George Eastman is best known as the inventor of photographic film and founder of Eastman Kodak Co, but his century-old legacy of entrepreneurship now rides on the lesser-known Eastman Chemical Co.That was hardly the case in 1994, when Eastman Kodak spun off its chemicals business to help pay down debt. At that time, Kodak was still a colossus in photography whereas Eastman Chemical was a small player very much in its parent's shadow.
But because of a sea change in digital technology and different approaches to business, Eastman Chemical's stock market value has since increased 71 percent to $5.5 billion today, while Kodak's has plummeted 99 percent to about $185 million.
Interviews with former executives, retirees and analysts describe two companies that were polar opposites in many ways, despite their shared heritage: where Eastman Chemical was swift to move into new markets, Kodak rested on its laurels for too long; where Chemical had a management team obsessed with the bottom line, Kodak retained cushy employee benefits even when the advent of digital cameras caused film demand to crater.
Speculation flared in September that Kodak was on the verge of bankruptcy, after the Rochester, New York-based company hired restructuring experts. Last month, Kodak warned that unless it could raise $500 million in new debt or sell some patents in its portfolio, it might not survive 2012.
"George Eastman's legacy will be Eastman Chemical and not Eastman Kodak," said Willy Shih, a Harvard Business School professor who ran Kodak's digital imaging business from 1997 until 2005. "I am absolutely convinced of that."
Eastman Chemical shares lagged Kodak's until 2006:
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Eastman Chemical vs Kodak quarterly profits:
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George Eastman, a high-school dropout from rural New York, founded Eastman Kodak Co in the late 1880s and built it into the world's biggest photographic film supplier and camera maker. He patented roll film when he was 30 and quickly became a wealthy man. In 1919, he gifted one-third of his Kodak stock -- worth roughly $10 million at the time -- to employees.
Eastman established a chemicals subsidiary in 1920 to supply acetic acid and other photographic chemicals to Kodak, a business that grew strongly in the next 50 years, gaining many customers beyond its sibling.
After Eastman Chemical was spun off, it continued to expand and innovate by staking out new niche chemical markets, such as fibers for cigarette filters and plastic free of bisphenol A, a potential carcinogen.
Kodak, on the other hand, invented the digital camera in 1975 when one of its engineers developed a prototype that was as big as a toaster and captured black and white images.
But it failed to capitalize on that innovation, and it was only when Kodak's film business began to decline a decade ago that it tried to catch up with rivals by launching mass-market digital cameras with the Easyshare line.
"We had something that was so good, but now it's deteriorated to the current state of affairs," said Bob Shanebrook, a former Kodak executive who ran the professional film business and retired in 2003. "We thought $40 per share was a ridiculously low stock price, but now it's below a dollar."
Kodak's five-year credit default swaps were quoted at distressed levels earlier this month, reflecting a 92 percent chance of default on its debt in the next five years.
The city of Rochester itself seems resigned to Kodak's fate. At one point, the company employed more than 60,000 people in the area -- now, that number is closer to 7,000.
A PATERNAL HISTORY
To be sure, Eastman Chemical has been fortunate to be in an industry that has changed little compared to the technology sector, which has forced other American icons including International Business Machines Corp and Corning Inc to reinvent themselves. The type of chemical products may change, but the science of producing them does not.
Nonetheless, people familiar with both companies give Eastman Chemical credit for a corporate culture change that has helped it eschew the Kodak legacy.
In March 2009, for example, Eastman Chemical asked all employees from the CEO down to take a 5 percent pay cut to prevent widespread layoffs. The tactic worked, layoffs were averted, and the prior pay levels were restored later that year.
"We needed to understand that we were not a family; we were a team," Brian Ferguson, who joined Eastman Chemical in 1977 and was chief executive from 2002 through 2009, said in an email. "We had difficulties dealing with these issues due to the paternal history of Kodak, which implied employment for life, benefits forever unchanging and general conflict avoidance."
Kodak, in contrast, was much more generous with its employee benefits. Even after the decline in its business forced massive layoffs -- it has 18,800 global workers today, down from 86,000 in 1998 -- the company offered lucrative severance packages.
"They could have just said, 'Thanks for coming, goodbye,'" said Shanebrook, the former Kodak executive. "Instead, they gave people at all levels separation packages based on how long they worked. They continue to provide medical coverage for retirees."
Kodak's U.S. pension plans, which cover 65,000 people, were underfunded by nearly $200 million at the end of 2010. The funds slipped into the red after a surplus of more than $2 billion as recently as 2008, according to filings with the U.S. Securities and Exchange Commission.
When asked for comment, Kodak spokesman Gerard Meuchner said in an-email that the company has cut its post-employment benefits by two-thirds since 2005 and lowered its severance benefits from two weeks per year of service to 1.5 weeks.
CONTRASTING CEOS
The differences in Kodak and Eastman Chemical's cultures are reflected in the management styles of their leaders. Eastman Chemical Chief Executive Jim Rogers, a former naval aviator and corporate treasurer, has a reputation for being pragmatic and low-key. Kodak CEO Antonio Perez is known for his charisma, but some of his spending decisions have raised eyebrows.
Perez's liberal use of corporate jets has become a popular topic among Kodak pensioners on Internet message boards. Perez, who is on the President's Council on Jobs and Competitiveness, flew with his wife in 2006 on a Kodak plane to a Super Bowl football game viewing party at the White House.
The plane was later destroyed when a hangar near Dulles International Airport collapsed after a snowstorm. Perez decided to lease another one.
In 2010, he racked up a $309,407 bill using Kodak's jet for personal travel, according to regulatory filings. Starting in 2011, the company said Perez would have to pay out of pocket if his personal travel bill eclipsed $100,000.
Rogers, by contrast, used Eastman Chemical's jet infrequently in 2010 for personal travel. The cost was so small -- less than $10,000 -- that Eastman Chemical said in filings it would not bother to report it.
PRODUCT DEVELOPMENT
Among the handful of Wall Street analysts who still follow Kodak, three advise selling the stock. By contrast, at least seven Wall Street analysts say the shares of Eastman Chemical are a good buy. StarMine, a Thomson Reuters data service that aggregates leading analysts' expectations, believes the stock's true value is nearly double current levels.
Earnest Deavenport, who was chief executive of Eastman Chemical when it first became independent, said the company would not have flourished if it had remained part of Kodak.
"The cash needs of the chemical group and the rest of Kodak were out of phase with each other," Davenport said. "Kodak did not see the global expansion of the chemical group's manufacturing base as strategic to the parent company."
As an independent company, Eastman Chemical had to learn to compete with Dow Chemical, BASF and other global chemical giants. It never grew complacent the way Kodak did with its near-monopoly of the photographic sector.
Kodak has been hamstrung by Asian competitors that have experience making cheaper electronics. In 2010, Kodak held about 7 percent of the digital camera market, in seventh place behind Canon, Sony Corp, Nikon and others, according to research firm IDC. Its position has slipped since 2007, when it was No. 4 in U.S. digital camera sales with a 9.6 percent share.
Kodak's spending on research and development fell 10 percent last year to $321 million. Eastman Chemical spent $152 million on research in 2010, up 23 percent from the previous year.
If Perez cannot find a way to revitalize Kodak, Rogers could soon find himself the only CEO of a company with "Eastman" in its name.
In 1932, sick and frail from a spinal disorder, George Eastman took his own life with a bullet to the heart, feeling that his legacy had been cemented by both the film and chemical businesses. He left a note, unaware that Kodak would one day fall on hard times.
"To my friends," Eastman wrote. "My work is done. Why wait?"