Closing the books on a failed diversification strategy, Eastman Kodak Co. said Tuesday that it will sell its Sterling Winthrop drug unit and two other subsidiaries in order to pay down debt and focus resources on photography and other “imaging” businesses.
The selloff is the first big initiative undertaken by Kodak Chairman George M.C. Fisher, who took the helm of the staid photography giant last fall with a vow to transform it into a major player in a variety of Information Age businesses.
Analysts generally applauded the divestitures, which come at a time of frantic consolidation in the worldwide drug business. Kodak shares jumped $1.375 to $46.125 on the New York Stock Exchange after surging $3.25 on Monday in anticipation of the announcement.
But Fisher’s broader strategy for restoring growth at Kodak, outlined at meetings here with reporters and analysts, was peppered with platitudes and drew a more skeptical reaction from Wall Street and at least some employees.
“It’s good that they are focusing back on the core business, but there’s no real change in the near-term outlook,” said Nicholas P. Heymann, an analyst at NatWest Securities in New York.
In essence, Fisher--who as chief executive of Motorola Inc. was credited with turning that company into a world-beating electronics powerhouse--said Kodak will improve earnings in the short run by running the company more efficiently.
Three to five years down the line, he said, growth will start to come from new product and marketing initiatives and expansion of overseas sales.
Fisher expressed confidence that Kodak’s traditional film and photographic chemical business will remain strong. He downplayed concerns about intensifying price competition in the consumer film business and rejected the widely held notion that chemical film will quickly be undermined by electronic cameras.
“I understand electronics, and I understand what it can do at a reasonable cost,” Fisher said in an interview. “It’s going to be a long, long time before electronics supplants high-resolution, 35-millimeter imaging.” Still, Fisher said, Kodak has major opportunities to expand in the electronic-imaging arena. The prospects include everything from low-resolution electronic cameras to photocopiers, computer printers, digital picture transmission systems and photo editing software.
Ironically, it was the previous management’s pessimism about traditional photography that led Kodak to diversify in the first place. Sterling Drug, acquired for a premium price of $5.1 billion in 1988, was the centerpiece of that strategy.
But Sterling--later split into Sterling Winthrop, a drug company, and L&F; Products, a personal care and household products company--proved to need more investment than Kodak could afford. Debt from the acquisition has also been a big burden.
In some respects, Fisher’s strategy is a continuation of plans put in place by Kay Whitmore, who was forced to step down as CEO last year by angry shareholders and an impatient board. Whitmore split off Kodak’s other big non-imaging business--a specialty chemical company--and oversaw a series of job cuts, culminating in a 10,000-employee downsizing announced last summer.
Fisher said no new layoffs are on the immediate horizon, but he did not rule out the possibility of additional job reductions down the line.
Proceeds from the sale of Sterling Winthrop, L&F;, and Kodak’s clinical diagnostics division will be used to pay off debt, which currently totals about $7 billion, the company said.
Harry L. Kavetas, a former IBM executive who was hired as chief financial officer three months ago, all but conceded that Kodak--facing a market shaken by health care reform--would not get what it paid for Sterling.
Analyst estimates of proceeds from the sales ranged from $3 billion to $5 billion. Sterling will probably be sold in chunks; a French joint venture partner and Bayer, the big German drug maker, are among the likely bidders.
Fisher stressed that Kodak had no intention of “throwing money at the great information superhighway in the sky.” But he indicated a willingness to take on some risky challenges, notably making Kodak a much bigger player in the manufacture of cameras and electronic products--businesses currently dominated by Japanese firms.
“I absolutely do not accept the tenet that U.S. companies cannot manufacture,” he said. “I’ve been in that battle all my life and never lost once.” Indeed, Motorola’s successes lay in its ability to build cellular phones, pagers and other sophisticated, high-volume electronics products better than its Japanese competitors.
Kodak is also counting on growth in developing countries--notably in Asia and Eastern Europe--to compensate for relatively stagnant film sales and the rise of electronic imaging in the industrialized world.