Kodak Acquires Creo, Special Report and Discussion with Jim Langley

By Cary Sherburne, Senior Editor

February 1, 2005 -- As has been rumored for several months, Kodak’s Graphic Communications Group announced yesterday that it has entered into a definitive agreement to acquire Creo Inc., a premier supplier of prepress systems used by commercial printers worldwide. Under the terms of the agreement, Kodak will pay approximately $980 million in cash, or $16.50 per share, for all the outstanding shares of Creo, on a fully diluted basis. Creo presently has approximately $85 million in cash on its balance sheet and no debt. The transaction, which has been approved by Kodak's and Creo's respective boards of directors, is to be carried out by statutory plan of arrangement under Canadian law and is subject to regulatory approvals, the approval of Creo's shareholders, and court approval. Kodak expects the transaction to close during the second quarter. Creo shares were up nearly 14% on the news, trading at $16.32 Monday morning. Creo’s share price, over the past 52 weeks, has ranged from a low of $6.53 on May 6, 2004, to today’s high.

Upon Kodak’s announcement that it would be acquiring Sun Chemical’s 50% interest in the Kodak Polychrome Graphics joint venture, there were indications that another acquisition was in the works. According to Kodak’s Chairman and CEO, Daniel A. Carp, “Graphic Communications represents one of the three pillars of Kodak's digitally oriented growth strategy. The purchase of Creo strengthens that pillar, and essentially concludes the company's acquisition plan, announced in September 2003."

As our readers will be aware, Creo has been embroiled in a bitter proxy fight for control of the company. The dissidents, Goodwood Inc. and Burton Capital Management, who between them own nearly 6% of Creo’s shares, were forcing a shareholder vote on February 10, to replace the Creo Board with their own nominees and install Robert G. Burton, Sr., as Chairman and CEO. Their plan was to restructure the company in what Creo referred to as a “contradictory and ill-conceived strategy for Creo.” Both parties have been lobbying shareholders heavily over the last few weeks.

Now, as a result of Kodak’s announced intent to acquire Creo, the Creo shareholder’s meeting has been rescheduled from February 10 th to March 30 th, at which time shareholders will vote on whether to approve this acquisition, which is being recommended by Creo’s Board of Directors. It is not clear whether the “dissidents” will attempt to continue their quest in any manner; even if they don’t, their Creo stock has likely grown in value—enough to offset any expenses they have incurred and deliver a tidy profit as well.

In this article, I will look at the deal from the Kodak perspective; my colleage, Gail Nickel-Kailing, will present the deal from the Creo perspective in an accompanying article.

Kodak Strategic Intent

Kodak indicates that Creo will provide Kodak with an innovative digital prepress product portfolio and established relationships in the commercial printing segment, the largest market opportunity within the graphic communications industry, and the primary target market for Kodak’s Graphic Communications Group. Creo has more than 25,000 customers and offices in 30 countries worldwide. By adding Creo to its already impressive line-up of digital and traditional printing products and solutions, Kodak is now well positioned to capture a market leading role in the graphic arts industry.

According to Barbara Pellow, Chief Marketing Office for Kodak’s Graphic Communications Group, “Our belief is simple: Digital is here and we understand that. But offset is going to be around for a long time. The industry is rapidly moving to blended production envi ron ments where workflow is hybrid in nature. This acquisition expands the range of products and services we can bring to bear in supporting that transformation.”

When asked what the transaction might mean for partners, Pellow said, "We will maintain partnerships and alliances where they make sense. Our end objective is to deliver the best possible product portfolio to our customer base. Both Kodak and KPG value the industry partnerships and agreements we have in place and we don’t feel that this acquisition will have any impact on those relationships.”

Word from the Top

Amidst the flurry of activity that accompanies announcements of this nature, WhatTheyThink had a brief discussion with Jim Langley, President of Kodak’s Graphic Communications Group. Here’s what he had to say.

WTT: Jim, at your press conference at drupa, you stated st rongly that Kodak was “Here to Play and Here to Stay,” declaring your intent to be a market leader. I think a lot of people, back then, questioned your ability to do so. What do you have to say to those naysayers today?

JL: Simply stated, we committed to this business and we are walking the talk.

WTT: I am assuming, under the new organization, that Creo will be integrated into the Prepress Solutions Strategic Product Group. Is that the case?

JL: Yes

WTT: Is it safe to assume that Creo is likely to be subject to the same sales structure you have laid out for the rest of the organization, that being centralized sales deployed to regions covering the entire portfolio, with product specialists remaining in the strategic product groups?

JL: There will be one sales force and a regional business manager and sales manager for the Graphic Communications Group in each region. That sales force will have the consumables sales team, the integrated channel management team, and the account management team. And that reports to Jeff. We will back that up with equipment specialists from the individual Strategic Product Groups, who get called in to do the heavy lifting on specific deals around equipment placements.

WTT: How do you see the Creo plate manufacturing business fitting in to the overall portfolio?

JL: They do have a consumables business, but it is not large or tenured. In the overall scheme of things, consumables is not a big piece of the picture with the Creo acquisition. Put more positively, it is the equipment presence and the market share that Creo enjoys with its equipment placement around the world that made this attractive. The second piece of it is their number one share position for workflow around the world, and the third would be their sales force. Consumables were not fundamental to why we were pursuing Creo.

WTT: What is most exciting for you in this acquisition, and in having pulled the full portfolio together at this point?

JL: I think I am most excited about the big picture—about accelerating digital adoption rates and incorporating digital technology into the larger commercial printing space. By pulling the right pieces together to make it easy for printers to go digital, we will see a real acceleration of the digital transformation of the industry, and whole new ways of communicating with customers. For me, that is exciting. Itt is a major transformation, and we are a part of it.

