Read the Case Study below and answer the following questions:

1.) What is the SWOT analysis of Marvel on the case study

2.) What is their competitive advantage?

3.) Give(3) recommendations on how Marvel can avoid bankruptcy.

The Rise and Fall of Marvel Entertainment Group In addition to being known as a shrewd financier, Perelman had a reputation for buying and reviving underperforming companies. After buying Marvel, he quickly eliminated unprofitable lines of business and strearulined operations. In its first year under Perelman's control, Marvel's net income increased from $2.4 million to $5.4 million, while revenues increased from $68.8 million to $81.8 million. Eighteen months later, he sold 4.2 million shares to the public at a price of $16.50 per share-a split adjusted price of $2.06. He used the proceeds to repay $26.5 million of acquisition debt and to pay a cash dividend of $37.2 million to his holding company. The dividend alone almost quadrupled his initial equity investment in the span of less than two years; the return, counting his remaining; 65% ownership position, was almost 16 times his original investment Commenting on what appeared to be the darling of Wall Street, Donald Drapkin, vice chairman of MacAndrews & Forbes, said, "We've never disappointed investors in a public offering." Perelman set out to build a diversified youth entertainment company using the comic book business as a foundation. He accomplished the diversification by acquiring other entertainment companies. First, he acquired Fleer, the second largest manufacturer -after Topps Company-of sports and entertainment trading cards, in July 1992 for $286 million, a 12% premium over the current market price. In March 1993, Perelman acquired a minority position in Toy Biz, a designer and retailer of children's toys, in exchange for an exclusive, perpetual, royalty-free license to use all of Marvel's characters. Then, in July 1994 he acquired the Panini Group, an Italian producer of sports and entertainment stickers, for $150 million. While he was actively diversifying outside of Marvel's core comic tack business, Perelman was also attempting to consolidate the comic book industry. In the early 1990s, Marvel was the leading publisher of comic books, followed closely by DC Comics and Archie Comics. During 1994, Marvel acquired four other comic book publishers including Harvey Comics and Malibu Comics Marvel also changed its distribution strategy to concentrale on comic book specialty stores rather than subscriptions or the traditional mainstream retailers such as newsstands and convenience stores. Because sales to specialty stores were final (i.e., they could not return unsold comic books), they yielded higher margins. As this strategy began to succeed, Marvel's stock price began to rise, peaking in November 1993 at $34.25 per share for a total market value of $3 3 billion (see Exhibit 2). Given the strength of Marvel's stock price, Perelman saw an opportunity to increase his ownership of Marvel Entertainment Group above the 80% level that would allow him lo incurporate Marvel into the MacAndrews & Forbes holding company for tax purposes. Through a tender offer and open market repurchases, the Andrews Group acquired core than 20 milion shares, thereby boosting its consolidated ownership to 80.6% To finance the repurchase: Perelman issued debt through three different Andrews Group holding companies (see Exhibits 1 and 2). First, Marvel Holdings issued $517.4 million of zero-coupon senior secured notes yielding 11.25%. The cash proceeds from this offering were $286.6 million and the debt was secured by 48.0 million Marvel shares. Marvel Parent Holdings then issued $251.7 million of zero-coupon senior secured notes yielding 11.875%. This offering produced $144.9 million in cash and was secured by 20.0 million Marvel shares. Finally, Marvel III Holdings issued $125 million in senior secured notes yielding 9.125%. The interest payments on these bonds would be made from revenues received through tax sharing agreements between Marvel and Marvel III Holdings. Like the other two iseues, this debt was secured by Marvel sharesin this case, 9.3 million shares. All three issues were scheduled to mature in April 1998 i'erelman used this financial strategy of equity-backed debt throughout MacAndrews & Forbes. In fact, he issued $1.7 billion of share-collateralized bonds in 1993 alone for Marvel, Revlon, and Coleman." This debt was like margin loans in that it was secured by Marvel's equity rather than its essets or operating cash flows. Nevertheless, with the stock price trading above $25.00 per share, the 77.3 million shares of collateral had a value of more than $1.9 billion, well above the face value of $894.1 million Shortly after the third issuance, however, Marvel's core businesses began to falter. Marvel's CEO Scott Sassa summed it up this way: "When the business turned, it was like everything that could go wrong did go wrong." The decline in sales was driven largely by disappointed collectors who had viewed comic books as a form of investment. For years, Marvel had capitalized or the speculative frenzy of collectors by increasing the number of monthly titles