Bankruptcy and Restructuring at Marvel

CASE STUDY : MARVEL

Bankruptcy and Restructuring at Marvel (HBS Case number: 9-298-059)

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

Marvel was in the incapacity of reimbursing his short term debt and liabilities due to a huge drop in the sales of its most important lines of business (Sport and Entertainement Cards, Children’s Activity Stickers and Publishing). The losses began to appear in the Publishing and Comic book segments in 1995 and continued in 1996 with losses in the 3 sectors mentionned above despite a first attend of restructuration. Those losses were mainly due to a bad strategy and bad execution from Ronal Perelman.

First, he chose to over-diversified and for that purpose he had to contract a large amount of debt and paid large premium in his various acquisitions in order to control companies to benefits from advantage such as tax reductions due to consolidation of holding companies. The amount of debt issued was far too big and increased highly the bankruptcy costs of Marvel. Plus, when Marve annonced that he could not reimburse its debts, Moody’s downgraded the compagny and cause the bond price to fall by more than 41%, which had been reinforced with the later massive selling of bonds from 2 huge creditors. At the end, the stock price fell by 41% and the bond price by more than 50%.

Furthermore, he may have had a wrong speculation about the Comics Book sector as he decided to focus on collectors and restricted his target by selling books at a higher price. He didn’t anticipated the fact that collectors prefer autothencity and wouldn’t like to see Comics Books as a form of investment. At the same time, children discovered video games, which were a perfect substitute for all the forms of entertainement that Marvel could proposed and the strikes in the sport segment wouldn’t help the trading card market. The effect results in a huge drop in sales (19% at first) and therefore in income.

At the end, it was concluded by Bear Stearns & Company that the company and its creditors were better off keeping its activity rather than liquidating as it would have ended in a situation where shareholders and creditors wouldn’t have been paid at all. But the integrity of Bear Stearns & Company had been interrogated as it had an incentive, a 1 million contingency fee, to say that the restructuration plan was the right solution.

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

The plan proposed in front of the bankrupty court is to buy 427 million of new shares for $365 million at a price of 0.85 dollar (current market price = 2$) per share, acquire the Toy Biz company with a 32% premium and exchanging debt for equity, this way bondholders would get 14.6% of the new shares (77.3 million$).

One of the reason Marvel had to fill for bankruptcy was the high premium paid during the previous acquisition. Thus, it might seem irrational and very risky to pay 32% in the Toy Biz acquisition. But Marvel have to act rapidly and a high premium would facilitate the chance of a successful acquisition and restructuration.

 The advantage of exchanging debt for equity is that Marvel wouldn’t have to pay back the debt in 1998, which in any case wouldn’t be possible regarding the current profits and losses of the company. This way the debtholders would have a small compensation, at least the loss would be smaller than if there were no exchange and then they would probably simply not be paid at all in 1998. That is why creditors have an incentive to accept the restructuration.