Monday, November 14, 2011

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Sunday, October 30, 2011

Private Equity Firms Eye Turkish Department Store Chain YKM

Turkish retail sector continues to attract interest from private equity firms. YKM which is Turkey's first department stores brand from 20 years ago has been struggling to compete and fund its domestic expansion. The firms manages 38 owned stores and 24 franchises in Istanbul and Anatolia. 
I hear that Carlyle and Turkven a local PE shop are currently bidding for a stake in Istanbul-based department store chain YKM. They are joined by another Turkish private equity group Is Venture Capital and California-based real estate investor Colony Capital in the sale process, the two of which have partnered for the 63% stake.
Carlyle has teamed up with Turkish private equity investor Esas Holding for YFM, which is currently owned and operated by Turkey’s Agrali and Tan families.

Turkey has seen a wave of private equity interest in recent years, as firms seek to capitalise on the emerging opportunities on offer.
Global private equity firm Cerberus Capital Management recently partnered with Turkish bank Garanti Securities to invest up to $1billion in buy-out deals in the country.
However, the deal suggests existing players may be having tough time generating propsects for deals given there appears to be at least 5 financial investors involved with a transaction of a small department chain with 62 stores. YKM has been for sale for at least 3 years and this may not close. However, the next deal for dealmaker may take even longer.

Thursday, October 20, 2011

Do's and Dont's of Private Equity Dealmaking in Turkey

Earlier this week, I have had a first-hand experience of Turkey’s growing “center of gravity” among financial investors at a PE-focused event “Capital Impact 2011” organized by FT in London. I was the only senior advisor from Turkey that FT Business has invited to participate.
Some of the reasons for investors’s excitement include:

·         Turkey will be a trillion dollar economy by 2015.
 ·         From 2011 to 2013, the country’s privatization program will amount to about $50 billion, embracing the energy, banking, transportation, and telecom sectors.

·         The government is making plans to invest $100 billion in energy infrastructure over the next 20 years.

·         Sabanci Holding, my former company is only one of the two Turkish companies to make it to Boston Consulting Group’s list of Top 100 Global Challengers

China has become China by consistently growing the fastest in the world. However, unlike China, Turkey will prove to transform into a “China-like” growth democracy with better demographics and sustainable economy.

Building on all the excitement and growing interest, I’ve advised everyone to focus on six critical success factors:

1.    Need to be even more patient in Turkey. “Patient capital” will win in the end. 
2.    Know exactly what you will bring to the candidates – capital alone does not cut it anymore. Help them become “pretty” – build strong governance, enable IFRS reporting, fight bribery  & corruption etc. 
3.    Take a flexible and innovative approach to sourcing deals. Build and offer a local “multi-asset” strategy. Don’t always insist on majority or a minimum check size.  Sometimes you need to invest small to win big. 
4.    Be emphatetic to the local business community. First-generation business owners are in love with their firm more so than own children. What has gotten you successful globally may not get you too far in Turkey.
5.    Turkey is not just Istanbul. Can you count the top 10 cities that will deliver the biggest deals in the next five years? Which ones have you visited?
6.    Recruit local teams with ties to the community. Can’t cover it from abroad with credibility.

Alcohol, Billion Dollar Dealmaking and Muslim Turkey

Two major deals by alcoholic drink giants made some of the highest profile deals in Turkey, a country predominantly muslim with a stable, mature, western democracy. At the end of February, Diageo’s acquisition of Turkey’s Mey Içki for $2.1 billion was not a real surprise, as nascent talks were first reported back in December last year.

 But SABMiller’s play Wednesday morning for its Turkish adventure was not so well tracked. Still, the rationale is the same and that rationale is compelling—access to booming economies and fast-growing markets without paying for anyhting.

According to Wall-Street Journal, the London-based global brewing giant, maker of Grolsch, Peroni Nastro Azzuro and Miller Lite, announced a strategic alliance with Turkish peer Anadolu Efes, allowing the two companies to push further into Turkey, Russia, Central Asia and the Middle East.

It is understood that Anadolu Efes was also weighing up striking a partnership with rival Heineken as a platform for reciprocal growth in Russia, but in the end plumped for SABMiller as the advantages fit better with the brewer’s ambitions.

Taking a 24% stake in Anadolu Efes, SABMiller will transfer its Russian and Ukrainian beer businesses, with an equity and debt value of $1.9 billion, to the Turkish company in return. The Anadolu Group will control 42.8% of Anadolu Efes’s enlarged share capital.

The deal will allow Anadolu Efes to leverage SABMiller’s logistical expertise to distribute its portfolio of brands across the region, while SAB can in turn use the Turkish group’s dominance in the local markets to grow its international brands.

Anadolu Efes will have an 89% share of the Turkish beer market and occupy a number two market position in value terms in Russia, with a valuable portfolio of brands across key market segments.
Turkey is one of the world’s high growth economies with a population of 74 million people, while the company’s products overall reach more than 600 million consumers across the region.

It has also leading market positions in the growth beer markets of Kazakhstan, Moldova and Georgia.
As ever, the commercial benefits are key. The companies say the transaction is expected to be earnings per share enhancing for both groups in the first full year following completion, which is expected at the end of the year.

Sunday, October 02, 2011

IHH, Turkey's Acibadem To Form JV Valued Over $2 Billion

Integrated Healthcare Holdings Sdn Bhd (IHH), whose shareholders include Khazanah Nasional Bhd and Mitsui & Co of Japan, has entered into a non-binding term sheet with Turkey's Acibadem Saglik Yatirimlari Holding AS, to explore establishing an international joint partnership.

If successful, the partnership between IHH and Acibadem will become an integrated group operating in the healthcare services sector within the geographical corridor from Asia-Pacific to the Middle East and Eastern Europe.

In a statement, the hospital operator said IHH and Acibadem will commence due diligence and exclusive negotiations for the execution of binding and definitive agreements in due course.

IHH wholly owns Parkway Pantai Ltd and IMU Health Sdn Bhd. IHH and Khazanah collectively own 11.5% of Bombay-listed Apollo Hospitals Enterprise Ltd in India.

Turkey is providing rich opportunities for merger specialists trawling for the next big deal, as the country’s booming economy and improving corporate governance partially insulate it from a slowing global M&A market.

Globally, mergers and acquisitions activity has been suffering; the euro zone debt crisis is dampening activity in countries to the west of Turkey, while political instability is complicating decisions in much of the Middle East and North Africa.

A strong recovery from the global financial crisis of 2008-2009 has persuaded many long-term investors to look at Turkey. Its economy grew 10.2 percent in the first half of this year; it will not escape the looming global slowdown, but the International Monetary Fund’s forecast of 2.5 percent growth for Turkey in 2012 is still well above the 1.1 percent which it predicts for the euro zone.

Turkey’s location as a land bridge between Europe and Asia is also attracting investors, even though its prospects of joining the European Union have faded for the time being because of disagreement over Turkey’s role in northern Cyprus and concern among some EU states about the admission of a largely Muslim country.

