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Kodak takeover ends Creos divisive boardroom saga

July 20, 2005

Despite their North American connections, both Vancouver-based Creo Inc. and Eastman Kodak of Rochester, NY, obviously have global ties that transcend national borders. That’s why news of Kodak’s proposed acquisition of Creo has stirred up so much interest across all sectors of the European graphics industry. The deal will mark the completion of a $3 billion digital printing growth strategy that began in September 2003 to counter declining sales in its traditional film and camera business. As it is, Creo has a huge European operation based in Waterloo, Belgium, arising from its takeover of Scitex Graphics a few years ago. It also has many service offices throughout Europe (many non-users don’t know that it’s Canadian by origin). In fact, just over half of Creo’s revenues come from users in Europe, the Middle East and Africa. Many of these customers will also be aware of the irony of the situation, for Kodak’s action allows Creo’s board to avoid a messy ownership battle with dissident shareholders.
First, it must be recognized that Kodak’s impressive shopping list is a positive vote of confidence in digital printing technologies. Last year it bought Scitex Digital Printing with its Versa-mark high speed inkjet printing capability. Relieving Heidelberg of its unwanted 50 percent stake in the NexPress digital press rekindles interest among offset printers. On January 12 it revealed a plan to buy Sun Chemical’s 50 percent stake in Kodak Polychrome Graphics for about $817 million. The Creo deal is even larger, at $980 million in cash. It will form part of Kodak’s Graphic Communications Group within the newly formed Graphic Solutions and Services business unit headed by Jeff Jacobson, KPG’s chief executive.
Shareholders vote on the deal at a rescheduled annual and special meeting on March 29. Creo had originally planned this meeting for February 10; on the agenda were corporate governance issues arising from plans to restructure the company by dissident shareholders, led by two investment firms. A proposal for a $60 million reduction in Creo’s cost structure was one issue: R&D spending and staff employment were likely targets.
Until Kodak stepped in, the dissidents seemed to be winning and a bloody fight was expected. They had gained support from other shareholders, whose challenge to the Creo board had seen the share price leap to a 52-week high. Analysts had flagged up a “buy” rating on the basis of a speculative gain and forecast that a victory for Creo’s board would reverse this gain. Andrew Tribute, an authoritative UK-based digital prepress consultant and journalist, commented: “… it’s a typical asset-stripping and bean-counting approach generating a relatively immediate return to shareholders.” He recalled that Robert Burton of Burton Capital Management — who would have led a new Creo board as chairman and CEO — typified this approach when at the helm of Moore Corporation.
In an official statement, Amos Michelin, Creo’s combative CEO and target for the dissent, said shareholders could expect to benefit from Kodak’s proposal, although he was talking from a different financial perspective: “The economy of scale gained by combining resources will allow us to speed up product development and deliver new innovations and breakthrough solutions to the market. Kodak also stands to gain a great deal from this transaction, including direct access to the largest installed base of computer-to-plate and workflow systems in the world.”
Integrating Creo along with all the other disparate businesses that make up Kodak’s Graphic Communications Group will not be easy. Also, with a bid offer of $16.50 a share, shareholders will want Kodak to maintain the momentum, which could still include major cost-cutting programs. This raises some interesting questions. Will Kodak retain the present Creo board, as shown with its other acquisitions, or will it change it? What happens to Creo’s expansions to its CTP offset plate operations, based on a second plate line in the USA and another in Germany, now that KPG has an even stronger link with Creo users for its plates and consumables? Can Kodak build on Creo’s move into the label and packaging sector, based largely on the Thermoflex range of CTP flexo platesetters and Prinergy workflow systems?
For Creo’s global customers, the Kodak deal still looks like the best option to ensure a generally high level of support in all areas. Naturally their interests — and those of Creo’s employees too — were the least of concerns for the dissident shareholders and their supporters to worry about. As often argued, shareholder power is all very well, but it can lead to damaging short-termism that conspires to threaten a company’s very existence. Good thing the guys in the white hats arrived when they did.
• Creo has just announced its first quarter results for 2005 (actual quarter ended December 31), said to be the highest in its history — up 12.4 percent over the previous year to US$175 million (US$155.3 million for the same period last year).
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