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Kodak's Bankruptcy: Manufacturing a 21st Century Rebirth

Kodak's Bankruptcy

Up until its bankruptcy filing, Kodak pressed what it thought was a winning strategy to stay afloat by litigating to protect the company's trove of digital imaging and camera patents. A day before its Chapter 11, Kodak alleged patent infringement claims against Korean electronics giant Samsung. A week earlier, the company had sued competitor Fujifilm and that January it also took smartphone makers Apple and HTC to court.

In total, Kodak said it could raise almost $3 billion dollars by litigating its intellectual property and selling a portfolio of about 1,100 highly valuable digital imaging patents. That cash, Kodak said, would help the company reinvest in its digital businesses and further its strategy to move into consumer and commercial printing markets.

After its day in court, Kodak came away with virtually no money from infringement claims. In bankruptcy, the company also sold its portfolio of patents to tech firms such as Apple (AAPL - Get Report), Facebook (FB) and Google (GOOG) for $530 million, about 20% of previous forecasts.

In retrospect, the company's survival strategy was a disappointment.

Many had assumed an inevitable failure and in the background of Kodak's filing, some parties were preparing a different solution to the company's woes.

Bankruptcy created an opportunity for Kodak to try new strategies. In particular, investors and management honed in on the company's commercial printing technologies, while giving Kodak's pensioners ownership of the company's doomed but cash flow positive businesses.

Instead of focusing on winning consumer inkjet market share from Hewlett-Packard (HPQ), as CEO Antonio Perez had attempted to do prior to bankruptcy, the company now markets itself as having re-positioned around far more technologically advanced commercial printers.

Kodak's SONORA and PROSPER printers and its FLEXCEL system for flexographic package printing stand out as pieces of the company that could be attached to growing end-markets. They also appear to be a part of the printing business where Kodak could have a fighting chance, a contrast to the company's previous efforts to win inkjet users from HP.

When Kodak filed for bankruptcy, the company initially listed its consumer printing kiosks, document scanners and digital printing plates as a "core business" and characterized consumer inkjet, digital printing and packaging technologies as "growth businesses."

Kodak's most recognizable products such as film, digital cameras, motion picture film and its online photo-sharing platform, Kodak Gallery, were listed as assets to either be sold or managed for cash. What Kodak decided to keep and sell changed during bankruptcy, however, the company retains virtually no consumer-facing businesses.

Commercial printing, and particularly Kodak's high-end functional printing capabilities, are the company's future.

Equity holders will have a 100-day plan upon the company's exit from bankruptcy, which involves re-positioning and marketing the company by using printing assets to manufacture technological products such as semiconductors.

Continued operational changes such as more targeted research and development spending could also help with Kodak's financial and technological footing. This contrasts to the years when Kodak patented breakthroughs but did not commercialize them."If R&D doesn't have an end use it doesn't matter, no matter how cool it is," one source said.

That source said an ambitious benchmark for Kodak in public markets would be 3M (MMM - Get Report) and not Xerox (XRX - Get Report). A technology firm should trade at eight-or-nine-times earnings before interest, taxes, depreciation and amortization (EBITDA), whereas a printing company would trade at a lower multiple.

According to public filings, Kodak projects it will earn nearly $500 million in operational EBITDA by 2017 on about $3.2 billion in revenue.

Kodak's revival can be a boon to other Rochester-based firms at the confluence of manufacturing and technology.

Kingsbury, a manufacturer recently acquired by former Kodak employee Bill Pollock's Optimation, is opening a plant in Kodak's Eastman Business Park to produce sensors that utilize the company's silver halide technologies. Kodak will also supply chemicals and technical support, and assist with Kingsbury's marketing.

Eastman Business Park, once the world's largest manufacturing facility, stands out as yet another piece of Kodak that could emerge from a bankruptcy freeze.

In June, Kodak and the State of New York reached an agreement to establish a $49 million environmental trust for Eastman Business Park that will settle the industrial park's environmental liability and help to bring in new businesses to make use of scores of idled factories.

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