Turkey's geographic proximity to Eastern Europe, the Middle East and Asia positions Turkey as an ideal hub for the corporate world as the China of Europe with half of the country younger than 29 years.

M&A deals with Turkish targets shot up to 218 deals worth $24.9 billion last year from 167 deals worth just $4.0 billion in 2009, when activity was hit by the last global economic slump, Thomson Reuters data shows.

Last year’s dollar value was lower than the record $30.6 billion hit in 2005, but the number of deals was much higher; there were 102 deals in 2005. So far this year, the value of deals has dropped back somewhat, to $8.4 billion, but the number has remained extremely high at 151.

Global private equity houses, local independent PE shops as well as Family-owned PE funds are increasingly active in Turkey.

The most popular M&A sectors have been energy, power generation healthcare, retail and finance. But the biggest splash so far this year was made by the world’s largest spirits company, Diageo, which agreed in February to buy Turkish raki and vodka distiller Mey Icki for $2.1 billion.

For foreign investors, Turkey’s corporate regulation has been a concern, but the planned introduction of the Turkish Commercial Code in July next year is expected to improve disclosure of companies’ financial performance, governance and ownership structures.

Turkey has adopted liberal economic policies under Prime Minister Tayyip Erdogan’s AK Party government over the past decade, which has been a key source of stability and economic reforms.

Friday, September 30, 2011

Larry, Please Buy Autonomy

The Akbas Post has already informed public about Autonomy having heavily shopped itself around for two years back in August. Larry Ellison of Oracle posted Autonomy's Information Memorandum on its website.

Autonomy CEO Lynch is in big trouble with London SE and HP' $11.7 B deal could be in jeopardy. And of course, following Megg Whitman's appointment, HP soap opera continues!

Larry Ellison has built a reputation for buying companies at bargain prices; His spat with Mike Lynch is brilliantly calculated in an attempt to kill HP/Autonomy deal by having authorities heavily scrutinize the deal and any past transaction attempts that were kept from the public by Autonomy management, for which they could go to jail or be banned from executive posts in public companies. 

Most of deals come in with mult-year earnouts and stay-on bonuses for key executives, this alone could kill the deal itself. If the deal is dead, Autonomy's shares would tank and Ellison would then conveniently make his move, as he has done in the past.

According to Financial Times this morning, Autonomy, Oracle and a leading technology banker fell into a war of words over Hewlett-Packard’s high-priced acquisition of the British software company this week.

Larry Ellison, Oracle’s rambunctious chief executive, and Mike Lynch, Autonomy’s forthright head, have accused each other of lying about whether Autonomy was “shopped” to Oracle before agreeing its $11bn sale to HP, at a premium of more than 60 per cent.

Although Mr Lynch has borne the brunt of Mr Ellison’s assault this week, the Oracle chief’s real target is its increasingly bitter rival, HP. Mr Ellison has previously lambasted the HP board for discharging chief executive Mark Hurd last year, who is now Oracle’s president.

The dispute could also raise serious questions for Autonomy with the London Stock Exchange, which requires listed companies to inform shareholders about any serious takeover talks.

At the source of the spat is a presentation given to Oracle management by Frank Quattrone, whose boutique Qatalyst acted as adviser both to Autonomy and in Motorola’s $12.5bn sale to Google, the year’s two biggest tech deals.

“Autonomy was shopped to us,” Mr Ellison told analysts on an Oracle earnings call last week. “We looked at the price and thought it was absurdly high.”

Mr Lynch denied this in an interview with the Wall Street Journal, saying: “If some bank happened to come with us on a list, that is nothing to do with us.”

He went on to reprise his familiar critique of Oracle’s database products, which compete with Autonomy’s “unstructured data” management software.

In its typical splashy style, Oracle hit back at Mr Lynch by issuing a press release late on Wednesday night, accusing the Autonomy chief of telling “another whopper” by failing to mention his April meeting with Mr Hurd and Doug Kehring, Oracle’s head of M&A, in April.

“Either Mr Lynch has a very poor memory or he’s lying,” Oracle said. “After listening to Mr Lynch’s PowerPoint slide sales pitch to sell Autonomy to Oracle, Mr Kehring and Mr Hurd told Mr Lynch that with a current market value of $6bn, Autonomy was already extremely overpriced.”
Mr Lynch immediately returned fire, insisting the meeting was nothing more than a “lively discussion about database technologies”.

“Frank was not engaged by Autonomy and there was no process running. The company was not for sale,” Mr Lynch said.

Oracle then took the unusual step of publishing the full slide deck from Mr Quattrone’s presentation at, which it said was made with Mr Lynch present.

“After the sales pitch was over, Oracle refused to make an offer because Autonomy’s current market value of $6bn was way too high,” Oracle reiterated.

This prompted Mr Quattrone to wade in with a new twist in the tale.

“The slides Oracle posted publicly were sent by me to Mark Hurd in January, were prepared by Qatalyst and were for the purpose of our independently pitching Autonomy as an idea to Oracle,” Mr Quattrone said. “These slides were not used in our April meeting with Mark and Doug.”

HP said in a regulatory filing that the Autonomy deal could close as soon as Monday if it gets required acceptances from holders representing 75 per cent of Autonomy’s stock.

Thursday, September 22, 2011

Crisis Unfolds at H-P Over CEO Following Our Blogpost - Committing Corporate Suicide HP

The stock has been down more than 50% in the last 11 months under Leo's leadership. I am not surprised at all that HP board is finally firing Leo as I had published a blog post a month ago - Committing Corporate Suicide HP holding the board accountable for not only Leo's appointment but also Carly's and Hurd's.

The shareholder dissatisfaction is so high that firing Leo or bringing in Meg Whitman will not turn things around but things could improve from now on with almost any CEO I must admit.  I would also change all board members who should be held accountable for the wrong CEO appointments three times in a row.

Another suggestion I'd have is to get out of the Autonomy deal at whatever cost possible as they had offered ridiculously high premium for a company that was shopping itself around for years.

Saturday, September 03, 2011

Eli Lilly in Partnership Talks with Turkish Drug Maker

According to a report in WSJ, Eli Lilly & Co. is in talks to form a partnership with, and potentially invest in, Turkish generic-drug company Mustafa Nevzat İlac Sanayii AS, according to people familiar with the matter, marking the latest effort by a big Western multinational to tap emerging markets for growth.

The talks are at an early stage and it is possible no deal will result. Indeed, industry watchers say there are a number of big Western drug companies that could have an interest in MN Pharmaceuticals, as the company is also known.

Though the talks with Lilly are currently focused only on a minority investment, control of the Turkish company also could ultimately be in play given that strategic buyers often prefer that course. MN is worth about $1 billion, one of the people said.

A spokesman for Lilly didn't immediately comment. An MN representative couldn't be reached.