from 45 to some 140 and doubling prices from $1.50 to $3.00 per comic book. But collectors stopped buying in 1994 after failing to realize significant returns, causing sales to fall 19% across all distribution charinels. The company had pandered "... to the speculative excesses of collectors, turning out pricey comics with fancy covers while neglecting their core readers," said Harry DeMott, a Cs First Boston analyst covering Marvel.10 Jim Shooter, Marvel's former Editor-in-Chief and a current competitor, was more critical. He said that Marvel had been strip-mining the company" for years.11 Just as the comic book market began to turn south, so too did the irading card market due to strikes in both professional baseball and hockey. In addition to collector apathy stemming from the strikes, trading cards increasingly had to compete with other forms of entertainment. Jill Krutick, a Smith Barney analyst covering Marvel who had recently slashed her earnings estimates, remarked that "... little boys have found alternative means of entertainment, such as video games. "12 Finally, as in the comic book market, speculators who were active purchasers in the early 1990s stopped buying after failing to realize significant returns. In total, trading card sales would fall by more than 30% over the next two years. Because of declining revenues and missed profit estimates, Marvel's stock price began to fall. After Marvel reported a 33% drop in first quarter net income for 1995, "Short on Value," an investment newsletter, recommended it as an attractive stock to sell short. 13 Despite the problems, Perelman continued building his entertainment company. In March 1995, Marvel acquired SkyBox International Inc., a maker of trading cards, for $150 million. The SkyBox acquisition provided an opportunity to buy an undervalued asset, to expand Marvel's presence in the trading card business, and to realize operational synergies with Fleer. Marvel paid a 25% premium to acquire SkyBox and financed the acquisition with $190 million of additional debt. Four months later, in July 1995, S&P downgraded the holding company debt from B to B-, noting that "... Marvel's earnings from baseball and hockey cards have fallen while the company has added debt to make acquisitions."14 Moreover, they predicied that Marvel might need to restructure its debt in the next 12-18 months. Following the SkyBox acquisition, Marvel had, indeed, become a diversified entertainment company. As of year end 1995, it had six principle lines of business, four of which were approximately equal in size: 1. Sports and Entertainment Cards (22.4% or revenues): sold picture cards depicing professional athletes and other entertainment figures through its Fleer and SkyBox subsidiaries; 2. Toys (21.7% of revenues): designed, manufactured, and distribuced children's toys based on Marvel characters through its Toy Biz subsidiary; 3. Children's Activity Stickers (20.7%): sold sports and entertainment stickers worldwide through its Panini subsidiary; 4. Publishing (17.8%): published comic books; 5. Confectionery (10.9%): manufactured confectionery products-primarily gum; 6. Consumer Products and Licensing (6.4%): licensed characters for merchandise. Although diversification was, in theory, supposed to protect against downturns, Marvel lost $48.5 million in 1995, mainly due to the losses in its comic book and publishing segments. To address its declining profitability, Marvel announced a restructuring plan in early 1996 consisting of layoffs, elimination of unprofitable comic book titles, improved editorial content, and consolidation of operations.15 Even with the restructuring, Marvel reported a loss of $27.9 million through the first three quarters of 1996. Exhibits 4 and 5 show Marvel's balance sheet and income statements. Moreover, it reported losses in three of its four largest divisions: comic books, trading cards, and entertainment stickers. During the summer, Perelman bought an additional one million shares at $10.00 per share. 16 On October 8, 1996, Marvel announced that it would violate specific bank loan covenants due to decreasing revenue and profits. Following the announcement, Moody's downgraded Marvel's public debt, causing the price of the zero-coupon bonds to fall by more than 41% (see Exhibit 3). 17 One month later, on Thursday, November 8, 1996, Howard Gittis, vice chairman of Andrews Group, called Fidelity Investments and Putnam Investments, two of the largest institutional holders of Marvel's public debt, and asked them what they would like to see in a restructuring plan. The next day, the two firms sold more than $70 million of Marvel bonds at a price of $0.37 per dollar of face value. When a spokesman for the Andrews Group announced the details of the proposed restructuring plan four days later, Marvel's stock price fell by 41% and its zero-coupon bonds fell by more than 50%, to $0.18. Reporters later asked representatives of both companies why the sold the bonds when they did. A spokeswoman at Putnam responded, "(We) received various bids ... that were attractive," while a spokeswoman at Fidelity responded, "We'd been selling since early October." is the sales saved the companies