Coleco Case

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STRATEGIC FINANCE

COLECO CASE
TOY STORY

Coleco INC. Profile
• • • • • • • Name – Coleco Industries Time – the end of 1980s Industry – toys Market - USA Market share – the fifth-largest manufacturer in the USA Head quarter - West HartFord, Connecticut Production line – Cabbage Patch Kids Plush Alf dolls and puppets Couch Potato Pals Play sets (The Flintstones,Sesame Street, Sylvanian Families)




Company`s issue - annual sales were behind expectations
negative equity position of $84 million The challenge - to determine whether the company’s capital could be restructured in a way that would satisfy its creditors without diluting the stock any further than was necessary

Product line

Economy and Industry Analysis 1988
• the economy - raising • unemployment and interest rates – low • demographic factors favorable • interest rate is decreasing • debt is becoming cheaper

Economy

Industry

• favorable conditions toy industry • approximately 800 toy companies in the United States • diversification for reducing sales and profit volatility - only for the biggest companies

Sales of Coleco and its Major Competitors
• In millions USD

1400 1200 1000 800 600 400 Coleco Hasbro Kenner Parker Mattel Tonka

200
0

Company Analysis
Sales growth
40,00%

30,00%
20,00% 10,00% 0,00% -10,00% -20,00% -30,00% -40,00%

1983

1984

1985

1986

1987

Company Analysis
Current ratio
3,00 2,50 2,00 1,50
Very fluctuating

1,00
0,50 0,00 1981 1982 1983 1984 1985 1986 1987

Company Analysis
Debt ratio
1,4 1,2
High dependence on debt

1
0,8 0,6 0,4 0,2 0 1981 1982 1983 1984 1985 1986 1987

Company Analysis
Net profit margin
0,15 0,1 0,05 0 -0,05 -0,1 -0,15 -0,2 -0,25 1981 1982 1983 1984 1985 1986 1987 Negative profits in last years

Company Analysis
Return on equity
20 15 10 5
Non meaningful figures (Equity is negative)

0
1981 -5 -10 1982 1983 1984 1985 1986 1987

Company Analysis
Return on assets
0,25 0,2 0,15 0,1 0,05 0 -0,05 -0,1 -0,15 -0,2 -0,25

High Volatility of ROA

1981

1982

1983

1984

1985

1986

1987

SWOT Analysis
strengths
1)Experience in past of recovery from company`s crisis 2) Current ratio is satisfactory

weaknesses
1) Sales reduction has resulted in losses that contributed to its negative equity position. 2)Negative or near zero sales growth in recent years. 3)Escalating dependency on debt. 4)Coleco’s capital position was uncertain. 5)Huge reduction in stock price.

1)The economy was entering its sixth year of overall strength. 2)Unemployment and interest rates at their lowest in years. 3)Demographic factors also were favorable; birth rates were increasing. 4)The toy industry had begun to consolidate. 5) Basic and technology-enhanced toys did well.

1)Of the approximately 800 toy companies in the United States, only the largest were able to minimize sales and profit volatility through diversification. 2)Each companies fortune rose and fell with the strength of its new products 3)Lack of exciting new toy introductions

opportunities

threats

ALTERNATIVES
1. “drifting” approach - hoping that products will do well 2. “merge” approach - hoping that there might be some value in the company’s assets

3. “equity” approach - to issue more shares at market price 4. “debts” approach - to restructure debts

5. “disengagement” approach – to go for liquidation

“Drifting” Approach
• • • Net income for Coleco is negative ($105.4mln in 1987) Net worth is also negative ($84.9mln in 1987). Huge amount of debt ($620mln in 1987)


• •

Equity deficit ($84,3mln in 1987)
No any new “blockbuster” products Low prospects for increasing the company’s sales based on its current product line



Low possibility to recover

inappropriate decision

“Merge” Approach
Coleco is not attractive in the sense of M&A deals: - big debts (total assets < total liabilities)

inappropriate decision

“Equity”...
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