Drug companies and other multinationals in the U.S. and Europe are increasingly looking east and south for an antidote to Western markets where economic growth is sluggish and which are already saturated with their products.

Last October, Pfizer Inc. agreed to pay 400 million reals ($250 million) for a 40% stake in Brazilian generic-drug maker Laboratório Teuto Brasiliero and the option to buy the rest of the company later. Spirits giant Diageo PLC in February agreed to acquire Turkish spirits company Mey Içki Sanayi ve Ticaret AS for $2.1 billion.

Turkey is a particularly attractive emerging market, given its large and increasingly wealthy population of more than 70 million people. Apart from a slowdown resulting from the global financial crisis, economic growth in the country has been swift in recent years.

Linking up with MN Pharmaceuticals would give a foreign drug company access to local distribution, low-cost manufacturing and regulatory expertise, not to mention new products. For Western companies, Turkey can also serve as a springboard to fast-growing markets in Asia.

MN, founded in 1923, makes generic drugs such as antibiotics that are injected rather than taken as pills. For MN, inking a deal with Lilly or another big Western drug company could give it access to a vast foreign distribution network.

Both Lilly and MN have lined up advisers in advance of a potential deal. Besides a foreign drug company, it is also possible MN could sell a stake to a Middle Eastern sovereign wealth fund, one of the people said.

Indianapolis-based Lilly, which makes products including the cancer drug Erbitux and Cialis for erectile dysfunction, has done a series of smaller acquisitions in recent years to augment its portfolio.

Lilly hasn't done a major deal since 2008, when it agreed to buy biotech concern Imclone Systems for $6.5 billion.

Fumbling the Future of A Once Great Industry - HP, Canon, Ricoh, Lexmark, Xerox and Kodak

This week's Businessweek article "For Kodak Change Isn't Instamatic" talks about Kodak's CEO Perez as he tries to bring digital revival into focus. The timing of such a massive turnaround is a bit off.  In Kodak's case however, better late than bankrupt.

In the past I have criticized Kodak for being too slow and too scattered to successfully pull it all together. One thing I must give Antonio Perez is his consistent leadership and sheer determination to stick to his plan despite all criticism from shareholders and Wall-Street.

Given once-in-a-life time chaos and disarray in the Document Industry, Kodak and particularly its leadership team suddenly look pretty good.

By a historic mistake, Canon just watched Ricoh snap IKON, 40% of its US business.  They did not even fight.  Just watched it happen and lost forever. Their response was even worse: buying another irrelevant box company Oce and turning all MFD distribution exclusively to HP. Canon will never be the great samurai once it was fighting passionately to win against Xerox back in the 70s.

HP has became even worse now - chaotic & suicidal with the new CEO Leo. You may want to read my blog post on HP's latest misfortunes and decide for yourself.  I hear that Leo may be selling the printing business next following PCs.

Ricoh bought IKON - a loose federation of once independent dealers. Prior to acquisition, IKON was itself painfully trying to become one integrated company. The buyout brought too much burden on a Japanese company that always managed coercively from HQs in Tokyo. Other than buying IKON, they largely missed out on the industry's services-led transition into consulting and managed print services (MPS). Recently, they fired the head of Americas. I hear a lot of talent has been leaving. Japan's old miracle of doing it "better faster cheaper" simply does not help you with services where talent and minds talk and win business. Not equipment nor factories nor kaizen....

One should not forget Lexmark, another IBM spin-off offering good technology with successful vertical solutions marketing. When the industry started consolidating at a rapid pace, Lexmark was one of the obvious printer companies to merge with. Curlander who has been the Chairman since then and his board repeatedly turned them down stating that Lexmark can continue propser and grow on its own. I will let shareholders do the math here. Now that the music has stopped, Lexmark is suddenly finding itself with no partner, limited resources, near-empty pockets in a brutally commoditized over-supplied industry desparately fighting against giant competitors. Sort of like Don Quixote fighting windmills!

And finally my old company Xerox; Under Ursula Burns, they placed two big bets and bought Global Imaging and ACS.  By doing so, they publicly announced the world the old Xerox did not in fact know how to manage or execute or build growth. Why? Global Imaging is being managed separately. Xerox Global Services has reverse-merged with ACS. Just when you think it can't get any worse, Ursula is now selling off engineering. Yes, once ran and led by engineers, the mighty Xerox is now selling off engineering! In a world where "Companies That Are Built To Last" are fighting for intellectual property, R&D, creativity and top talent, Xerox first sells off PARC. Then the entire engineering group.

I would say Kodak suddenly looks pretty good among its peers! When you have competitors like these, I would say to Antonio, just stay focused keep executing as fast as you can.

Saturday, August 27, 2011

Committing Corporate Suicide - Hewlett-Packard

Many iconic brands of our times have struggled to propser or even survive in the last decade. Some have successfully transformed themselves: Apple under Jobs and IBM under Gerstner to name a few…Some have gone bust or bought out.

I have managed businesses of various sizes – hardware, software or services around the world but I have yet to witness a “strategic” restructuring program as poorly-planned, disruptive, disorganized, and suicidal as HP’s. Having closely followed HP as an arch rival back at Xerox, I must note that Leo Apotheker’s appointment by the Board could be the last “nudge” into a deep abyss for the company.

HP primarily consists of Imaging & Printing Group (IPG) providing consummer and business hardware and supplies worldwide generating over 20% of sales and about two-third of operating margins. In other words, HP is the biggest printer company on earth.

Personal Systems Group (PSG) sells desktop and notebooks PCs for commercial customers and consummers worldwide accounting for 35% of total sales. Technology Solutions Group (TSG) generates 45% of revenues. Within TSG, software accounts for only less than 5% of sales where Leo wants to bet the future of all HP by paying a ridiculous premium of 11 times sales for Autonomy. HP Services is largely EDS, a big deal done by previous CEO Hurd about two years ago.

On March 14th, Leo annonced at the HP Summit 2011 that he was betting on cloud services and software, including WebOS coming from another big acquisition – Palm again under Mr. Hurd's leadership. Leo revealed that WebOS would be the future operating system in all the 100 million devices devices that they intend to be selling.

I remember the TouchPad demo given by an old friend and brilliant marketer Marge Breya who now heads up software business within TSG. I also remember how shocked I was not to hear anything related to IPG or Enterprise Servers & Storage (ESS) businesses which account for almost all corporate profits.

In a nutshell, Leo’s new vision and corporate strategy is to be a "late me too" to Steve Jobs’ Apple while betting the future of HP on a line of business - software that today accounts for less than 5% of the company. As if all of this weren’t ridiculous enough, only less than two months later, the company said they would be discontinuing WebOS and TouchPads while exploring strategic options the for PSG division but again few days later given overwhelming demand for discontinued TouchPads, they will manufacture more TouchPads. For a brand as respected as HP's with resellers, distributors and retailers, these "zig-zag" strategies and resulting communications will quickly diminish a once-iconic brand.