approximately $14 million in extra losses. Perelman's restructuring plan contained three parts. First, the Andrews Group would invest $350 million in Marvel in exchange for 410 million new Marvel shares to ensure it maintained 80% control. Thus, the new shares would be valued at $0.85, compared to a price of $4.625 for the existing shares the day before the announcement; the existing shares closed at $2.75 on the day of the announcement. Second, Marvel would acquire Toy Biz, a company that made toys based on Marvel characters. Marvel already owned 26.7% of Toy Biz and would use the cash investment to buy the remaining outstanding shares at a 32% premium and some of the insiders' shares at market prices. There were two reasons to acquire Toy Biz: it had close business connections to Marvel and provided a large fraction of Marvel's revenue, and it generated approximately $60 million of cash flow per year which could be used to service Marvel's debt as well as offset more than $100 million of net operating losses (NOLs). Without 80% ownership of Marvel, Andrews Group could not use the NOLS. Finally, the public debtholders would exchange debt with a face value of $894.1 million for equity in the newly recapitalized firm. Specifically, they would seize their collateral shares and hold 14.6% (77.3 million shares) of the new shares (see Exhibit 6). In contrast, Marvel Entertainment Group would repay its secured creditors (consisting primarily of banks) and its unsecured creditors (consisting primarily of suppliers and employees) in full. Ever since Perelman proposed the restructuring plan, so-called "vulture investors", including Carl Icahn, had been buying the public debt. Icahn, who made his name in the 1980s with takeovers of Trans World Airlines, Interco, Southlandi. USX, Texaco, and several other companies, bought approximately 25% of the bonds at prices ranging from 20 to 22 cents per dollar of face value.19 One analyst described Icahn this way: "His trend is to look for companies that are having trouble that he can turn around. He's been very successful. To an extent, it's the money, but it's the game more than anything ... Carl's always liked to rattle (management's) cages ... I think he gets a charge out of that....20 On December 10, 1996, Carl Icahn sent a letter to the Andrews Group proposing an alternative restructuring plan consisting of a $350 million cash infusion through a rights offering. His plan, however, did not include the Toy Biz acquisition. In the letter, Icahn indicated that he would not support Perelman's proposed restructuring plan and vowed to fight him in bankruptcy court. Publicly, Icahn said, "It is patently clear that Ron Perelman has adopted this course to realize a windfall prost for himself at the expense of those to whom he owes a fiduciary responsibility."21 In response, Perelman representatives warned that Marvel would be forced to file for bankruptcy unless the bondholders agreed to the plan in its current form. When it became clear that the bondholders were not going to give in, Marvel and its three primary holding companies filed for bankruptcy on December 27, 1996. Scott Sassa, Marvel's CEO, said, "We would have preferred to re- capitalize Marvel without having to seek the aid of the court, but the actions and positions taken by the hondholders prevented that approach."22 Marvel in Bankruptcy Although Marvel and its holding companies filed separate bankruptcy petitions, the interlocking nature of the cases made it possible that the bankruptcy court might consolidaie them into a single process. Whereas Perelman wanted to keep the cases separate so the public debtholders would not have a say in restructuring Marvel Entertainment Group (the operating company), Icahn and the public debtholders wanted to consolidate the cases so they could play an active role in restructuring it. In fact, the bankruptcy trustee appointed Icahn as the chairman of the creditur committee in early January, a signal the public debtholders would be involved with the restructuring By filing for bankruptcy, Marvel became eligible for Debtor-In-Possession (DIP) financing Perelman arranged for $100 million in DIP financing from Chase Mar:hattan Bank to "ensure Marvel had sufficient liquidity to pay all current and expected trade and employee obligations and to meet all of its operating and investment needs during the reorganization process."23 What was unique about this loan was the fact that it was contingent upon Perelman remaining in control and would immediately come due in the event of a change in control.24 According to standard bankruptcy procedure, Marvel's management had an exclusive 120-day period in which to propose a reorganization plan. The bondholders immediately challenged this provision claiming that Perelman had "a negligible economic interest in Marvel" because he had pledged the shares to the bondholders as collateral . Given their ownership of the collateral shares, the bondholders argued that they, not Perelman, should have the right to propose the first reorganization plan. The bankruptcy court, hoxrerer, enforced the automatic stay by rejecting the bondholders' motion. One month after filing for bankruptcy, Marvel