Business case. The Miraculous Resurrection of Marvel (Part 2)

    In the first part of the case I made a general description of the problem situation that Marvel faced in 1996 and told how it happened. In this, we will consider the bankruptcy procedure and options for overcoming the crisis.


    So bankruptcy - how it was

    In 1996, Marvel reported a massive loss of $ 464 million. On October 8, 1996, Marvel announced a violation of the terms of the loan due to a decrease in revenue. A third of the staff was fired. Then, on December 27, 1996, the publisher of Marvel Comics filed for bankruptcy under the terms of chapter 11 of the Bankruptcy Code. In accordance with this document, the company must pay all of its bills and maintain normal repayment schedules and loan terms with all its suppliers and licensees.

    Bankruptcy made it possible for all major stakeholders to evaluate all the possibilities of returning investment funds. In this part, we will identify and consider possible scenarios for overcoming the current situation for the three main stakeholders (in addition to them, there were others):
    1. Marvel is a group management company.
    2. Toy Biz is a large license holder, largely dependent on the fate of Marvel.
    3. Lenders are Marvel investors, including banks, bondholders and others.

    Based on the results of considering various scenarios, we will try to evaluate the best option from the point of view of each participant from a strategic point of view, and compare the options to assess who ultimately benefited from bankruptcy and who lost and if the competing needs of various parties were reasonably satisfied.

    Prospects for Marvel

    Bankruptcy immediately eases the cash shortage of the company, protects against creditors and some litigation. However, it negatively affects employees, customers and suppliers. Marvel needs a plan to regain stakeholder confidence. Sample options:
    1. Liquidation of non-core assets and loss of constituent parts.
    2. Sale of the entire company, including core assets.
    3. Consolidation with another company.
    4. Discussion of current financial conditions (debts).

    1. By the time of bankruptcy, Marvel consisted of five main divisions, performing the following functions:
    - Publishing and selling comics and other children's publications.
    - Consumer goods, display advertising, promotion and licensing of Marvel characters.
    - Marketing and marketing of collection cards and stickers.
    - Design, marketing and distribution of toys.
    - Production and distribution of adhesives and confectionery.

    Marvel may lose business, manufacturing capabilities and strategic values. Non-core assets not directly related to the development of the main Marvel asset (comic book characters) will be sold. Their sale will allow Marvel to straighten out the business of the main business (comics and licensing).

    Benefits and risks

    - focusing on the main business,
    - the possibility of licensing characters for other companies (i.e. outsourcing the business of current non-core units),
    - creating a compact organizational structure,
    - the ability to avoid future problems on non-core assets.

    - the lack of suitable buyers for non-core divisions,
    - the sale of divisions at lower than market prices,
    - the increased volatility of Marvel's total revenues as a more compact enterprise,
    - the sale of non-core assets will lead to a decrease in the comic book market as a whole.

    2. Marvel can be completely sold. The main business segments of the company, being on the decline in sales, would go under the hammer with a very steep discount to the potential market value of the company.

    Thus, it is likely that participants in the bankruptcy procedure are interested in finding alternatives, given the brand value and the history of the Marvel franchise.

    Benefits and risks

    - zero probability of any future losses for all shareholders (despite the fact that the chances of the company’s revival had very little potential)
    - the preservation of certain parts of the company, albeit through sale.

    - loss of status in the comic book industry,
    - loss of a unique asset, inexperienced customers will not be able to continue the development of the Marvel universe,
    - partial or total loss of funds by interested parties,
    - loss of the ability to restore the company,
    - overcoming resistance to dispossession.

    3. Marvel may be acquired by another company, a potential competitor, such as DC Comics, Time Warner or Disney. Such companies have experience. Another option would be a merger with a Marvel licensee. For example, with a toy company or a movie studio. The third target category could be some other companies wishing to use the Marvel legacy to strengthen their own business.

    Benefits and risks

    - financial resources and experience to preserve the Marvel universe,
    - huge benefits for acquisition by target companies,
    - rescue of Marvel characters,
    - acceptable financial reimbursement to interested parties.

    - the impossibility of identifying a “qualified” company for the merger,
    - the continued decline in the value of Marvel characters,
    - the loss of control over the company,
    - contradictions with the buyer, which can lead to financial instability, lack of interaction, clash of corporate cultures and more,
    - the merger can occur in the most uncomfortable moment, which in itself is capable of increasing the financial losses of interested parties.

    4. Marvel may also try to negotiate debt restructuring with current lenders to help avoid bankruptcy without significantly changing the structure of the company.

    Benefits and risks

    - restructuring without additional external assistance,
    - the ability to focus on the development of the company, rather than selling the business or merger procedures.

    - successful negotiations on new injections of funds with debt holders are unlikely, given the losses already suffered,
    - overcoming resistance to other options,
    - preventing the sale of debt bonds by current holders, provoking a further decrease in the value of the company.