So much for 100 million devices and the WebOS strategy outlined by Leo back in March. I have led divestitures of companies and assets worth as much as a billion dollars. I have never seen such a disasterously premature corporate announcement for the PC divison that will surely destroy the future sustainability of the business.

When you decide to explore strategic alternatives for an asset as large as $40 billion in sales, you just don’t make wishy washy annoucements to public but rather launch a fast-track, well-structured, multi-pronged effort with contingency plans in place to auction off the business supported by an army of advisors with track records. There are so many ways to maximize shareholder value from an auction or spin-off only if one can plan and manage effectively.

HP’s strategic blunders’ date back to Carly Fiorina’s appointment who opted for a merger with rival computer company Compaq. Following massive layoffs, R&D cuts and missed earnings, HP Board ousted Carly in favor of Mark Hurd who was a brutal cost-cutter and a disciplined deal maker.

Just when I thought Hurd’s appointment was disasterous enough, HP Board appointed Leo Apotheker, a software executive who had not lasted at his previous employer SAP for even a year. I fundamentally question Mr. Apotheker’s credentials and track record as a software executive but even if we assumed he was the right candidate, managing an enterprise software business takes a radically different management talent than printers or servers or even outsourcing services.

If HP Board and CEO insist on the current course, they would do more damage to HP than Hurrican Irene to the East Coast. They should not.

So how can HP be saved now?

1.    Brand New Strategy - Define why HP should continue to exist.
I can clearly see Steve Jobs bold vision leading to Apple’s dominant innovative product leadership and how it has orchestrated the rest of the company. I can clearly see Lou Gerstner's courage and strategic brilliance leading to IBM’s “best customer experience” led, services-driven technology supermarket strategy and its flowless execution.

When I look at HP on the other hand, what I see is worse than a blank sheet of paper.

HP ought to stick to its innovation heritage and seek new and different ways to leverage it. Can you tell me when was the last time you bought a cool HP product that you felt good about? How can one of the most customer-focused and  brilliant marketing companies back in the 1990s be turned into such a diasarray and desparation so fast?
HP’s fundamental core should center around on services-led printing and information management. They should stick to their core and look for adjacent markets to grow and dominate.
2.    A New Structure - Technology super-market strategy has failed.
HP shareholders should put pressure on HP Board and management to break the firm apart into two public companies: 1. "Hewlett Global Services" consisting of IPG, software and HP legacy services. 2. "Packard IT Services" where PSG is to be bundled with ESS and spun-off immediately.
HP could never leverage or execute its services strategy beyond printers and MFDs. Given the chaos followed by massive executive reshuffling and Livermore’s so-called promotion into a silent Board position, HP Services would not be able to effectively compete against the likes of IBM and Accenture.
Both Carly and Hurd’s attempts to turn HP into world’s largest IT company by buying Compaq and Palm have failed miserably.
PSG/ESS should be divested rather than auctioned to ensure maximum value creation for shareholders. Following a seconday listing, many strategic and financial buyers would be interested in the company.
3.    HP Way is The Way – Embrace your heritage. Embrace your people.
HP culture has been severely traumatized since Carly’s appointment. Hurd cut even more people as well as slashed R&D and innovation. Unforetunately, Leo has only made it worse.
HP used to be a customer-led, market-connected, innovative company. I wonder how many of HP Board of Directors or executive management actually read a copy of the book written by its founders - The HP Way?

It is so ironic that Leo decides to pay 11 times sales for an average Enterprise Content Management software company that has been shopped around for so long with no buyers in sight. This could have easily come from HP's very own garage should they not cut people and innovation so easily! I would like to know how management could ever justify this premium to shareholders?
I have yet to witness a corporate turnaround of this magnitude who would have any chance of succeeding without wining the minds and hearts of your people. How can you convince your best people to stick around if the leader in charge can unregrettably change his mind in less than two months?  or when you dont even blink about firing the entire leadership team in favor of outsiders?
HP badly needs a new Board of Directors who should in turn consider naming a new CEO - a lifetime HP insider similar to what Xerox did after Rick Thoman by naming Anne Mulcahy CEO and Chairman. A name that would not surprise me is Anne Livermore who is still around.  Unfortunately, the situation has became so severe that, only a well-respected insider (like Xerox' Mulcahy) can stabilize the troups and eventually bring the moral back up.

The fundamental problem starts with how the Board of Directors selected incorrectly HP's business leaders. Time is of essence to save HP only if they can go back to the "HP Way" focusing on innovation and brilliant marketing centered on futuristic customer insights or just follow what Jobs did for Apple....

 Otherwise, HPQ is headed for a corporate suicide…

Thursday, August 18, 2011

HP to Buy Autonomy for $10 Billion. Open Text is Next!

According to our sources, HP is buying Autonomy for $10 billion with a whopping 75% premium over closing stock price under Leo' laser-like focus on future growth centered around software. Autonomy is one of the two last largest independent Enterprise Search & Content Management players. Next in line for buyout should be Open Text which closed 3% higher today.

Leo would have bought Open Text back at SAP due to thier long-standing OEM relationship in Europe. 10% of OTEX's license sales come from SAP. Interestingly so, during our strategic advisory sessions with executives we long speculated about Autonomy's fit with HP, Oracle, and Microsoft.

The CEO Mike Lynch is rare among U.K. chief executives—one who has created, and still runs, a world-leading software company from scratch. He took Autonomy Corp. from a start-up in Cambridge, England, in 1996 to a company heading for $1 billion in revenue.

Hewlett-Packard Corp. said Thursday it would offer to buy the software company for an indicated value of $10.25 billion.

Autonomy software brings structure and order to the disorganized and disparate. It searches email, instant messages and other forms of data, looking for patterns and allowing enterprises to mine the information for business insight. The dealings of Jérôme Kerviel, rogue trader at Société Générale SA, were tracked using Autonomy's technology.

More conventional uses inside corporations include such seemingly simple— but actually complex—tasks as matching up records of a customer's phone conversations with emails from the same customer. Autonomy has an impressive list of blue-chip customers.

With an eye on the growth in cloud computing, Autonomy in May acquired the digital-archiving operations of Boston-based document-storage company Iron Mountain Inc. for $380 million.

Last month, Autonomy reported an 8.1% rise in second-quarter pretax profit, and forecast increased profit for the fourth quarter and continued improvement next year. The news was a marked improvement for a company that in October issued a profit warning.

"Given the rapidly increasing amounts of unstructured data being created thanks to explosions in digital photographs, videos, music, email, instant messaging and social networking, the need to be able to search different types of data is increasing dramatically," said Tim Daniels, a strategist at Olivetree Securities.

Autonomy's share price has been on a roller coaster for much of its history.

Such market turmoil is nothing new for Mr. Lynch, who has a Cambridge University doctorate in mathematical computing. He was dubbed the U.K.'s Bill Gates during the first dot-com boom and became the U.K.'s first software billionaire, only to see Autonomy's shares lose more than 90% of their value in the subsequent bust.

