Why Did Marvel File for Chapter 11? Were the Problems Caused by Bad Luck, Bad Strategy or Bad Execution?

Q1

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

Marvel had to file for bankruptcy (under whatever article) simply because it couldn't meet short-term obligations anymore. We think that mainly bad strategy caused this, combined with a little bad luck and bad execution (time and financing wise) of a takeover.

After 1994, collectors of comic books stopped buying because they couldn't realize the returns they were used to make on the comic strips (partly - we think - due to the fact that the number of issues more than tripled and the price per issue doubled; simple demand/supply analysis would suggest that this wouldn't do any collectors' item's price any good), and sales fell 19%. Jim Shooter's comment that 'Marvel had been strip-mining the company for years' is a sound not seldom heard in the financial industry. Marvel experienced bad luck in its trading card market due to unforeseen strikes in baseball and hockey. This caused 'little boys' to increasingly enter in alternative forms of entertainment, such as video games (which was - especially in the mid 90's - an upcoming market anyway). In two years' time, trading card sales fell by more than 30%.

The above led Marvel's stock price to fall 33%.Despite the turmoil, Marvel acquired Skybox for approximately $ 190 million ($ 150 million plus a 25% premium) taking on additional debt of $ 190 million. This taking on of additional debt combined with falling revenues didn't go unseen: In July 1995, S&P downgraded the holding company debt from B to B- and predicted that Marvel might need to restructure its debt in the nearby future.

Marvel continued to report losses ($ 48.5 million in 1995, $ 27.9 million in Q1-3 of 1996). In October 1996, Marvel had to announce that it would violate specific bank loan covenants due to decreasing revenue and profits. Moody's downgraded Marvel's public debt causing the price of the zero-coupon bonds to take a nose dive. A month later, two of the largest institutional holders of Marvel's public debt sold more than $ 70 million of Marvel bonds for 37% of its face value. Hereafter, Marvel's stock price and its zero-coupon bonds took another nosedive.

In a situation like this, there is not much else a company can do than filing for bankruptcy (absent investors willing to invest, or creditors willing to lend money). Marvel filed for Chapter 11 because it met the requirement of the 'best interest test', meaning that the company was deemed to be worth more 'going concern' than it would be under a Chapter 7 liquidation sale, in which most debt holders would have ended empty handed.

Concluding, it can be said that Marvel was forced into bankruptcy due to