    Discussion of Marvel Options

    After considering the advantages and risks of these four options, the most likely ones seem to be: abandonment of non-core assets (1) and merger with another company (3). Liquidation (2) and restructuring (4) are unlikely.

    The sale of non-core assets would allow to support its core business and implement a strategy for overcoming the current situation, which, perhaps, would receive the approval of all interested parties. By abandoning side businesses, Marvel could focus on what she can do best - create popular characters and storylines, which in turn could be licensed in other companies. However, the key issues in this scenario are: Marvel’s ability to correctly determine which parts are critical, selling non-core assets at a fair price, identifying potential buyers and growing publishing business in a declining market.

    The merger scenario was very viable. Depending on the company, a merger with Marvel would provide fresh resources for the development of the company. A merger with companies like DC Comics and Disney would allow Marvel to continue to grow under their leadership. Key factors regarding this option are identifying potential buyers, identifying relationships between companies, and validating a Marvel merger.

    Company liquidation was the most unlikely option due to Marvel's unique core asset. While the comic book market was in decline, some of the company's characters continued to enjoy enormous popularity. In addition, the liquidation of companies during bankruptcy brings the least return to all interested parties, due to the sale below market value.

    Debt restructuring was also hardly possible, given the declining popularity of Marvel's assets. Debt holders sought to reduce losses and most likely spoke in favor of the first or third option, as they provided Marvel with a chance to survive. Some would even prefer to completely eliminate Marvel than restructure debts.

    Prospects for Toy Biz

    The Marvel character set was vital to the Toy Biz business, and the success of the company depended on Marvel's ability to develop and support meaningful characters. Given the key importance of the Marvel universe, the bankruptcy of Marvel could lead to serious problems for Toy Biz, so we will consider the main options for the development of events from their point of view:
    1. Purchase rights to all Marvel characters.
    2. Full consolidation with Marvel.
    3. A new strategic direction of business development.

    1. Toy Biz could buy Marvel's core assets. Key factors determining the viability of this option include: determining the appropriate purchase price, assessing Marvel’s willingness to sell its core asset, and evaluating Toy Biz’s ability to maintain and increase brand value.

    Benefits and risks

    The benefits
    - the purchase of Marvel's main assets was relatively cheap, as bankruptcy was inevitable,
    - the Toy Biz’s dependence on third-party companies was reduced, Biz Toy Biz’s
    business expansion by opening the sale of character licenses to third parties,
    - full access to very popular characters,
    - cost reduction
    - control over the development and development of characters.

    - the impossibility of convincing Marvel to sell his main asset,
    - a possible overpayment for the characters,
    - a decrease in market demand.

    2. Toy Biz could merge with Marvel, given that Marvel already owns a large stake in the company. The merger of the two companies would provide both multiple benefits, including those listed in the previous version. Such an option would significantly reduce the financial difficulties of Marvel.

    Benefits and risks

    The benefits
    - buying Marvel as a potential bankrupt would cost a much lesser amount
    - expanding the Toy Biz business,
    - the ability to influence character development,
    - synergy of assets,
    - growth of both companies,
    - more stable income, due to business diversification.

    - the difficulty of convincing Marvel to unite,
    - the overpayment for Marvel,
    - the decline in market demand,
    - the inability to materialize the expected synergies,
    - the financial burden of Marvel is shifted to Toy Biz.

    3. According to this scenario, Toy Biz completely breaks off relations with Marvel and develops new lines of business based on new internal or external sources. A key factor regarding this option is the identification of new sources that correspond to the new strategic directions of the company.

    Benefits and risks

    - Toy Biz's dependence on Marvel is completely removed,
    - increasing the company's flexibility,
    - the possibility of developing more promising areas of business,
    - concentration of company resources on the development of new characters and toys.

    - the difficulty of identifying new sources of characters,
    - the difficulty of developing their own promising characters,
    - unsuccessful new sources,
    - the loss of the ability to get Marvel characters if the company survives.

    Discussion of options for Toy Biz

    Considering the risks and benefits, all three options were quite likely and feasible, nevertheless, dependence on the main Marvel asset, lack of experience in character development and limited ability to identify new assets or strategic directions. Based on the options considered, the second would be most preferable.

    Buying Marvel’s core assets was a very tempting undertaking, but Toy Biz’s ability to properly manage the asset was highly questionable, as the company had no experience in this area. The company would have to urgently develop a new niche for itself, and given how much time it took the same Marvel or DC Comics, this option seemed adventurous.

    The option of new strategic directions is also viable, but rather complicated, since it required significant investments and good planning.

    Prospects for investors and bondholders. Investing in a sinking ship.

    From the perspective of Marvel debt holders, they had two options that suit everyone:
    1. Continued support and investment.
    2. Sale or liquidation.

