Why Did Marvel File for Chapter 11? Were the Problems Caused by Bad Luck, Bad Strategy, or Bad Execution?

Marvel file

1. Why did Marvel file for Chapter 11? Were the problems caused by bad luck, bad strategy, or bad execution?

To begin with all the three factors had their play in the downfall of Marvel. We can say it was bad luck since there is no way Marvel could have anticipated that professional in baseball and hockey could have gone on strike. This strike together the competitions from other form of entertainment led to a decline in trading cards sales fell by 30% over the next two years. This would mean fall in profits and thus the stock price fell. However, we cannot blame luck on everything because after this fall Perelman would have concentrated on ways to revive the ailing Marvel he went ahead to continue buying just another trading cards company Skybox International thus adding a further $190 million debt to the already heavily debted Marvel. This brings us to the next factor bad strategy.

The factors that led marvel to file for chapter 11 first of all were bad strategy. In his strategy the holding companies were used for providing legal and financial protection. The limited liability of the holdings at subsidiary level ensured the holdings were protected from financial liability incase of default. From a financial perspective the holding shared net operating losses across the firms as they owned 80% of the subsidiaries thus fulfilling the Internal Revenue Service requirements .this was a smart move as it prevented the firms from paying much tax. The acquisition of other entrainment firms to build a youth entertainment company was bad strategy. First if all his acquisition of Fleer at 12% above premium was too pricey. Though it would give Topps Company a competitor a run for its money he did not consider profitability in the long run especially with other forms of entertainment coming up. His idea of changing the distribution strategy though it yielded profits at the beginning would be what made collectors has low returns and thus it was a bad mistake..

Perlman early financial moves at Marvel were very successful. However, the subsequent strategies I believe are what led to marvel to collapse. The first mistake was increasing the growth of comic books profits at the expense of the faithful buyers at he increased the prices. This made the comic books unattractive to the impoverished kids who viewed it as a form of entertainment and thus they diverted to video games. Also the increase of titles from 45- 140 decreased the quality of the product and remember the prices had doubled. The speculated collectors realized that the laws of demand and supply and that the comics books lacked quality and were not scarce. Therefore, the idea to put fancy covers and increase the prices backfired on Perlman face when the readers realize that they lacked content. Thirdly instead of Perelman trying to identify the cause of the sales decline, he blamed the distributors and the actions he took hurt both the distributors and the retailers. By introduced the strategy that would ensure that comic books were not returned they provided a loop hole of over production. Failure to return the unsold comics meant that the publisher could not known which ones were sold and which ones were in stores thus they went ahead to produce more. Therefore, Perelman blaming the distributors was like biting the hand which fed marvel and would have instead blamed the overprice book, overproduction and low quality.

The acquisition of more trading cards company was ill timed since instead of adding value to Marvel it eroded the balance sheet by putting Marvel further into debt. Below is to show how the debt increased the pre-bankruptcy.

Marvel Debt Analysis – Pre-Bankruptcy

1992 1993 1994 1995

Debt 236.3 250.2 384.3 586.5

Equity 84.7 147.3 243.0 207.8

Interest/Net Income

Debt/Equity 2.79 1.70 1.58 2.82

Debt/Total Capital 74% 63% 61% 74%

2. Evaluate the proposed restructuring plan. Will it solve the problems that caused Marvel to file Chapter 11? As Carl Icahn, the largest unsecured debt holder, would you vote for the proposed restructuring plan? Why or why not?

The sales and profits had had come to a screeching halt and the company was drowning in debt. Perelman therefore, came up with a restructuring plan that would get Marvel out of debt. His plan was however, not approved by Carl Icahn a major bond holder. He proposed a different plan which consisted of a cash infusion of $350 trough a letter to Andrews Group he threatened to go to court if Perelman went ahead with his restructuring plan. Carl Icahn refusals to barge forced the Marvel to file for chapter 11 where Perelman the debtor would still be in control as he waited the court jurisdiction. By filing chapter 11 Perlman was gambling for luck to be on his side because if the court agreed marvel is insolvent the absolute priority rule will eliminate the bold holders thus his original plan succeeds.

Due to purchases over the past several years the Marvel had experienced bad business execution. Perelman was more concerned with acquisition that he forgot to improve quality. By this time the company had six business lines; sport and entertainment cards, toys, children’s activity stickers, publishing, confectionary and licensing of characters. The trading cards, stickers and comic books started facing a sales decline. The reason for this decline was due to competition from other forms of entertainment like video games and also due to the increase in prices the collectors were no t getting value for their investment. Over confidence of Perelman about the future made him issue three main bonds when the stock of marvel was quite high and when profit was significant and still increasing. Perelman in his quest to increase ownership of marvel to 80% he issued to acquire 20 million shares which is the low bond of IRS.

Perelman’s plan to restructure was divided into three parts. The first proposed plan would seem very selfish as Perelman wanted to ensure he got 80% ownership through his 100% fully owned Andrews group. By investing $350 million in marvel the Andrew group would get 410 million new Marvel shares and this way 80% control went its way. This would mean the new shares would be valued at $0.25 as compared to $4.625 price the day before the announcement and $2.75 after the announcement.

The second plan involved acquisition of Toy Biz. Marvel already owned 26.7% of toy biz and additional cash investment would be used to buy the outstanding shares which were at 32% premiums. The plan to acquire toy biz looked like a good idea since it provided large revenue to Marvel as it generated approximately $60 million cash flow per year. This cash could therefore, be used to service to some of marvel debt and it would also offset more than $100 million of net operating losses. (80% was important for Andrew to use nols)