The Least Bad Outcome

This article originally appeared in Business Insider

The range of options available for addressing a problem is directly correlated to the amount of time available.  As the amount of time available to address a problem shrinks, so does the universe of options.  Eventually, the options all start to look painful.  Followers of Eastman Kodak are currently learning this lesson in corporate turnaround dynamics.

News that Kodak is looking to shop a portfolio of 1,100 patents (with the help of Lazard) had excited investors.  The $2.4 – $3 billion an IP sale would fetch would be a welcome cash infusion for a company with cumulative operating losses of $1.2 billion over the last three years.

But the market is fickle, and when Kodak drew down its $160 million revolving line of credit earlier this week, sentiment turned strongly negative.  Moody’s downgraded the company’s bond ratings to Caa2 from Caa1 (way to be ahead of the curve, guys).  Alarmed at Kodak’s cash burn, Scott Dinsdale of KDP Investment Advisors noted: “They could run out of cash in early 2012”.

Taking a look at Kodak’s financials, I think that analysis is fair.  It does not take much of a leap, given a continuation of the company’s recent poor performance, to see Kodak having burned through its current cash balance of $957 million by this time next year, if not sooner.

Given this situation, Bloomberg notes that Kodak may need to file a chapter 11 bankruptcy in order to ensure that bidders for its intellectual property are not liable for a fraudulent conveyance claim.  With the patents now for sale expected to yield several times the current market cap of the company, and additional patents that may offer further opportunities to reap some return on years of R&D (Kodak holds a total of 7,600 patents), any roadblocks to the sale of intellectual property clearly must be dealt with.

This is a sad development for a company that has seen change coming for a long time, but has been unable to make the necessary adjustments.  A 1995 Fortune article highlighted issues facing Kodak that are depressingly familiar today: managing a mature business in decline, building a business around digital imaging, right-sizing the cost structure.  The difference is that in 1995 Kodak had many more options than it does today.  After spending so much time searching for the optimal strategy, it may be that Kodak will have to settle for the least bad option of a chapter 11 filing and the sale of IP that it was never able to fully utilize.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.