announced its preliminary financial results for 1996. It expected to report a loss of approximately $425 million for the year largely due to a write-off of goodwill associated with its trading card business. The non-cash charge of $370 would reduce stockholders' equity to negative $245 million. Marvel's Amended Reorganization Plan To assist with the reorganization plan, Perelman hired Bear Stearns & Company. After a month of financial analysis and legal work, Marvel filed an amended reorganization plan with the bankruptcy court on January 28, 1997. Much to the bondholders' chagrin, it was virtually identical to the first plan albeit with some minor changes. Rather than investing $350 million to buy 410 million new shares, Perelman was now proposing to invest $365 million to buy 427 million new shares the average price would still be $0.85 per share compared to a current market price of $2.00 per share. A.ccording to bear Stearns, "the current market price of Marvel's common stock (did) not reflect the reorganization value of Marvel."26 CS First Boston provided a fairness opinion to Marvel's buard in support of the Andrews Group investment.27 As part of its review, Bear Stearns conducted three sets of analysis. First, as required under Chapter 11, it prepared a liquidation analysis to show that Marvel was worth more as a going concern than it would be under a Chapter 7 liquidation (the best interests test," see Exhibit 7). According to the liquidation scenario, Marvel debtholders (primarily barks) would recover approximately 70 cents on the dollar while the holding company debtholders and equityholders would get nothing. Second, Bear Stearns prepared an analysis of Marvel as a going concern without the Toy Biz acquisition. Bear, Stearns estimated that the total enterprise value was between $520 and $660 million. Given Marvel's projected net indebtedness of $725 million as of March 31, 1997, the equity would again be worthless. Finally, Bear Stearns prepared financial projections for the company as a going concern assuming Marvel acquired Toy Biz (Exhibits 8, 9, and 10 contain financial projections and other related information). Perelman's vision was "to transform the company inte an integrated entertainment and sports content company prominent in all forms of media, print, electronic publishing, toys and games. "28 In the future, Marvel would operate theme restaurants, own a movie studio, and produce entertainment software and on-line applications. The projections assumed "modest" growth for Marvel and significant" growth for Toy Biz due to new media exposure. In addition, the projections assumed that Marvel would exist as a stand-alone eniity filing its own federal and state income tax returns, and that the deal would close on March 31, 1997. Under this scenario, Marvel's secured and unsecured creditors would be paid in full. Based on this analysis, Bear Steams concluded that Marvel was worth more as a going concern because of (i) increased administrative costs associated with Chapter 7 liquidation, (ii) lower asset values in liquidation because of a forced sale" (1) lower asset values for key parts of business due to exit of key employees and loss of customers, and (iv) the amount of claims which would need to be satisfied on an absolute priority basis in a liquidation. Besides showing that the reorganization yielded equal or greater value to all classes of claimants, the Andrews Group had to show that the plan was feasible (the "feasibility test). In other words, that it was not likely to be followed by liquidation or another reurganization. Convincing the court that a company with a debt-to-total capital ratio of 88% ($805.4 million in total debt and $107.4 million in equity) might not be easy even though the company would initially have considerable cash balances. The Vote on March The vole com March 7 would pit Carl Icahn against Ronald Perelman. Because Perelman had filed for bankruptcy, he no longer needed the unanimous support debtholders that was required for out- of-court settlement. He did, however, need a majority (51% by number and two-thirds by dollar amount) of the claimants in each creditor class to vote for the plan. Even if he were unable to secure these votes, there was still a chance that the bankruptcy judge would approve the plan. Judge Balick could approve such a plan provided it did not discriminate unfairly against non-accepting creditor classes and provided it was fair and equitable to all classes. As the days went by, tempers began to rise on both sides. A lawyer representing the bondholders challenged Bear Stearns conclusions. "How objective is a valuation if investimeni bankers have a financial interest in the outcome (a reference to the $1 million contingency fee Bear Stearns would receive if Perelman's plan succeeded) 2-30 What bothered people the most was Perelman's valuation. One analyst commented, "People thought he'd buy in at a discount, but no one expected it would be this dramatic.w31 To which Howard Gittis, the Vice Chairman of Andrews Group responded, "Bondholders ought to be thankful that Ron is willing to put up $565 million in cash to save this company. "32 With a little more than a