Analysts call HP-Kodak merger talk unlikely

September 6, 2005

NEW YORK (Reuters) – Chatter about the possible acquisition of Eastman Kodak Co.(EK.N: Quote, Profile, Research) by Hewlett-Packard Co.(HPQ.N: Quote, Profile, Research) persists, even though analysts on Friday said such a deal would be expensive, ill-timed and unlikely.

A Kodak spokesman said the company does not comment on rumors or speculation. An HP spokeswoman was not immediately available for comment on Friday afternoon.

Shares of Kodak rose more than 3 percent on Friday to a one-month high, fueled by talk among traders that Kodak, the troubled photography icon, may be a takeover target, with leading inkjet printer maker H-P seen as the most likely suitor.

The chatter, which has popped up sporadically over the past few months, has piqued interest in options markets, where Kodak call options have been active this week. Option investors who expect more gains in a stock often buy calls, which give the right to buy the stock at a predetermined price within a specified time period.

While analysts suggest that anything can happen, many dismiss the notion of a marriage between HP and Kodak, who both make digital cameras, support online photofinishing sites, develop printing systems and have very popular retail brands.

They cite myriad reasons, many pertaining to the dramatic changes underway at Kodak, which is cutting up to 25,000 jobs and slashing manufacturing from its Rochester, New York, home to mainland China, as it shifts toward digital businesses like commercial printing and away from the flagging traditional film market.

Kodak, which in July posted its third quarterly net loss in a row, simply has too many changes in process and too few profitable segments to attract H-P, which is experiencing its own shift under new Chief Executive Mark Hurd, they said.

“While we cannot be certain, we continue to believe it is highly unlikely that HP would acquire Kodak, especially given HP’s current focus on fixing its own business,” said Cross Research analyst Shannon Cross in a client note. “The areas that Kodak gains profits from — film, X-ray film, entertainment film, laser imagers — are in secular decline.”

In a recent client note, Deutsche Bank analyst Chris Whitmore suggested that perhaps an HP-Kodak combination would would help slow Dell Inc.’s (DELL.O: Quote, Profile, Research) rapid gains in the inkjet printing market. However, it would come at a huge price: he concluded that HP would have to pay over $14 billion, including some $5 billion in debt, for Kodak.

For Hurd, perhaps the most compelling hindrance to such a deal is the ghost of Compaq Computer Corp., the last huge, unpopular acquisition made by H-P, which some say eventually cost then-CEO Carly Fiorina her job.

Fiorina left HP, which she led between 1999 and 2005, in February after disagreeing with the board over how to run the company and failing to produce promised results.

“Given the past CEO’s attempt to have HP acquire itself out of its troubles, we believe Hurd would be reluctant to attempt such a large deal before outlining his own plan for HP,” he said.

Kodak shares were up 65 cents, or about 2.5 percent, to $26.22 in late dealings on the New York Stock Exchange after trading as high as $26.85. HP shares were down 22 cents to $27.68.

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