Mr. Lynch, who was born in Ireland, has had a fractious relationship with the City of London, at one point lashing out at a Deutsche Bank analyst, a former Autonomy employee, who wrote a scathing analysis of the company's management and organization.

Monday, August 15, 2011

Google to buy Motorola Mobility for $12.5 B in cash, its largest deal to date

According to Associated Press, Google is bying Motorola's struggling mobile business for a whopping $12.5 billion in cash. It is amazing what you can buy these days if you do have cash in your balance sheet.

The sudden bold move should not come as a suprise; HP's Hurd bought Palm 2 years ago. Now Google's going for Motorola. Next in my opinion is Microsoft buying Blackberry and/or Nokia.

Following its largest-ever Skype acquisition and over $55 billion in cash, Microsft can certainly afford them both to embrace a new world with no PCs but rather increasingly full off tablets and smartphones.

I would also  not exclude Samsung or IBM as they would also need a major mobile platform,which they surprisingly lack today. There are 6 billion cell phone users in the world, in one fo the fastest growing markets.

My kudos to Steve Jobs once again for being so far ahead of his times to have stirred up the industry so they can catch up to Apple, now the world's most valuable firm.

MOUNTAIN VIEW, Calif. — Google Inc. is buying cell phone maker Motorola Mobility Holdings Inc. for $12.5 billion in cash. It’s by far Google’s biggest acquisition and a sign the online search leader is serious about expanding beyond its core Internet business and setting the agenda in the fast-growing mobile market.

Google will pay $40.00 per share, a 63 percent premium to Motorola’s closing price on Friday.

Google’s Android operating system runs smartphones that compete with iPhones, BlackBerrys and Windows-based mobile devices. Motorola Mobility was separated from the rest of Motorola in January. The company has remade itself as a maker of smartphones based on Android, but has struggled against Apple Inc. and Asian smartphone makers.

“Motorola Mobility’s total commitment to Android has created a natural fit for our two companies,” said Google CEO Larry Page in a statement. “Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers.”

The acquisition has the approval of both companies’ boards and is expected to close by the end of this year or early 2012. That may be overly ambitious, however, as the deal is likely to face regulatory scrutiny. It dwarfs Google’s previous biggest deal, the 2008 purchase of DoubleClick for $3.2 billion, which took a year to get approval.

What Google likely wants from the acquisition is Motorola’s trove of more than 17,000 patents on phone technology. Google recently lost out to a consortium that included Microsoft Corp., Apple and Research In Motion Ltd. in bidding for thousands of patents from Novell Inc., a maker of computer-networking software, and Nortel Networks, a Canadian telecom gear maker that is bankrupt and is selling itself off in pieces

Motorola has nearly three times more patents than Nortel.

In premarket trading, shares of Motorola Mobility soared 60 percent, or $14.72, to $39.19. Shares of Google, meanwhile, fell $14.68, or 2.6 percent, to $549.95.

Friday, August 12, 2011

Open Text Q4 Results Disappoint - License Slippage, Weaker Margins

One of last two independent Enterprise Content Management (ECM) vendor, Open Text (TM) Corporation (NASDAQ:OTEX) (TSX: OTC), announced financial results for its fourth quarter ended June 30, 2011.

Revenue was reported at $285.5 million, in line with our $285.4 million and just shy of the Wall-Street’s $286.7 million. Lower license revenue and weaker service gross margins contributed to a decline in the overall gross margin level (73.2% vs. 74.5%). Adjusted EPS was US$1.05 vs. the Wall-Street’s $1.11.

Adjusted net income for the fourth quarter of fiscal 2011 was $61.5 million or $1.05 per share on a diluted basis, up 12.0% compared to $54.9 million or $0.95 per share on a diluted basis for the same period in the prior fiscal year. Net income in accordance with U.S. generally accepted accounting principles ("US GAAP") was $28.6 million or $0.49 per share on a diluted basis, compared to $53.2 million or $0.92 per share on a diluted basis for the same period in the prior fiscal year. (2)

Total revenue for fiscal 2011 was $1,033.3 million, up 13.3% compared to $912.0 million in the prior fiscal year. License revenue for fiscal 2011 was $269.2 million, up 13.1% compared to $238.1 million in the prior fiscal year.

Adjusted net income for fiscal 2011 was $234.5 million, up 31.7% compared to $178.0 million in the prior fiscal year. Adjusted earnings per share for fiscal 2011 was $4.02 per share on a diluted basis, compared to $3.10 per share on a diluted basis, in the prior fiscal year. Net income for fiscal 2011 in accordance with US GAAP was $123.2 million, or $2.11 per share on a diluted basis, compared to $89.2 million, or $1.55 per share on a diluted basis, in the prior fiscal year. (2)

Management expects to remain acquisitive in the BPM space looking at deals of all sizes. It did point to Financial Services and Utilities as sectors where it would like to boost its BPM capabilities after Metastorm and Global 360 acquisitions.

Both acquisitions are taking longer than planned to integrate resulting in deals in the pipeline to be postponed. The company has taken its eyes off the expenses building out services and sales headcount, investing data centers for cloud services, investing in capabilities for OEMs such as Microsoft, SAP and Oracle due to the anticipated launch of revamped SharePoint in 1Q2013.

 We will be following Open Text very closely in the upcoming quarters. Open Text is one of the two remaining independent ECM vendors, making an attractive takeover candidate.

Wal-Mart Again Eyes Carrefour's Brazil Unit

According to Wall Street Journal this morning, Wal-Mart has mandated UBS to buy Carrefour's assets in Brazil. If Carrefour decides to exit their single largest operation in emerging markets, the rest should follow including China, Indonesia, Turkey.

Lars Olofsson, presurred by Colony Capital, announced the company's exit from Brazil back in 2009 but then could not reach a deal with Wal-Mart. Earlier this year only after less than two years, Carrefour made a bid at Brazil's largest retailer Cia. Brasileira de Distribuição, which was stopped by the government. Carrefour exited Russia several years ago and then announced its plans to evaluate their stratgeic options to get back to the country.

My friend Lars has a very tough job trying to juggle his impatient demanding shareholders who lost a fortune on paper. His fate is largely dependent upon how well France will do and its consequent impact on the stock price. 

Wal-Mart Again Eyes Carrefour's Brazil Unit - WSJ:

Wal-Mart Stores Inc. is exploring a potential acquisition of the Brazilian unit of French retailer Carrefour SA, two years after a previous attempt to strike a deal ended over a disagreement on price, people familiar with the matter said.

Wal-Mart isn't in current discussions with Carrefour and hasn't contacted the French company about its interest, which was described by one of the people as "serious."

Investment bank UBS AG is advising Wal-Mart on the possibility of making an offer for Carrefour's Brazilian stores, which could be valued at between $6 billion and $8 billion, they added.

