HBS CASE STUDY

Bankruptcy and Restructuring at Marvel Entertainment Group

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

        We believe that Marvel filed for Chapter 11 mainly because of its bad business strategy. As of year-end 1995, Marvel had 6 business lines: Sports and Entertainment Cards, Toys, Children's Activity Stickers, Publishing, Confectionery and Licensing of characters. Trading cards, Stickers and Comic Books started facing the decline in sales after year 1993. There were 2 main reasons for this decline: First, these businesses increasingly had to compete with alternative 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 pregnant with dangerous consequences, while performing a market research and forming a long-term business and financial strategy.

        As one can see from the diagram below, the three unpromising business lines (filled in red colors) 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 change in customers' preferences and was wrong in prediction of market trends, focusing on cards, stickers and publishing business lines and leveraging itself.

With this revenue structure, Marvel lost $48,5m in 1995 due to the losses in its comic book and publishing segments.  Despite these problems, in 1995 Marvin continued its leveraged expansion into entertainment cards business, acquiring a SkyBox (another maker of trading cards) for $150m. 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 which produces non-demanded products.

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As can be seen in the table above, Marvels operating ratios dropped dramatically. The cost of Sales/Sales (what can be seen as the costs of sold items) rose from 51% in 1991 to 64% in 1996, together with the SG&A expenses/Sales rising from 19% to 29%. Additionally Marvels Net Income/Sales (what can be seen as the Return on Sales) dropped from 14% to -5%.

Looking at management policy and comparing the leverage ratios from that time together with its operating ratios, it occurs to us that Marvel made an extremely impudent move to acquire Skybox for 150m ...

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