WTT: Is there anything else you would like to share with our readers?

JL: Let me just say again that I am really excited about this transaction. I am at Creo headquarters now and working with the team. The energy level is positive and they see the opportunity the same way Kodak sees the opportunity. It will be a lot of fun going forward.

My Take

With this final piece in place, Kodak will hold a unique position in the graphic communications industry. It is fair to say that there is no competitor with as broad a product line. The company is financially solid and has made good progress on a corporate level in refocusing its business to replace declining revenues in its analog businesses, including film. And its global sales and service force is an added advantage for the company. One area of concern is the impact on partners of this series of acquisitions—both in terms of Kodak partners and those of the acquired companies.

One thing that KPG has certainly done well, especially under the leadership of Jeff Jacobson, is to effectively manage a wide range of diverse partnerships, with many of those partners being competitors as well. There is no reason to believe that that will change on any grand scale as Jacobson moves into his new role as Chief Operating Officer of the Graphic Communications Group, and President of the Graphic Solutions & Services business.

The Creo acquisition does, however, raise questions about some of the partnerships and alliances the two companies have in place, including:

• Xerox Corporation. Currently, Creo is the partner of choice in Xerox’s FreeFlow Digital Workflow Collection in terms of f ront end solutions targeted at the graphic communications industry, with EFI designated as the partner of choice for the corporate market. In addition, Creo resells some Xerox digital color presses. One has to imagine that the folks at Xerox are scrambling to determine what this acquisition means for them. But a continuation of the partnership should not be ruled out. It should also be noted that Xerox has an OEM relationship with Kodak’s Encad group to resell, under the Xerox brand, Encad wide format products. Xerox also does some business with Kodak Versamark in Europe. Perhaps this will signal a new spirit of “coopetition” between the two companies, who were once bitter competitors.
• Screen. KPG is perhaps one of Screen’s largest partners in the marketing of Screen’s PlateRite CTP solutions. Some of these platesetters are head-to-head competitors with Creo. It would seem to be counterproductive, over the long term, to carry both lines. This will be an area for close observation as the integration proceeds.
• Presstek. The relationship between Presstek and Creo has been rocky. Following settlement of patent disputes between the two companies, there appeared to be some level of collaboration in terms of certification of Presstek plates for use on the Creo Trendsetter family of thermal CTP devices. However, with Creo’s acquisition of its own plate manufacturing facilities, that effort seemed to lose momentum. Presstek has a good relationship in place with KPG, who sells Presstek-enabled Ryobi DI presses under the KPG brand. It remains to be seen what Kodak will do with Creo’s plate manufacturing businesses in light of the fact that they are acquiring KPG’s extensive manufacturing facilities. Like Xerox, Presstek will likely remain both a competitor and a partner for the new combined company. What remains to be seen is whether additional market opportunities will open up for Presstek in the consumables arena as a result of the integration.
• DuPont. In September of 2001, Creo and DuPont entered into a worldwide strategic alliance to promote and enhance thermal halftone proofing systems based on DuPont WaterProof Thermal Halftone proofing media for Creo CTP proofing systems. And in January off 2005, the companies announced that they were initiating new joint development and sales activities in color proofing, with DuPont deploying its CromaNet color management, together with its Cromalin ink and media, on the Creo Veris proofer. While the companies are engaging in other joint efforts, the proofing arena appears to be the one most in jeopardy, considering Kodak’s st rong position in proofing solutions, including both equipment and media.

In the Creo investor conference call discussing the Kodak acquisition, Creo’s Amos Michelson stated, “We will continue all activities with Dupont exactly as before,, and Kodak will support them in exactly in the same way Creo has supported them. Both Kodak and Creo support open standards in the industry and that will continue. I see it as business as usual with respect to everything we do today.” Michelson indicated that a “firewall” would be erected to protect the interests of partners such as DuPont and Xerox, and expressed a belief that those relationships would stay on track.

Representing one of those partners, Presstek’s President and CEO, Ed Marino, commented on the deal by saying, “ This is a good day for the graphic arts market. The Kodak acquisition of Creo is the best possible situation for the industry. Kodak and KPG are known to be good partners to work with, as our direct experience with KPG has shown. What is clear to us is that Kodak-KPG will use this new capability to add value in the market to the benefit of customers and all industry players. It is the rising water lifting all boats.”

“Here to Play, Here to Stay”

Back at drupa 2004, in an exclusive WhatTheyThink interview, Kodak’s COO Antonio Perez made the statement, relative to Kodak’s ability to succeed as a market leader in the graphic communications space, “ We have the brand; we have the distribution; we have the technology.” With this latest acquisition and the assimilation of the full portfolio that has been accomplished over a very short period of time, Perez and Kodak have lived up to their promises thus far. Now it boils down to execution. Over the next several months, the industry will be watching the integration efforts closely. The new Kodak portfolio is impressive, backed by heavy investments in R&D to build for the future. It has been an exciting journey to get to this point, and now, for Kodak, the real work begins. The company must successfully conclude its integration efforts to reap synergistic benefits. And the company must convince the marketplace to vote with its dollars and euros to place Kodak in a leadership position across the all of the product categories it represents, both through its own manufactured products and those it will continue to acquire from partners. The pieces are all there … the process of assembling them into a clear picture will be a challenge. The Kodak team appears to have the skills and talents to bring its vision to reality.

This report was written by Cary Sherburne. She can be reached via email at cary@sherburneassociates.com, online at www.sherburneassociates.com and by telephone at 603-430-5463.