    Both options involve high risks. When choosing an option, it was necessary to solve the following questions:
    - Which option is better for bondholders?
    - Is the company really so bad?
    - Can Marvel develop and implement a restructuring plan?
    - What will be the result of the liquidation of the company?

    The key to understanding the choice of scenario is highly dependent on the nature of the shareholders' attitude to risk.

    1. Assuming that Marvel introduced a viable restructuring plan, debt holders could continue to hold existing stakes in the hope of Marvel recovering, which in turn would have a beneficial effect on the company.

    Benefits and risks

    The benefits
    are better relations with company employees,
    - greater future returns,
    - reduction of current losses from the sale of shares during bankruptcy,
    - refusal to liquidate Marvel assets (potential increase in the price of shares).

    - significant losses in case of unsuccessful attempts to resuscitate the company
    - the loss of the ability to minimize losses.

    2. Under this option, bondholders sell their assets. A very plausible option, given the current plight and the foggy future of Marvel, the more so many investors in such cases try to fix the losses and move on to more productive tools.

    Benefits and risks

    - minimization of further losses,
    - obtaining the residual value of assets.

    - the loss of the opportunity to make money on the revival of Marvel,
    - the liquidation of assets, makes a potential revival impossible.

    Discussion of options for debt holders

    Both options were equally viable, none of them prevailed over the other. Everyone had obvious advantages and disadvantages. The key factor in choosing an option, as already mentioned, is the risk profile of each specific debt holder.

    Holding and further investing in Marvel is the most preferred option for debt holders who are willing to take risks and consider the revival of Marvel a very likely event. Providing Marvel a second chance allowed investors the opportunity to compensate for investments, but in the same way deprived them of the opportunity to minimize losses.

    Eliminating current positions was a better option for those who were more cautious and considered the revival of Marvel not real. Such investors could liquidate portfolios of securities. However, under this option, holders lost the ability to compensate for investments when restoring the company's position.

    How it really was. Winners and losers

    Based on all of the above, there were two of the most likely scenarios. Marvel sells non-core businesses or merges with another company. An open question is who would merge with. Toy Biz had only one acceptable option - to merge with the company, since they were inextricably linked. Also, from the standpoint of holders of obligations, there were two options applicable depending on risk preferences.

    In fact, lenders were divided into two main camps: banks, somewhat protected, and holders of unsecured bonds, which financed Ron Perelman when he was CEO of Marvel. Bond owners teamed up with corporate raider Carl Aykan(Carl Icahn), who owned shares of $ 100 million from $ 70 million, actually invested funds, trying to get a controlling stake. Marvel's net valuation in accordance with the liquidation plan for the foreseeable future did not satisfy the desires of the two groups of creditors. As a result, they fought in the arbitration court. Meanwhile, Director General of Toy Biz Ike Perlmutter (Ike Perlmutter) made a deal with the banks to support the reorganization plan and combining Toy Biz and Marvel. After several rounds of legal battles, the arbitral tribunal ultimately ruled in favor of Perlmutter and the companies were allowed to merge into Marvel Enterprises.

    In the end, Marvel was able to overcome all the obstacles to merging with the company most closely associated with it, which in turn is also true for Toy Biz, whose survival without Marvel was in question. From the perspective of lender banks, the merger increased the chances of survival of both companies. Holders of unsecured bonds were losers, but by the same decision the arbitral tribunal ruled that they could recover the losses as a result of the lawsuit against Ron Perelman for corporate negligence and fraud. Here, the court was guided by the fact that bondholders understood the risk of buying bonds, and compensation should be carried out at the expense of the person who issued these securities. In the end, bondholders lost the lawsuit because it was determined that Ron Perelman did not violate any laws.

    The banks that won the most were those who received $ 232 million in cash, 13 million ordinary and 8 million preferred shares with an 8% fixed dividend, the right to an additional purchase of shares and a small compensation from Ron Perelman. You can also include Toy Biz among the winners, which was guarded from the inevitable capture by Karl Aikan and retained access to the Marvel universe. Owners of shares received $ 12 million warrants for the purchase of shares. Holders of debt bonds did not win anything. Karl Aikan received $ 3.5 million for legal costs and part of the preferred shares of Marvel Enterprises.

    In general, the bankruptcy court decision turned out to be the most fair and reasonable settlement that could be reached, since the majority of interested parties were less satisfied, the laws were not violated, and all participants in the drama shared the positive and negative moments of bankruptcy, which are the same for all procedures of this kind. kind of.

    The next part of the case will describe the solutions that allowed Marvel to rise to its feet and grow to a billionth sale. And it is also quite possible to describe a little the current position of the company and development prospects. See you.

    Business Case. The miraculous resurrection of Marvel (part 1) .
    Business case. The miraculous resurrection of Marvel (part 3) .
    PDF version .

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