month to go before the confirmation bearing, it was unclear whether enough creditors would vote for Perelman's plan. The Rise and Fall of Marvel Entertainment Group In addition to being known as a shrewd financier, Perelman had a reputation for buying and reviving underperforming companies. After buying Marvel, he quickly eliminated unprofitable lines of business and strearulined operations. In its first year under Perelman's control, Marvel's net income increased from $2.4 million to $5.4 million, while revenues increased from $68.8 million to $81.8 million. Eighteen months later, he sold 4.2 million shares to the public at a price of $16.50 per share-a split adjusted price of $2.06. He used the proceeds to repay $26.5 million of acquisition debt and to pay a cash dividend of $37.2 million to his holding company. The dividend alone almost quadrupled his initial equity investment in the span of less than two years; the return, counting his remaining; 65% ownership position, was almost 16 times his original investment Commenting on what appeared to be the darling of Wall Street, Donald Drapkin, vice chairman of MacAndrews & Forbes, said, "We've never disappointed investors in a public offering." Perelman set out to build a diversified youth entertainment company using the comic book business as a foundation. He accomplished the diversification by acquiring other entertainment companies. First, he acquired Fleer, the second largest manufacturer -after Topps Company-of sports and entertainment trading cards, in July 1992 for $286 million, a 12% premium over the current market price. In March 1993, Perelman acquired a minority position in Toy Biz, a designer and retailer of children's toys, in exchange for an exclusive, perpetual, royalty-free license to use all of Marvel's characters. Then, in July 1994 he acquired the Panini Group, an Italian producer of sports and entertainment stickers, for $150 million. While he was actively diversifying outside of Marvel's core comic tack business, Perelman was also attempting to consolidate the comic book industry. In the early 1990s, Marvel was the leading publisher of comic books, followed closely by DC Comics and Archie Comics. During 1994, Marvel acquired four other comic book publishers including Harvey Comics and Malibu Comics Marvel also changed its distribution strategy to concentrale on comic book specialty stores rather than subscriptions or the traditional mainstream retailers such as newsstands and convenience stores. Because sales to specialty stores were final (i.e., they could not return unsold comic books), they yielded higher margins. As this strategy began to succeed, Marvel's stock price began to rise, peaking in November 1993 at $34.25 per share for a total market value of $3 3 billion (see Exhibit 2). Given the strength of Marvel's stock price, Perelman saw an opportunity to increase his ownership of Marvel Entertainment Group above the 80% level that would allow him lo incurporate Marvel into the MacAndrews & Forbes holding company for tax purposes. Through a tender offer and open market repurchases, the Andrews Group acquired core than 20 milion shares, thereby boosting its consolidated ownership to 80.6% To finance the repurchase: Perelman issued debt through three different Andrews Group holding companies (see Exhibits 1 and 2). First, Marvel Holdings issued $517.4 million of zero-coupon senior secured notes yielding 11.25%. The cash proceeds from this offering were $286.6 million and the debt was secured by 48.0 million Marvel shares. Marvel Parent Holdings then issued $251.7 million of zero-coupon senior secured notes yielding 11.875%. This offering produced $144.9 million in cash and was secured by 20.0 million Marvel shares. Finally, Marvel III Holdings issued $125 million in senior secured notes yielding 9.125%. The interest payments on these bonds would be made from revenues received through tax sharing agreements between Marvel and Marvel III Holdings. Like the other two iseues, this debt was secured by Marvel sharesin this case, 9.3 million shares. All three issues were scheduled to mature in April 1998 i'erelman used this financial strategy of equity-backed debt throughout MacAndrews & Forbes. In fact, he issued $1.7 billion of share-collateralized bonds in 1993 alone for Marvel, Revlon, and Coleman." This debt was like margin loans in that it was secured by Marvel's equity rather than its essets or operating cash flows. Nevertheless, with the stock price trading above $25.00 per share, the 77.3 million shares of collateral had a value of more than $1.9 billion, well above the face value of $894.1 million Shortly after the third issuance, however, Marvel's core businesses began to falter. Marvel's CEO Scott Sassa summed it up this way: "When the business turned, it was like everything that could go wrong did go wrong." The decline in sales was driven largely by disappointed collectors who had viewed comic books as a form of investment. For years, Marvel had capitalized or the speculative frenzy of collectors by increasing the number of monthly titles from 45 to some 140 and doubling prices from $1.50 to $3.00 per comic book. But collectors stopped buying in 1994 