Kodak: Stock Buyback Blowback and Bankruptcy

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There have been numerous articles, lately, about the bankruptcy of Kodak Eastman Co. All the attention on the financial condition of Kodak has been focused on its patent portfolio, and then to some degree, its legacy costs.

The key question now is whether Kodak will be able to squeeze the billions of dollars out of its patents that it thinks they are worth. By suing companies for alleged patent infringement and then striking license deals to settle the cases, Kodak says it raised $3 billion between 2003 and 2010.

Imagine a company that is over 130 years old claiming that it needed more and better patent protection to survive in the digital age? The New York Times wrote, “Eastman Kodak, the 131-year-old film pioneer that has been struggling for years to adapt to an increasingly digital world.” USA Today ran a nice timeline of quarterly stock prices that describes the plunge. But still, the real story escapes the media. Stock buybacks.

In October 2008 I ran an article called, “Cash is Trash: The Sewage of Ivy League Management Philosophy and Other Thoughts.” As I noted then, anyone who knows anything at all about finance understands that a robust balance sheet is a company’s sign of strength and longevity, its bulletproof vest, and it even provides a peek into the soul and ethos of its executives. Cash and equity are essential for a company’s survival, especially in bad times, which is why you see all of the devil-may-care financial institutions falling by the wayside. Cash and equity (I repeat: a healthy balance sheet) can also cover bad management decisions in regards to business operations. Guido Hulsmann, an economist, professor, and Mises Institute scholar, correctly referred to a healthy equity position as being similar to having a “shock absorber” to ride the company through rough times.

In October 2011, Eric Englund, my sometimes co-writer, published an article for LewRockwell.com titled “Buyback Blowback at Kodak.” As usual, Lew Rockwell chose to publish a great piece ahead of its time. In this article, Eric details the rise of the company under a fiscally conservative George Eastman (founder), and the fall of a giant through its Ivy-League incompetence (managers). In his article, Eric notes that Kodak saw its net worth drop to a negative $1.075 billion. He writes:

If Kodak had a positive retained earnings position of $4.969 billion, at fiscal year-end 2010, then how did it have a net worth of negative $1.075 billion? Over the decades, after all, Kodak had been a very profitable company and had built up a substantial retained earnings position. A quick perusal of Kodak’s FYE 2010 balance sheet provides an answer to this question. With $5.994 billion of treasury stock (a contra-equity balance sheet entry) leaping off of the balance sheet, it is unmistakable that stock buybacks have played a significant role in depleting Kodak’s cash, working capital, and equity over the years. When a corporation’s treasury stock position exceeds its retained earnings by over $1 billion, it shouldn’t be a surprise to see a company with a negative net worth.

Kodak’s dividend payouts, most certainly, haven’t served to preserve the company’s capital base either. From 2000 through 2008, Kodak paid out $2.757 billion in dividends; while no dividends were paid in 2009 and 2010. During the five-year span of 2004 through 2008, in which Kodak suffered an operating loss each year, this company paid out $714 million in dividends. EKC’s executives, undoubtedly, would love to have this money back almost as much as they wish the company had never engaged in stock buybacks.

According to Eric’s research, Kodak squandered $6 billion in share repurchases. Just two days ago, Butler Shaffer and I had a conversation about business owners vs managers, and how managers were like politicians in that they typically experience a short time at the helm, and thus they have no long-term interests in the company. This leads to short-term planning, financial mismanagement, and even fraud and corruption. In the least, it means that these managers do not embrace the proper level of fiduciary duty to the company and its shareholders.

Kodak went bankrupt because its managers – executives – financially raped the company through shoddy management and corrupt practices that enriched executives and left shareholders dry, with taxpayers picking up the tab. Also see Eric’s “Stock Buybacks Are a Scam,” an article from 2008.

2:43 pm on January 22, 2012
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