March 9, 2012

 

  • George Eastman was attacking apples before Steve Jobs was born.
  • However, George grew up in apple country (I don't mean Cupertino) and must have had an appreciation for NY State's delicious varietals.
  • There's a very good argument that Kodak was the Apple of its day.

So, why is today's American technology behemoth trying so hard to beat the tar out of yesterday's? The longer answer has to do with competition, technology, and imaging, but in the end only the short answer matters: money. Both Kodak and Apple think they own the same very lucrative idea and they want the matter settled so that they can continue (or in Kodak's case, start again at) making money.

 

Yesterday, Judge Allan Gropper ruled that he would not "unfreeze" the lawsuit Apple has brought against Kodak over patent infringement. Since Apple thinks it owns one of those patents, it would prefer to get a court ruling saying so before the patents get sold as it will be more difficult for Apple to regain the rights to that patent if they get sold to a third party. Yesterday made that a whole lot harder.

How does this matter to Rochester? The patent sale is an enormous factor in Kodak's ability to fund its pension, the Kodak Retirement Income Plan or KRIP. Let's look at some numbers:

KRIP is funded at either 86% (PBGC) or 90.5% (Kodak's 10-K), depending on who you want to believe. That leaves the dollar amount of the underfunding at either 700 million or 500 million. Let's split the difference and call it 600 million. Estimates of the value of the patent portfolio Kodak wants to sell range from 2.2 billion - 2.6 billion. Before Kodak can make up the funding gap, it has to pay back the DIP loan it got to get it through the first part of bankruptcy: 950 million. Still waiting after DIP and the pension are 2.6 billion in bondholder debt and a pile of unpaid vendors and some environmental remediation. But what will Kodak have left to pay them?

$2,000,000,000 (Patents) - $950,000,000 (DIP) - $600,000,000 (Pension) = $450,000,000.

That's 450 million left over to pay back 2.6 billion + of debt and have enough money to keep operating a business!

Now, bankruptcy is going to reduce the bondholder, vendor and environmental debt (and reduce retiree benefits outside of KRIP) to some degree and Kodak has other valuable assets to try to sell (profitable business lines, real estate). But if you take a moment and think about how much worse a situation Kodak will be in if they don't sell those patents - that is, if that 2 billion dollars is not available to pay off the DIP, pension and some other debts - you will understand just how critical the patent sale is to Kodak and to Kodak's retirees.

Yesterday's decision takes Kodak a step closer to being able to sell those patents. Hopefully, this is a pattern that continues.