Shares in almost every major American company on the most active list fell and in some cases fell sharply on the 28th. The stock of Qualcomm (NASDAQ:QCOM), the largest handset chip maker in the world, dropped 14%, after reporting tepid results. Ford (NYSE:F), which released extraordinary quarterly numbers, sold off despite signs that its turnaround continues. Apple (NASDAQ:AAPL) shares dropped 4% although there were a number of positive reviews of its new iPad since the product will not affect earnings for several quarters. The market was aware of that before the iPad debuted. Even Amazon (NASDAQ:AMZN) traded down sharply after the market closed despite posting results that were, at the very least, acceptable.
On the same day, Eastman Kodak (NYSE:EK), once one of America’s great industrial firms but one that has been in ruins since the mid-1990s, had its shares trade up 25% to $5.92. Kodak was an $80 stock in 1995. The firm showed a profit for the fourth quarter of 2009, posting net income of $430 million on revenue of $2.6 billion. The revenue increase was a modest 6% compared to last year. Kodak has never been able to overcome the fact that people do not use film in cameras anymore and that few photographers print their pictures.
Kodak is an example of a company never truly dies if there is one shareholder who believes in it. Investment firm KKR put $700 million in debt into Kodak last year. Other investors were not happy with the arrangement because KKR can take control of 20% of the photo company’s shares by exercising favorably priced warrants.
The people who run KKR did not become billionaires without the possessing astonishing skills that help them to find value in something that appears valueless. KKR figured correctly that Kodak revenues would never go to zero, or even close. And, the company has gone through one of the most brutal series of cost cuts in the history of American corporations. Kodak still does well in the relatively small ink-jet printer market. It has also done a good job collecting licensing fees for its intellectual property, although many of these sales are not recurring.
More important to KKR is that Kodak, which was started in 1892, is, like GM and other old industrial companies, an opportunity to make money on companies that can rapidly cutting costs to match swiftly falling revenue. If there is still a core set of customers to support some revenue at the end of the process, there is money to be made.
Kodak has fired more people over the years than most of the largest companies in the world will ever employ. The firm had over 145,000 workers in 1988. Today Kodak employs barely 20,000 people.
Unfortunately, Kodak’s story matches the employment trends in America over the last 30 years. In the mid-1980s, Kodak was one of the fifty largest companies in the country based on sales. GM, Chrysler, Xerox, and 3M were on that list as well. So were US Steel and Goodyear. It is academic now whether these firms could have kept their competitive positions in the world by more rapidly improving or changing the nature of the products that they sold. Their sales fell, for whatever reasons, precipitously over two decades and there was no choice than to fire huge portions of their workforces or go out of business.
GM found an investor, an unlikely one, in the US government. The No.1 US car company had fired hundreds of thousands of workers and had a weak balance sheet. But, the cost cuts were not enough. Taxpayers own 70% of GM, and the company, with a fraction of its market share from the 1970s and 1980s, is likely to make money and perhaps even pay the government back through an initial public offering of shares in a company that was public for the better part of a century before it was pushed into Chapter 11.
GM will have cut its way to profitability and KKR gambled that Kodak could do the same.
The process of dismantling large US industrial companies may occasionally be profitable for investors like taxpayers and private equity firms, but the American economy may never entirely recover from the trend. The majority of the jobs that Kodak and Goodyear and Chrysler have eliminated will not be replaced because the manufacturing base in the US has grown smaller and will not get much larger again. A Goodyear worker will have to work in a McDonald’s (MCD) for a fraction of his former wage, become permanently unemployed, or need to be re-educated in the hope of finding another line of work that pays well. Millions of Americans has gone through these processes in the past or are going through them now, and their prospects of having good jobs again is poor.
KKR may know how to make money from a floundering company that is prepared to put as many people on the unemployment line as is necessary to operate in the black. But, the economy can’t absorb those jobs. That is one of the reasons that high employment had become a chronic condition, and why KKR makes as much money as it does by finding survivors among the rubble.
Douglas A. McIntyre
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