterling Drug would never have been
bought…or sold a few years later at a loss.
I think all the digital technology people and the digital patents and
research would have been bundled up and spun off as a different company,
KodakDT (for Kodak Digital Technologies) maybe, and shipped out of Rochester to
Palo Alto with instructions to compete with the digital technology
leaders. I think all fundamental R&D
on silver halide would have been shut down, employment would have been reduced,
and focus would have been put on TQM to reduce cost and required selling price for film and paper and to maximize the volume as “the air was gradually let out of the balloon,” a
phrase from my former boss at Kodak who was smart enough to realize what was
happening but powerless to do anything about it. Many Kodakers would have been unhappy, and
Rochester would have suffered sooner rather than later, but chances of corporate
success would have been greatly increased.
Unfortunately, 1980 would have been too late for the private
equity owners to prevent Kodak entering the instant photography business which
resulted in being sued by Polaroid for patent infringement and having to pay
Polaroid $909 million in 1990.
If such a private equity strategy had worked as planned,
KodakDT would be a leader today in digital imaging, film would still be a
profitable, though much lower volume, product, and a big bunch of KodakDT
employees would still have a bright future, a good trade-off for having had
fewer employees laboring in a dying business over the past twenty years. And pensions and health care for retirees would be more secure.
It is just something to keep in mind as we consider the two
approaches being proposed for “job creation.”
We really don’t want or need job creation. What we want is meaningful work that builds
economic value in the USA. It may be
appealing to argue in favor of keeping a company going as long as possible just
to provide jobs, even if the company is failing and the jobs are non-productive,
but few really want to waste their time and talents in such enterprises. Most people want to work for a successful
company and play a role in that success. For that reason, I’m voting for the business
approach.
Afterthought:
And, speaking of non-productive, created work, Kodak was a big target for the federal
anti-trust regulators because of its monopoly on silver halide photography. After surviving consent decrees in response
to successful federal anti-trust attacks on “private label” film (1921) and on
bundling film and processing (1954), these issues became moot beginning in the
1980’s with the advent of digital photography and digital images and the
proliferation of private label film and single use cameras. Kodak was able, in 1995, to have the consent
decrees set aside based on the argument that the company no longer had any
power in its markets. What an admission, and what a waste all that
anti-trust activity was, perfect examples of created jobs destroying value
simply because the trust busters had failed, along with Kodak, to understand
the true scope of the market.
Another
Afterthought: It is not only private equity managers that can make
tough decisions and maximize value. Jack
Welch ran GE for 20 years, creating so much value and keeping the stock price
so high that no private equity investor could have touched the company. Private equity generally steps in only when a
company is already in trouble.