after failing to realize significant returns, causing sales to fall 19% across all distribution charinels. The company had pandered "... to the speculative excesses of collectors, turning out pricey comics with fancy covers while neglecting their core readers," said Harry DeMott, a Cs First Boston analyst covering Marvel.10 Jim Shooter, Marvel's former Editor-in-Chief and a current competitor, was more critical. He said that Marvel had been strip-mining the company" for years.11 Just as the comic book market began to turn south, so too did the irading card market due to strikes in both professional baseball and hockey. In addition to collector apathy stemming from the strikes, trading cards increasingly had to compete with other forms of entertainment. Jill Krutick, a Smith Barney analyst covering Marvel who had recently slashed her earnings estimates, remarked that "... little boys have found alternative means of entertainment, such as video games. "12 Finally, as in the comic book market, speculators who were active purchasers in the early 1990s stopped buying after failing to realize significant returns. In total, trading card sales would fall by more than 30% over the next two years. Because of declining revenues and missed profit estimates, Marvel's stock price began to fall. After Marvel reported a 33% drop in first quarter net income for 1995, "Short on Value," an investment newsletter, recommended it as an attractive stock to sell short. 13 Despite the problems, Perelman continued building his entertainment company. In March 1995, Marvel acquired SkyBox International Inc., a maker of trading cards, for $150 million. The SkyBox acquisition provided an opportunity to buy an undervalued asset, to expand Marvel's presence in the trading card business, and to realize operational synergies with Fleer. Marvel paid a 25% premium to acquire SkyBox and financed the acquisition with $190 million of additional debt. Four months later, in July 1995, S&P downgraded the holding company debt from B to B-, noting that "... Marvel's earnings from baseball and hockey cards have fallen while the company has added debt to make acquisitions."14 Moreover, they predicied that Marvel might need to restructure its debt in the next 12-18 months. Following the SkyBox acquisition, Marvel had, indeed, become a diversified entertainment company. As of year end 1995, it had six principle lines of business, four of which were approximately equal in size: 1. Sports and Entertainment Cards (22.4% or revenues): sold picture cards depicing professional athletes and other entertainment figures through its Fleer and SkyBox subsidiaries; 2. Toys (21.7% of revenues): designed, manufactured, and distribuced children's toys based on Marvel characters through its Toy Biz subsidiary; 3. Children's Activity Stickers (20.7%): sold sports and entertainment stickers worldwide through its Panini subsidiary; 4. Publishing (17.8%): published comic books; 5. Confectionery (10.9%): manufactured confectionery products-primarily gum; 6. Consumer Products and Licensing (6.4%): licensed characters for merchandise. Although diversification was, in theory, supposed to protect against downturns, Marvel lost $48.5 million in 1995, mainly due to the losses in its comic book and publishing segments. To address its declining profitability, Marvel announced a restructuring plan in early 1996 consisting of layoffs, elimination of unprofitable comic book titles, improved editorial content, and consolidation of operations.15 Even with the restructuring, Marvel reported a loss of $27.9 million through the first three quarters of 1996. Exhibits 4 and 5 show Marvel's balance sheet and income statements. Moreover, it reported losses in three of its four largest divisions: comic books, trading cards, and entertainment stickers. During the summer, Perelman bought an additional one million shares at $10.00 per share. 16 On October 8, 1996, Marvel announced that it would violate specific bank loan covenants due to decreasing revenue and profits. Following the announcement, Moody's downgraded Marvel's public debt, causing the price of the zero-coupon bonds to fall by more than 41% (see Exhibit 3). 17 One month later, on Thursday, November 8, 1996, Howard Gittis, vice chairman of Andrews Group, called Fidelity Investments and Putnam Investments, two of the largest institutional holders of Marvel's public debt, and asked them what they would like to see in a restructuring plan. The next day, the two firms sold more than $70 million of Marvel bonds at a price of $0.37 per dollar of face value. When a spokesman for the Andrews Group announced the details of the proposed restructuring plan four days later, Marvel's stock price fell by 41% and its zero-coupon bonds fell by more than 50%, to $0.18. Reporters later asked representatives of both companies why the sold the bonds when they did. A spokeswoman at Putnam responded, "(We) received various bids ... that were attractive," while a spokeswoman at Fidelity responded, "We'd been selling since early October." is the sales saved the companies approximately $14 million in extra losses. Perelman's restructuring plan contained three parts. First, the Andrews