For Carrefour, the world's second-largest retailer by sales, after Wal-Mart, Brazil is a cornerstone of its global ambitions. But the company has been struggling to turn around its performance in recent years and its shares have dropped sharply this year. Analysts have said spinning off or selling some of its international operations could help revive the stock.

Blue Capital, an activist investor group comprising French luxury tycoon Bernard Arnault and California-based private-equity firm Colony Capital LLC, owns a 14% stake in Carrefour. Since acquiring their stake in 2007, Mr. Arnault and Colony Capital have pushed Carrefour's management to sell off assets and increase profitability.

A Wal-Mart spokesman said the company "does not comment on rumors or speculation." A spokeswoman for UBS declined to comment.

A Carrefour spokeswoman said the company is committed to staying in Brazil. "It's an important strategic market for us, and we plan to remain there and grow," she said.

Buying Carrefour's Brazilian unit would give Wal-Mart access to a network of more than 500 stores, including "hypermarkets"—huge supercenters selling everything from baguettes to bicycles—supermarkets and convenience stores, buttressing its position in one of the fastest-growing emerging markets.

Wal-Mart's interest comes as Carrefour's plans to merge its Brazilian operation with a Brazilian retailer collapsed. Carrefour's board had approved a deal to merge its Brazilian business with Brazil's largest retailer Cia. Brasileira de Distribuição, which owns the Pão de Açúcar supermarket chain. But the deal fell apart last month after the government-owned bank that was financing the project withdrew its support.

That deal was also opposed by French retailer Groupe Casino,an archrival of Carrefour, which jointly controls CBD along with Abilio Diniz, CBD's chairman and 74-year-old billionaire.

The U.S. retail giant has long been interested in Brazil, where it opened its first stores in 1995.

As of June, Wal-Mart ran 484 stores in Brazil under different formats and names, according to its website.

It has grown in Brazil through a mix of acquisitions and organic growth. Wal-Mart acquired the Bompreço chain in northernBrazil in 2004 from Dutch retailer Koninklijke Ahold NV, and the Brazilian operations of Portuguese retailer Sonae SGPS SA in 2005.

Wal-Mart has been bullish on international opportunities, and global sales have boosted its earnings in recent quarters. Wal-Mart had $419 billion in sales last year, of which $109 billion was international.

In its second-largest deal ever, Wal-Mart last year agreed to acquire a 51% stake in Johannesburg-based Massmart Holdings Ltd. for $2.4 billion. Earlier this year, South African antitrust regulators approved the deal, but the government appealed that decision and appears to be trying to get Wal-Mart to agree to additional conditions.

Wal-Mart has said it plans to respond to the appeal.

When Lars Olofsson took over as chief executive of Carrefour in early 2009, he considered selling off the retailer's international operations, including in Brazil. Wal-Mart had expressed interest in the Brazil business, and the two rivals held informal talks, but failed to reach a deal after disagreeing on price, people familiar with the matter said.

In the end, Carrefour concluded that it wanted to remain in Brazil, which is its second-largest market after France.

Thursday, August 11, 2011

Deal volumes on the rise in the mid-market

As the global economy traces a delicate trajectory back on to a path to growth, dealmakers are reporting a surge in interest in mergers and acquisitions. The mid-market is typically a fertile source of deals, and the beginning of this M&A cycle is no different, with a resurgence in acquisitions already apparent.

In the UK last year, eight FTSE 250 stocks fell to buyers, a volume typical of the early stages of an M&A cycle. On average, about 17 UK mid-cap stocks are taken over in the middle to late stages of an M&A cycle, according to analysts at Citi, the financial services group, suggesting more activity to come.

According to Dealogic, the data provider, mid-market M&A as a percentage of total global activity has reached 24 per cent, a level not seen since 2004.

“We are seeing significant M&A activity in the mid-market area. It is a fertile ground for deals,” says Cyrus Kapadia, deputy head of UK investment banking at Lazard. “Many corporates have been through a period of difficult cost-cutting and have been careful about their use of cash, but are now in a better position from an M&A financing perspective.”

Global mid-market M&A, for deals of $100m-$1bn, reached $675bn in 2010, a level of dealmaking not surpassed since 2007 and up from $469bn in 2009, according to Dealogic. Nearly half of that total has been reached already this year, with $310.6bn of mid-market deals completed by May 31. For deals of between $250m and $2bn, global volumes reached $789bn last year, according to Mergermarket, the news and data company.

Chief executives are increasingly looking at what their competitors are doing and whether to be proactive on a particular situation,” adds Mr Kapadia. “They want to make sure that any deal will be perceived as a success. A transaction in the mid-market area may well be more appealing than a multibillion-dollar transformational deal that would naturally be higher risk in the current environment.”

A strong recovery in capital markets has supported the revival in dealmaking. As investors search for yield in an environment of low interest rates, bond markets have boomed and opened to a greater range of riskier, smaller borrowers.

“Both debt and equity are available for deals in the mid-market, although access to capital for smaller companies is generally more volatile,” says Tom Willett, chairman of corporate finance for Europe, the Middle East and Africa at Royal Bank of Scotland. He adds that macroeconomic uncertainty continues to complicate dealmaking even in the mid-market.

The oil and gas, property and healthcare sectors have been the busiest for mid-market M&A so far this year, with an 89 per cent increase in activity in healthcare on the same period last year, according to Dealogic. The US has seen the most activity, followed by China and the UK.

However, shareholders are not always supportive of M&A, and some bankers highlight the uncertainty some boards have about getting the necessary support for dealmaking.

“While the mid-market is generally in reasonable financial health, shareholders in the UK tend to look to companies to manage efficient balance sheets and return any excess cash to shareholders,” says Mr Willett. “US investors seem to be better disposed towards M&A as an acceptable use of surplus cash.”

The depth of demand for high-yield bonds has helped finance a resurgence in leveraged buy-outs by companies backed by private equity, which has boosted M&A volumes. In the first quarter of 2011, junk bond issuance has continued apace, with global issuance up 28 per cent at $103bn, a record start to the year.

Bankers and investors say a large source of deal activity has been companies backed by private equity. In the first quarter of 2011, private equity buy-outs were up 71 per cent from the same period last year, accounting for a higher proportion of M&A activity, reports Mergermarket.

“We have done £170m [$278m] in the year to date in six new deals, which is in line with our strategy of investing through the cycle, and what we would do in an average year,” says Darryl Eales, chief executive of LDC, the UK mid-market private equity house that is part of Lloyds Banking Group. “Our plan is to do £300m-£350m in 2011. I’m confident we will do that because the pipeline is strong. In a typical year, we would do £250m- to £300m-worth of deals.”

But competition for assets is intensifying. “We have been trying to originate more deals urselves as a way of dealing with this more competitive environment, and our regional network is a great strength here,” adds Mr Eales. “Trade buyers are back in the market very aggressively.”

