Coleco Case

STRATEGIC FINANCE COLECO CASE TOY STORY Coleco INC. write Name Coleco Industries Time the end of 1980s Industry toys Market the States Market share the fifth-largest manufacturer in the USA Head draw West HartFord, Connecticut produceion line Cabbage Patch Kids plush Alf dolls and puppets Couch Potato Pals Play sets (The Flintstones,Sesame Street, Sylvanian Families) Companys issue yearly sales were behind expectations egative equity position of $84 million The challenge to determine whether the companys capital could be restructured in a way that would satisfy its creditors without diluting the investment trust any further than was necessary Product line Economy and Industry outline 1988 the economy raising unemployment and reside judge low demographic factors favorable interest rate is fall debt is becoming cheaper Economy Industry favorable conditions toy industry about 800 toy companies in the unite States diversification for reducing sales and advantage volatility only for the biggest companiesSales of Coleco and its Major Competitors In millions USD 1400 1cc 1000 800 600 400 Coleco Hasbro Kenner Parker Mattel Tonka 200 0 Company synopsis Sales growth 40,00% 30,00% 20,00% 10,00% 0,00% -10,00% -20,00% -30,00% -40,00% 1983 1984 1985 1986 1987 Company Analysis Current balance 3,00 2,50 2,00 1,50 Very fluctuating 1,00 0,50 0,00 1981 1982 1983 1984 1985 1986 1987 Company Analysis Debt ratio 1,4 1,2 High dependence on debt 1 0,8 0,6 0,4 0,2 0 1981 1982 1983 1984 1985 1986 1987 Company Analysis win profit margin 0,15 0,1 0,05 0 -0,05 -0,1 -0,15 -0,2 -0,25 1981 1982 1983 1984 1985 1986 1987 Negative profits in last yearsCompany Analysis regress on equity 20 15 10 5 Non meaningful figures ( justness is negative) 0 1981 -5 -10 1982 1983 1984 1985 1986 1987 Company Analysis Return on assets 0,25 0,2 0,15 0,1 0,05 0 -0,05 -0,1 -0,15 -0,2 -0,25 High Volatility of ROA 1981 1982 1983 1984 1985 1986 1987 SWOT Analysis streng ths 1)Experience in past of recovery from companys crisis 2) Current ratio is fine weaknesses 1) Sales reduction has resulted in losses that contributed to its negative equity position. 2)Negative or near zero sales growth in recent years. 3)Escalating dependance on debt. 4)Colecos capital position was uncertain. )Huge reduction in stock monetary value. 1)The economy was entering its sixth year of overall strength. 2)Unemployment and interest pass judgment at their lowest in years. 3)Demographic factors also were favorable birth rates were increasing. 4)The toy industry had begun to consolidate. 5) Basic and technology-enhanced toys did well. 1)Of the approximately 800 toy companies in the United States, only the largest were able to minimize sales and profit volatility by dint of diversification. 2)Each companies fortune rose and fell with the strength of its saucy products 3)Lack of exciting new toy introductions opportunities threats ALTERNATIVES . drifting burn down hopin g that products will do well 2. blend approach hoping that there might be some value in the companys assets 3. equity approach to issue more shares at market price 4. debts approach to restructure debts 5. disengagement approach to go for liquidation Drifting Approach Net income for Coleco is negative ($105. 4mln in 1987) Net worth is also negative ($84. 9mln in 1987). Huge amount of debt ($620mln in 1987) Equity deficit ($84,3mln in 1987) No any new smash hit products Low prospects for increasing the companys sales based on its current product line Low possibility to recover contradictory decision Merge Approach Coleco is not attractive in the sensation of M&A deals big debts (total assets total liabilities) inappropriate decision Equity Approach The company could issue more shares but the stock price is apparently small (Ex. 1) Colecos equity is negative through last two years 1986 ($7. 6) mln 1987 ($ 84. 3) mln inappropriate decision Equity Approach Ex. 1 Stoc k price High 1984 1985 1986 1987 Apr May June July Aug Sept Oct Nov Dec 1988 Jan Feb 14-Mar $22. 250 21. viosterol 20. ergocalciferol 11. 625 10. 750 11. 25 11. 000 10. 375 10. 250 9. one hundred twenty-five 6. 000 4. 625 4. 250 3. euchre Low $9. 625 10. cxxv 8. 125 10. 000 9. 875 10. 250 9. 750 9. 125 8. 500 4. 250 4. 375 3. 625 3. 125 2. 625 Close 12. 125 16. 000 8. 375 10. 375 10. 500 10. 625 9. 750 9. 375 9. 125 5. 500 4. 625 3. 875 3. 500 3. 000 2. 500 167. 24 211. 28 242. 17 288. 36 290. 10 304. 00 318. 66 329. 80 321. 83 251. 79 230. 3 247. 08 257. 07 267. 82 266. 37 S&P 500 Closing Bond Prices 11. 13% $81. 875 82. 000 77. 750 76. 000 94. 000 75. 625 76. 125 72. 000 55. 250 50. 000 41. 500 41. 750 27. 000 14. 38% $90. 125 101. 875 100. 75 99. 500 96. 500 95. 000 95. 000 98. 625 96. 000 94. 375 68. 875 63. 500 50. 000 54. 125 34. 250 S&P longterm gov bond 40. 29 48. 93 58. 04 60. 69 51. 55 52. 42 51. 89 50. 40 47. 39 47. 17 50. 31 49. 89 51. 28 53. 67 52. 50 Debts Approach Coleco is helpless on debt through years (also successful ones) The company has a spacious amount of total liabilities (in 1987 about $ 620 mln) No resources to pay debts (Negative equity, Assets are in general composed of Accounts receivables) Company by the moment already does not agree with the creditors requirements nappropriate decision Disengagement Approach The first reason for liquidation 700 600 500 400 300 Stock based insolvency 200 100 0 -100 -200 Debt Assets Equity Disengagement Approach The second reason for liquidation order of insolvency cash flow contractual obligations 1980 1981 1982 1983 1984 1985 1986 1987 Conclusion We consider disengagement approach the best solution for Coleco INC, as the firm is a prime outlook for bankruptcy. 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