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Eastman Kodak Ripple Effect - What You Need to Know

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The shares of Eastman Kodak Company (EK) tanked by 3.04% the very next day, following the disturbing news on January 19, 2012 that the company voluntarily filed for Chapter 11 business reorganization suit in the US Bankruptcy Court for the southern district of New York. Although it has improved by 7% in the last 5 days, I would attribute it still to the irrational market sentiment.

Anyway, coming to the main topic, the company is expected to bolster liquidity, monetize non-strategic intellectual property, determine legacy liabilities and reorganize the profitable lines of businesses within 2012. In short, the company is expected to climb out of the rut within the next year.

Here's a good article by another Alpha contributor, Bill Maurer on the bad financial condition of Kodak a week ago. It seems the company was already running on loss, while Xerox (NYSE:XRX), Canon (NYSE:CAJ) and Fuji-film Holdings (OTCPK:FUJIY) returned net profit margin of 2.58%, 6.82% and 3.12% respectively. It was long feared that the company will finally go for the bankruptcy filing soon, and so it did!

"Kodak is taking a significant step toward enabling our enterprise to complete its transformation," said Antonio M. Perez, Chairman and Chief Executive Officer. "At the same time as we have created our digital business, we have also already effectively exited certain traditional operations, closing 13 manufacturing plants and 130 processing labs, and reducing our workforce by 47,000 since 2003. Now we must complete the transformation by further addressing our cost structure and effectively monetizing non-core IP assets. We look forward to working with our stakeholders to emerge a lean, world-class, digital imaging and materials science company."
Hopefully, it resurrects from the dead by 2013.

Kodak bankruptcy ripple effect

The company is crumbling, that's true. But at the same time, it can have negative effect on various fronts as well. Here are the couple of instances that stand at risk with Kodak's weak financial standing.

  1. Creditors - The Company received $950 million debtor-in-possession credit facility, which is due in 18 months, from Citigroup (NYSE:C). If the company is not able to amortize it back within time, this can result in a loss of Citigroup nonetheless. How can we discount the other small creditors that are also linked with the company?
  2. Employees - As last adjusted in December 2011, the current unemployment rate is around 8.5%. And as last updated, the number of employees in Eastman Kodak Company was around 20, 000. So, as common sense says, the bankruptcy filing of the company will be followed with a certain number of job cuts in the near future. When the US employment condition still needs some improvement, I believe this is going to be hard on the laid-off employees. It may not be that high a number, but still it is going to affect the psychology of the market, nevertheless the pockets of a few people.
  3. Retirees - Although PBGC says Kodak pension plans are pretty well-funded and in case of any emergency, PBGC can and will take care of it. But that's far from reality. Even the process of filing a claim to getting the money in hand is going to take at least 18 months or even more. Not to mention the fact that in case of such disruption, several retirees will have to return empty-handed. That's bad news again!
  4. Investors - I am sure, there are many people who used to believe that Kodak is an important part of their equity portfolio and nevertheless held a huge amount of Kodak shares. I pity those people! If things don't improve in a year, many people (stakeholders) are going to lose a lot of money. We are talking about shrinkage in money supply again.
If the company is bought by any other big brand name such as Apple, Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Canon, Xerox, Sony (NYSE:SNE) or Microsoft (NASDAQ:MSFT), especially the ones who would benefit from the investment in the Kodak's portfolio, things may change. Or if the management can "reorganize the Kodak business"! Perhaps that made the stock rise up in the last few days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.