However, lending has not returned to pre-crisis levels, and dealmakers say activity has been limited by restrictions on the provision of finance for M&A with smaller companies.

“For businesses with an ebitda [earnings before interest, tax, depreciation and amortisation] of €25m [$36m] or more, you can attract a more international group of lenders, but if earnings are below that, then companies are restricted to a narrower set of local lenders. That can make deals more difficult to finance on attractive terms,” says Neil MacDougall, managing partner at Silverfleet Capital, the private equity company.

Not all shareholders are keen to sell out of their companies yet, presenting opportunities for new investors to provide capital.

“We have recently seen opportunities to invest alongside existing owners who don’t want to sell their companies but want capital to invest,” says Stephen Welton, chief executive of the Business Growth Fund, which has £2.5bn to invest in UK companies. The fund was launched by banks last month in response to government pressure to lend more to small and medium-sized enterprises.

Mr MacDougall says Silverfleet is the busiest it has been for several years. “France and the UK continue to be active for us, and Germany has picked up again in the past few months,” he says.

Opportunities could be more attractive in continental Europe. “There is on average a definite gap between the growth prospects of deals in the UK and, say, Germany,” says Mr MacDougall. “Would you find it easier to believe the same forecasts from a UK company or a similar German company given the difference in the strength of their domestic economies? You have to take into account the impact of reductions in government expenditure and the levels of personal spending, which in Germany are much less of an issue.”

The rise in dealmaking is expected to continue through 2011. KPMG, the professional services firm, predicts UK companies will have comparatively larger war chests this year, but bankers note nervousness about the economic outlook as a barrier to deals. Earlier this year, KPMG noted a fall in forward price/earnings ratios, which some see as an indicator of confidence to do deals.

As the recovery in capital markets strengthens and confidence about the economic recovery improves among corporate leaders, the shift could be towards bigger deals.

In April, the global M&A deal count was 3.8 per cent below the same period last year, but announced dollar volume grew 21.4 per cent, driven by an increase of more than 40 per cent for the number of deals valued above $500m, according to RW Baird, the mid-market investment bank.

In the global middle market, the first four months of the year saw a 7.2 per cent decrease in the deal total and 24.1 per cent growth in dollar volume. In April, the monthly total of transactions dropped 22.6 per cent to 2,095, the lowest since August 2009. However, reported dollar volume increased 38.5 per cent to $195.8bn. In the mid-market, the transaction total was down 21.5 per cent, whereas dollar value climbed 21.6 per cent.

Kodak Struggles to Find Its Moment

According to an article by WSJ this morning, Kodak's still struggling hard to turn the company around. Mr.Perez and his team have been around long enough to assess the core issues. The addressable markets are all brutally competitive mature markets with surplus capacity following major waves of consolidation from manufacturing to distribution.

The brand name is still highly valuable particularly for non-US manufacturers and consummers. The macro economic headwinds will make Perez's job ten time more difficult as printing is one of the first categories to be downsized in recession. The biggest hurdle I see is the insular, relaxed, homegenous, small-town culture of Rochester that has been ingrained in the company's own culture. This is precisely one of the reasons why Xerox moved its headquarters to Connecticut a while back. Top leadership must have created a much-needed sense of urgency to get its act together.

I believe the company is far more valuable than what its market cap of $476 million currently seems to suggest. Its deep imaging portfolio alone could incubate a dozen Apples and Ciscos. There are many strategic buyers such as Samsung, LG, Konica Minolta, Kyocera Minolta or even Lexmark who would a significant premium for its brand, IP portfolio and imaging & printing businesses.

Instead, Kodal should be focusing on developping a services-led outsourcing business with strategic emphasis on developping markets such as Brazil, Turkey, Indonesia, Russia, Middle East and Africa under a still respected brand name in the business world. Rather than sinking cash into low-end inkjet business (a business that even Xerox abandoned many years ago with far better market dynamics, cash flow and balance sheet), they ought to be looking at medium size acqusitions in the US and around the world. For example, there are many medium size commercial printers in the US that would give Kodak a customer base to churn with own technology as well as entrenched enterprise customer relaitonships.

Trying to do both commercial printing for Graphic Arts customers and consummer and SOHO inkjet printing is a loosing battle given their cash crunch. Without any doubt, they ought to pull the plug on low end inkjet printing busines, perhaps divesting it to Lexmark and exclusively focus on high-end digital printing services aimed at enterprise clients. There is absolutely NO WAY they can afford to successfully fund and grow all three businesses at the same time given current cash generation capacity and market conditions unless they can pull in at least $2-3 billion from selling of IP portoflio.

Wall Street Journal Article: 

ROCHESTER, N.Y—After three decades of serial reorganizations, Eastman Kodak Co. is struggling to stay in the picture.

The 131-year-old company lost much of its film business to foreign competitors, then mishandled the transition to digital cameras. Now it is quickly burning through its cash as it remakes itself into a company that sells printers and ink.

On July 26, Kodak reported its fifth consecutive quarter of losses. The company's junk-rated debt coming due in two years has moved below 80 cents on the dollar, signaling the market sees a risk of default. The company's already battered stock has taken an especially tough pounding in recent days, falling 10% Wednesday to $1.77. Prior to this week, Kodak hadn't closed below $2 since the 1950s, according to the Center for Research in Security Prices at the University of Chicago.

Kodak had been raising money by suing companies for its portfolio of patents, including its image-preview patent. But the flow of settlements dried up this year, prompting Kodak last month to seek offers on some the patents themselves, a person familiar with the matter said.

In a sign of how far Kodak has fallen, analysts believe the patent portfolio is worth more than the company's stock-market value, which has fallen below $500 million.

After the company got a call from a banker late last month describing a private-equity firm's interest in buying a large stake in the company, Chief Executive Antonio Perez quickly assembled the board for a weekend conference call to approve a measure that would deter a hostile takeover, a person familiar with the matter said. Kodak announced a poison pill Aug. 1 that allows shareholders to buy stock at a discount if an outside investor acquires a big stake.

Some former executives say the company probably should have broken itself up and sold off the parts. Mr. Perez rejects that notion, and it would be complicated by the company's pension obligations. The board may be more flexible than its CEO, however. Rick Braddock, Kodak's presiding independent director, said a breakup doesn't make sense given the company's commitment to a turnaround. But he added, "I am not going to rule anything out."

Mr. Perez said he remains confident in the company's transition plan. He said the company will end the year with at least $1.6 billion in cash, up from $957 million now, because he expects intellectual property revenue, asset disposals—potentially including the patents—and sales to pick up in the second half.

"You can argue with the degree with which this plan is going to work," the chief executive said in an interview at the company's Rochester headquarters in its "Experience Kodak" room, which is filled with Kodak's new printers and digital cameras, as well as artifacts of the company's glory days. "It's not that it's not going to work."

