Case: Marvel Entertainment Group
1 Marvel’s bankruptcy
In December 1996, Marvel Entertainment Group and the three holding companies entered bankruptcy. Why did they file for it and why were the problems caused; bad luck, bad strategy or bad execution? And did Perelman’s pre 1997 decisions contributed to Marvel’s downfall?
In our opinion, the bankruptcy of Marvel was caused by a variation of problems. These problems can be divided into issues in the overall industry (bad luck) and the negligence of Perelman himself (bad strategy).
In general, the whole comic book industry shrunk, because of the rise of other forms of entertainment, such as video and computer games. The trading card market turned bad as well, because of strikes in the baseball and hockey leagues. These events could not have been foreseen, although the rise of the electronic entertainment could have been anticipated. The key was to swiftly adjust to these turn of events and that is where the business strategy comes in.
Some of Perelman’s pre decisions contributed to the downfall of Marvel as well.
First of all, Perelman failed to recognize the competition of other forms of entertainment and despite all the problems, Perelman continued to build up the entertainment company. Perelman ignored the market shifts and the boom of new technologies. Perelman focused on “old-fashioned” hobbies like trading cards or action figures of Marvel heroes. The aspect of a well diversified company does not hold under a certain perspective: If Perelman adjusts other business lines to Marvel products it is not surprising that the major business lines of the whole company go down in bad times. Moreover, Perelman decided to distribute exclusively to specialty stores, because these sales are final, which generated higher margins.
Additionally, Perelman destroyed the collector’s passion and the potential collector’s value by heavily increasing the number of monthly titles from 45 to around 140 and doubling the price per book. Comic books were not only favored by children, but also by adults. Over the years, collecting comic books became a hobby, also due to collectors seeing the comics as a kind of investment opportunity. As a result, many fascinated collectors stopped buying Marvel comics. This resulted in a decline in sales, driven by disappointed collectors (for them it was a form of investment).
Despite all the problems, Perelman continued building the entertainment company. It seems that Perelman did run into the comic book business before he focused on the core competency of Marvel itself. Perelman started to acquire lots of firms that fit into an entertainment company and that indeed can benefit from each other, e.g., through sale synergies. However, the above mentioned restructuring changes disappointed Marvel’s readers and, on top of that, Perelman did not realize important market trends. Instead, he issued huge amounts of debt that are, on the one hand, a financial burden for the company and, on the other hand, the acquisitions did not strengthen the company. In contrast, most of the newly acquired lines ran bad as well. Perelman ignored or did not notice the problems of Marvel; otherwise he might not have continued to build up the firm with costly investments, which made the situation even more complex.
2 The restructuring plan
On January 28, 1997, Marvel filed its plan of reorganization with the United States Bankruptcy Court. According to the plan, Ronald Perelman, Marvel’s largest shareholder, would recapitalize the company by investing $365 million in exchange for 427 million newly issued shares. Perelman would then own 80% of the reorganized company’s equity while public debtholders would receive 15% of the equity in exchange for debt with a face value of $894 million. Will it solve the problems? Would...