Group would invest $350 million in Marvel in exchange for 410 million new Marvel shares to ensure it maintained 80% control. Thus, the new shares would be valued at $0.85, compared to a price of $4.625 for the existing shares the day before the announcement; the existing shares closed at $2.75 on the day of the announcement. Second, Marvel would acquire Toy Biz, a company that made toys based on Marvel characters. Marvel already owned 26.7% of Toy Biz and would use the cash investment to buy the remaining outstanding shares at a 32% premium and some of the insiders' shares at market prices. There were two reasons to acquire Toy Biz: it had close business connections to Marvel and provided a large fraction of Marvel's revenue, and it generated approximately $60 million of cash flow per year which could be used to service Marvel's debt as well as offset more than $100 million of net operating losses (NOLs). Without 80% ownership of Marvel, Andrews Group could not use the NOLS. Finally, the public debtholders would exchange debt with a face value of $894.1 million for equity in the newly recapitalized firm. Specifically, they would seize their collateral shares and hold 14.6% (77.3 million shares) of the new shares (see Exhibit 6). In contrast, Marvel Entertainment Group would repay its secured creditors (consisting primarily of banks) and its unsecured creditors (consisting primarily of suppliers and employees) in full. Ever since Perelman proposed the restructuring plan, so-called "vulture investors", including Carl Icahn, had been buying the public debt. Icahn, who made his name in the 1980s with takeovers of Trans World Airlines, Interco, Southlandi. USX, Texaco, and several other companies, bought approximately 25% of the bonds at prices ranging from 20 to 22 cents per dollar of face value.19 One analyst described Icahn this way: "His trend is to look for companies that are having trouble that he can turn around. He's been very successful. To an extent, it's the money, but it's the game more than anything ... Carl's always liked to rattle (management's) cages ... I think he gets a charge out of that....20 On December 10, 1996, Carl Icahn sent a letter to the Andrews Group proposing an alternative restructuring plan consisting of a $350 million cash infusion through a rights offering. His plan, however, did not include the Toy Biz acquisition. In the letter, Icahn indicated that he would not support Perelman's proposed restructuring plan and vowed to fight him in bankruptcy court. Publicly, Icahn said, "It is patently clear that Ron Perelman has adopted this course to realize a windfall prost for himself at the expense of those to whom he owes a fiduciary responsibility."21 In response, Perelman representatives warned that Marvel would be forced to file for bankruptcy unless the bondholders agreed to the plan in its current form. When it became clear that the bondholders were not going to give in, Marvel and its three primary holding companies filed for bankruptcy on December 27, 1996. Scott Sassa, Marvel's CEO, said, "We would have preferred to re- capitalize Marvel without having to seek the aid of the court, but the actions and positions taken by the hondholders prevented that approach."22 Marvel in Bankruptcy Although Marvel and its holding companies filed separate bankruptcy petitions, the interlocking nature of the cases made it possible that the bankruptcy court might consolidaie them into a single process. Whereas Perelman wanted to keep the cases separate so the public debtholders would not have a say in restructuring Marvel Entertainment Group (the operating company), Icahn and the public debtholders wanted to consolidate the cases so they could play an active role in restructuring it. In fact, the bankruptcy trustee appointed Icahn as the chairman of the creditur committee in early January, a signal the public debtholders would be involved with the restructuring By filing for bankruptcy, Marvel became eligible for Debtor-In-Possession (DIP) financing Perelman arranged for $100 million in DIP financing from Chase Mar:hattan Bank to "ensure Marvel had sufficient liquidity to pay all current and expected trade and employee obligations and to meet all of its operating and investment needs during the reorganization process."23 What was unique about this loan was the fact that it was contingent upon Perelman remaining in control and would immediately come due in the event of a change in control.24 According to standard bankruptcy procedure, Marvel's management had an exclusive 120-day period in which to propose a reorganization plan. The bondholders immediately challenged this provision claiming that Perelman had "a negligible economic interest in Marvel" because he had pledged the shares to the bondholders as collateral . Given their ownership of the collateral shares, the bondholders argued that they, not Perelman, should have the right to propose the first reorganization plan. The bankruptcy court, hoxrerer, enforced the automatic stay by rejecting the bondholders' motion. One month after filing for bankruptcy, Marvel announced its preliminary financial results for 1996. It expected to report a loss of approximately $425 million