Mark Ovaska for The Wall Street Journal
Kodak CEO Antonio Perez has fought against breaking up Kodak, even as the company has struggled.
Mr. Perez said the company's heavy cash burn this year reflects the timing of pension-plan contributions and intellectual-property settlements, not an underlying problem with the business. Kodak's printers are rapidly gaining market share, and the business will be highly profitable once a base of users is established and Kodak can start cashing in on ink sales, he said.

Separately, Kodak got a break earlier this month when a judge who had initially ruled against the company in a patent suit against Apple Inc. and BlackBerry maker Research In Motion Ltd. resigned before completing a second review of the case. Kodak alleges that the camera functions in Apple and RIM mobile phones violate its image-previewing patent. The case will now be assigned to a different judge. Mr. Perez has said the suit could bring in $1 billion. Apple and RIM declined to comment.

Wall Street remains concerned about the company's performance. "It was a disappointing quarter in cash-flow burn, topline growth and overall growth," said Chris Whitmore, an analyst with Deutsche Bank. "They're selling the family silver to keep the lights on."
Mr. Perez, 65 years old, is the fifth Kodak chief in about three decades to be charged with stopping the company's slide. Their approaches haven't lacked for creativity. Over the decades, the film giant tried diversifying into pharmaceuticals, bathroom cleaners and medical-testing devices. None did the trick.

A Hewlett-Packard Co. veteran, Mr. Perez picked printers. The plan puts him in competition with giants like H-P, Canon Inc. and Seiko Epson Corp., which together control nearly three-quarters of the market, according to technology data firm IDC.

Kodak began selling printers to consumers in 2007. Its strategy was to turn the industry's prevailing approach on its head by offering a more expensive printer and cheaper ink. At its core was a bet that nanotechnology used in filmmaking would enable Kodak's scientists to produce an ink that wouldn't clog printer heads, which typically have to be replaced at each refill, adding to the cost.

By 2010, the company held 3% of the all-in-one inkjet printer market world-wide, according to IDC, up from 1% in 2008. Kodak's strategy is to subsidize the cost of the printers until its installed base is big enough to generate a lot of ink sales. Still, because its ink refills are cheaper, Kodak is able to sell its printers at a higher price than competitors.

While acknowledging that Mr. Perez inherited a difficult business challenge, people inside the company say missteps have slowed Kodak's transformation. Early versions of Kodak's printers were plagued by problems, like printhead failures that required Kodak to cover the cost of replacements, said a person familiar with the matter. By the time the company sorted out the complications, the recession had set in.

Kodak's board of directors maintains its support for Mr. Perez and his strategy. In September 2009, it talked him out of retiring and renewed his contract through 2013. Kodak's shift to a new strategy "is really one of the hardest business transitions I have ever seen,'' said Mr. Braddock, the presiding director.

For generations, Kodak reaped profits from one high-margin product: film. With the credo "You press the button, we do the rest," Kodak's affordable film and cameras transformed photography from a highly skilled pursuit to a pastime of the everyman.

By the 1980s, troubles were mounting as foreign film competitors took share from Kodak and digital technologies emerged. Kodak says it invented the world's first digital camera in 1975 and spent hundreds of millions of dollars developing digital technology. Yet the fear of cannibalizing its film sales paralyzed the company when it came time to go to market
Kodak's struggles have taken a toll on Rochester. In 2004, Kodak employed 16,300 workers in the city. As of 2010, that number was just 7,100. Over the same period, the company's global work force has shrunk to 18,800 from 54,800.

Kodak's insular corporate culture, encouraged by the town's isolation, bears much of the blame for Kodak's failure to adapt, former employees say. A retired board member says an outside consultant hired by management in the early 1990s prepared a report titled "The Poisoned Inheritance" criticizing the company's inwardly focused culture. Management's reaction? "Ho hum," he said, adding that few independent directors even saw the report.

Mr. Perez joined Kodak in 2003 as president and chief operating officer following a 25-year-career at H-P, where he headed the company's inkjet printer business. At H-P, he led an effort to acquire Kodak, during which he says he became fascinated by the company's intellectual property. Leaving H-P after Carly Fiorina beat him out for the top post, Mr. Perez took his printer know-how to Kodak.

When he was tapped by the board to become chief executive in 2005, Mr. Perez was given three goals: Shrink the film business, create a new digital company and manage its pension and health-care costs for retirees. Each is enormously expensive. The company says restructuring film alone cost $3.4 billion over four years. The company's operations don't generate enough cash to cover all the expenses.

From early on, Kodak began amassing patents related to film and coating technology. It's registered more than 11,000 patents, with many of the new ones focused on digital technology like its image-previewing patent. To fund the massive investment his digital strategy required, Mr. Perez started litigating and licensing Kodak's digital-imaging patents, a strategy that brought in $1.9 billion from 2008 to 2010.

The drought in income from patents suits this year prompted the company to look more seriously at selling patents, one board member said. The plan was approved at a meeting in Connecticut in mid-July, this director said. Kodak is also looking to sell off or lease 2.5 million square feet at what used to be its major manufacturing center in Rochester, Kodak Park.

Mr. Perez says he spent his first months at Kodak wandering its sites and factories, assembling an internal group of "rebels" to get to know the operations. During a weekly meeting with his "R-team," he learned of a continuous inkjet project one of the labs was working on. Because of the company's film background, Kodak had the capability to make pigment-based ink that wouldn't clog the nozzles of printing heads.

Mr. Perez said he presented a number of digital businesses to the board. They included document scanners, high-tech display panels and new sensor technology. "I started with 11, and I told the board that at least 30% of them were the wrong ones, but I didn't know which ones," Mr. Perez said.

The board approved all 11 digital businesses, but Mr. Perez and management later stopped pursuing two of them. The company's fate now rests primarily on printing. Kodak originally forecast that its consumer printers would break even in 2010, but later pushed the time frame to 2011.

A former executive who recently left the division says Kodak overestimated its ability to penetrate the printer market and there are doubts internally about whether the 2011 target can be met. Mounting competition has pushed down printer prices, raising another hurdle to profitability.

Revenue from sales of consumer inkjet printers and ink grew by 48% in the second quarter. "We are taking share from everyone," said Mr. Braddock, the director. Mr. Perez said the business could become instantly profitable by eliminating its subsidies for consumers who buy its printers, but that doing so would hurt efforts to build a base for ink sales.

Kodak's commercial printing business, geared toward publishers and marketers, has even further to go. The company aims to sell room-size machines that can print thousands of pages a minute, each of them with different content. So far, it has only a few dozen customers and is building the complicated machines by hand.

In the second quarter, losses in the commercial group swelled to $45 million from $17 million a year earlier, due largely to unanticipated costs of adapting the complicated technology to customers' environments.

Mr. Perez, who has surrounded himself with former H-P executives, is pressing ahead with printing. To keep up employees' morale, he draws on his experience as a former runner, saying when he used to run 10,000-meter races, the last two kilometers were always the hardest.

"At the same time, this is the time you can lose the race," he said. "So keep running."