Marvel

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Bankruptcy and Restructuring at
Marvel Entertainment Group
Chen Ziqiang
Wu Libin
Lin Yingshuai
Deng Linli
Lim Yihao
2011/11/29

1. Why did Marvel file for Chapter 11? Were the proble ms caused by bad luck, bad strategy, or bad execution?
We think that Marvel filed for Chapter 11 mainly due to its bad business strategy.
Three o f its six b usiness lines, Trading cards, Stickers and Comic Books started facing the decline in sales after year 1993. There were two main reasons for this decline: F irst, these businesses increasingly had to compete with a lternative forms of child entertainment (mainly video games). Second, the decline in sales was driven by disappointed collectors who had viewed comic books as a form of investment and stopped buying them as company stopped increasing the prices. We believe that the company should have foreseen these events while performing a market research and forming a long- term business and financial strategy.

The three unpromising business lines accounted to 61% of total revenues of a company in year 1995. At the same time, the company's financial strategy was based on highly optimistic business expectations and was not suitable for unfavorable turn of demand for entertainment products towards video games. Due to its high leverage (52%), the company was not able to serve all the debt in case of sharply declining revenues. It is obvious that the company did not anticipate the cha nge in customers' preferences and was wrong in prediction of market trends, focusing on cards, stickers and publishing business lines and leveraging itself. Moreover, in 1995 Marvin continued its leveraged expansion into entertainment cards b usiness - acquiring Skybox. This decision was extremely imprudent, as the company was already on the threshold of financial distress and should have sought for high growth opportunities to expand in order to boost its revenues instead of adding debt to buy business whic h produces non- demanded products.

Operating ratios Marvel Entertainment Group
1991
1992
1993
Sales
115.1
223.8
415.2
Cost of Sales
58.2
112.6
215.3
Cost of sales/ Sales
50.6%
50.3%
51.9%
SG&A
21.4
43.4
85.3
SG&A/Sales
18.6%
19.4%
20.5%
Net Income
16.1
32.6
56
Net Income/Sales
14.0%
14.6%
13.5%

1994
514.8
275.3
53.5%
119.7
23.3%
61.8
12.0%

1995
823.9
383.3
46.2%
231.3
27.9%
- 48.4
- 5.8%

1996
581.2
372.4
61.4%
168
28.9%
- 27.9
- 4.8%

As can be seen in the table above, Marvels operating ratios dropped dramatically. The cost of Sales/Sales rose from 51% in 1991 to 62% in 1996, together with the SG&A expenses/Sales rising from 19% to 29%. Additionally Marvels Net Income/Sales dropped from 14% to - 5%.

Leverage ratios Marvel Entertainment Group
1991
1992
1993
Total Debt
355,3
324,7
Shares outstanding
97,7
98,6
102,6
Share price
5
12
26
Market value of equity 488,5
1183,2 2667,6
Debt/ D+E
23,1% 10,9%
EBITDA
35,5
67,8
114,6
EBITDA/SALES
30,8% 30,3% 27,6%
Interest expenses
3,50
6,50
14,60
EBITDA/Interest
10,1
10,4
7,8

1994
585,7
103,7
16
1659,2
26,1%
119,8
23,3%
16,50
7,3

1995
934,8
101,3
12
1215,6
43,5%
214,7
25,9%
43,20
5,0

1996
977
101,8
4
407,2
70,6%
40,8
7,0%
42,70
1,0

Compare the management policy and the leverage ratios from that time together with its operating ratios, we believe Marvel made an extremely impudent move to acquire Skybox in 1995. While their operating margins where deteriorating and their leverage coverage ratio (EBITDA/Interest) where falling, they should have acquired a different policy.

For all above stated reasons, we believe that the company's financial problems were caused mainly by bad strategy and poor management.

2. Evaluate the proposed restructuring plan. Will it solve the proble ms 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...
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