for the year largely due to a write-off of goodwill associated with its trading card business. The non-cash charge of $370 would reduce stockholders' equity to negative $245 million. Marvel's Amended Reorganization Plan To assist with the reorganization plan, Perelman hired Bear Stearns & Company. After a month of financial analysis and legal work, Marvel filed an amended reorganization plan with the bankruptcy court on January 28, 1997. Much to the bondholders' chagrin, it was virtually identical to the first plan albeit with some minor changes. Rather than investing $350 million to buy 410 million new shares, Perelman was now proposing to invest $365 million to buy 427 million new shares the average price would still be $0.85 per share compared to a current market price of $2.00 per share. A.ccording to bear Stearns, "the current market price of Marvel's common stock (did) not reflect the reorganization value of Marvel."26 CS First Boston provided a fairness opinion to Marvel's buard in support of the Andrews Group investment.27 As part of its review, Bear Stearns conducted three sets of analysis. First, as required under Chapter 11, it prepared a liquidation analysis to show that Marvel was worth more as a going concern than it would be under a Chapter 7 liquidation (the best interests test," see Exhibit 7). According to the liquidation scenario, Marvel debtholders (primarily barks) would recover approximately 70 cents on the dollar while the holding company debtholders and equityholders would get nothing. Second, Bear Stearns prepared an analysis of Marvel as a going concern without the Toy Biz acquisition. Bear, Stearns estimated that the total enterprise value was between $520 and $660 million. Given Marvel's projected net indebtedness of $725 million as of March 31, 1997, the equity would again be worthless. Finally, Bear Stearns prepared financial projections for the company as a going concern assuming Marvel acquired Toy Biz (Exhibits 8, 9, and 10 contain financial projections and other related information). Perelman's vision was "to transform the company inte an integrated entertainment and sports content company prominent in all forms of media, print, electronic publishing, toys and games. "28 In the future, Marvel would operate theme restaurants, own a movie studio, and produce entertainment software and on-line applications. The projections assumed "modest" growth for Marvel and significant" growth for Toy Biz due to new media exposure. In addition, the projections assumed that Marvel would exist as a stand-alone eniity filing its own federal and state income tax returns, and that the deal would close on March 31, 1997. Under this scenario, Marvel's secured and unsecured creditors would be paid in full. Based on this analysis, Bear Steams concluded that Marvel was worth more as a going concern because of (i) increased administrative costs associated with Chapter 7 liquidation, (ii) lower asset values in liquidation because of a forced sale" (1) lower asset values for key parts of business due to exit of key employees and loss of customers, and (iv) the amount of claims which would need to be satisfied on an absolute priority basis in a liquidation. Besides showing that the reorganization yielded equal or greater value to all classes of claimants, the Andrews Group had to show that the plan was feasible (the "feasibility test). In other words, that it was not likely to be followed by liquidation or another reurganization. Convincing the court that a company with a debt-to-total capital ratio of 88% ($805.4 million in total debt and $107.4 million in equity) might not be easy even though the company would initially have considerable cash balances. The Vote on March The vole com March 7 would pit Carl Icahn against Ronald Perelman. Because Perelman had filed for bankruptcy, he no longer needed the unanimous support debtholders that was required for out- of-court settlement. He did, however, need a majority (51% by number and two-thirds by dollar amount) of the claimants in each creditor class to vote for the plan. Even if he were unable to secure these votes, there was still a chance that the bankruptcy judge would approve the plan. Judge Balick could approve such a plan provided it did not discriminate unfairly against non-accepting creditor classes and provided it was fair and equitable to all classes. As the days went by, tempers began to rise on both sides. A lawyer representing the bondholders challenged Bear Stearns conclusions. "How objective is a valuation if investimeni bankers have a financial interest in the outcome (a reference to the $1 million contingency fee Bear Stearns would receive if Perelman's plan succeeded) 2-30 What bothered people the most was Perelman's valuation. One analyst commented, "People thought he'd buy in at a discount, but no one expected it would be this dramatic.w31 To which Howard Gittis, the Vice Chairman of Andrews Group responded, "Bondholders ought to be thankful that Ron is willing to put up $565 million in cash to save this company. "32 With a little more than a month to go before the confirmation bearing, it was unclear whether enough creditors would vote for Perelman's plan