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The sad saga of Kodak is yet another reminder to investors that it's generally a mistake to bet on mega-turnarounds.
The latest twist in this long tale of decline is the announcement by a number of institutional investors that they'll oppose Kodak's most recent plan to rescue itself. It's unusual for major shareholders to gang up on the management of a big, blue-chip company and proclaim publicly that they think the firm's announced strategy is nuts, but in this case it isn't really surprising. For one thing, that strategy, which we'll get to, strikes a lot of people as nuts. For another, Kodak's history of setting itself a sensible course is so awful that no one should be shocked when a new plan fails to set the world on fire.
Kodak's troubles have been apparent for quite a long time. Just over a decade ago we published a cover story in FORTUNE with the memorable cover line, "Dinosaurs?" The subject was IBM, General Motors and Sears, which at the time appeared to be the three preeminent dinosaurs of American business: Each had been an utterly dominant, world-bestriding colossus that was getting beaten badly by new competitors. The great question was which would recover -- which could achieve a mega-turnaround.
They all survived, of course, but only one, IBM, could be said to have succeeded. GM was still the world's largest company at the time of the article, but it no longer is and probably never will be again. It has continued to lose market share and still can't make money selling cars in North America. Sears was Americas largest retailer in 1990 but no longer is and probably never will be again. It isn't even No. 2 anymore: It ranks third behind Wal-Mart and Home Depot. Only IBM managed to reassert itself no longer as dominant as it was, but still a behemoth, with a stock that performed respectably. From the investor's point of view, two out of these three mega-turnarounds didn't succeed.
At the time of that article, many people told us we should have included a fourth dinosaur: Kodak. It too had utterly dominated its industry but was faltering even then. The main problem at the time was Fuji, which was relentlessly taking film customers away from Kodak. But it was also clear that Kodak faced another problem in the near future: digital photography, which would simply eliminate a huge part of the film business.
In short, here was an obvious crisis of corporate strategy, requiring a mega-turnaround. That was perfectly clear to Kodak's managers and its board of directors. They knew, in the large sense, what needed doing. They just could not even begin to do it. Kodak in the '90s became corporate America's leading serial restructurer. I don't know how many restructurings they announced -- I stopped counting after five. They brought in a savior CEO, George Fisher, who had performed well at Motorola. They knew digital photography was going to hit them like a tidal wave, and they even had a plan for dealing with it. But they couldn't execute the plan.
The latest strategy, the one that has so many big investors upset, includes a plan to jump into the printer business. This is one of the most ferociously competitive industries in the world, populated by such fearsome players as Hewlett-Packard, Lexmark (formerly part of IBM), and Canon. Can Kodak take a significant piece of the market away from them? It's a fair question. The new strategy also includes plans to make more acquisitions. Buying other companies is usually an effective way to destroy wealth for the acquiring company's shareholders. Whether Kodak can break the pattern is another fair question.
To pay for its plans, Kodak has cut its dividend from $1.80 a share to 50 cents a share. This move strikes many people as odd, coming at just the moment when the new tax cut has sharply reduced taxes on dividends and many companies are raising payouts, not cutting them, as a result.
Kodak stock dropped like a stone when management announced the new strategy. You really can't blame shareholders for being upset. This is a company that has been in a continuing turnaround for the past 10 years, and it has never worked.
We'd all like to see Kodak succeed. It's an icon of American business. But when one of these old giants -- these dinosaurs -- gets into deep trouble, getting it out is almost impossible. Investors who realized that a decade ago are much better off for having done so.
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