On Dec. 31, 2009, Disney finalized the purchase of Marvel Entertainment for $4.3 billion. Disney is known as the world's purveyor of fairy tales, but not everyone knows Marvel's Cinderella story. Just over 10 years ago Marvel was a bankrupt company, searching for a hero to save the day. The saviors came not in the form of a Prince Charming but rather as a web-slinging teenage misfit, a group of mutants and a scientist who turns green when he gets angry. Not to mention a group of brave executives who resuscitated the one power those iconic Marvel characters had all always had — the power to make money.
Peter Cuneo became chief executive officer of Marvel in July 1999, brought in by Isaac Perlmutter, a power player in the toy industry whose company had just taken Marvel out of bankruptcy. At one point in 2000 the company had only $3 million in the bank, barely enough to cover its cash needs. There were only 250 employees and no facilities that could be closed to cut costs. The company's stock fell as low as a dismal 96 cents per share.
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Cuneo was CEO for a three-year turnaround that was completed by the end of 2002. With six previous successful turnarounds on his résumé — including Remington and divisions of Black & Decker and Clairol — Cuneo knew well that Marvel would require both short-term fixes to put cash in the bank and new strategies to generate long-term revenue.
Cuneo's tenure with Marvel, most recently as vice chairman, ended with Disney's acquisition, for $54 a share. Following is the inside story of the Marvel's turnaround. It's a Cinderella story that will be told for generations to come.
Forbes: Looking back to 1999, what was the most significant strategic decision that helped launch Marvel's turnaround?
Peter Cuneo: Coming out of bankruptcy, Marvel was burdened with $250 million in high-yield debt and 11 million shares of preferred stock. The board of directors knew that we needed to conserve cash and cut back our required capital to grow the business. We adopted a licensing model for all forms of media, such as movies and television shows, and for consumer products such as clothing and school supplies.
This was also a way to maximize the exposure of our brands worldwide in a short amount of time. We focused on the existing library of characters that were recognizable to the public: Spiderman, the Incredible Hulk, Captain America, etc. It is much safer to revitalize previously successful intellectual property than to assume the greater risk associated with creating new content.
Two years later we licensed out the toy business for action figures and role-playing games, which had previously been run internally. Doing so freed up capital that we used to purchase our own bonds at 52 cents to par. Also we would no longer be exposed to the risks involved in this notoriously volatile consumer category. This became Marvel's largest licensed business. We've issued thousands of licenses over the last decade while committing minimal capital to them.
As a result we retired the high-yield debt and converted the preferred shares to common shares within four years.
If the licensing activities stabilized the company, what made it actually grow?
Our board knew that to grow the company we'd have to get our characters, our brands, in front of the global general public, not just comic book fans. Motion pictures and videogames are perhaps the two best vehicles for reaching the masses.
Film is unparalleled in its ability to generate worldwide excitement for a fantasy property. Our strategy was to spread out our intellectual property among a variety of Hollywood studios, so that we could attract the most enthusiastic partners for each character. One or two film studios could never produce all the films we wanted, and we didn't like the idea of being tied down to any single partner for all our films. Since our first live-action film was released — X-Men, in 2000 — Marvel has had history's greatest track record for worldwide box office results with live-action films.
Videogames were equally important. Gamers are demographically identical to the core comic book fan base — males 13 to 30. As with motion pictures, our strategy was to spread our game production among several producers to avoid domination by any single entity. Today videogame revenue is Marvel's second largest merchandise contributor, after toys.
Did this focus on new media mean pushing the old-fashioned comic books to the back burner?
Actually, to the contrary. We saw our publishing business as more than just offering product to the small comic book market. One of our greatest epiphanies was recognizing publishing as a research and development function for all of Marvel, and with outstanding profit potential. The quality of Marvel's books had crumbled during the company's troubled years, and our readers and creative talent had been wronged. We had to repair and rebuild those relationships.
Over time, we attracted the best talent in the world, while issuing a mandate that average content was totally unacceptable. We then decided to retell many of our old stories in today's milieu, so that new fans would be attracted to those timeless adventures. We also pursued new distribution channels, such as book stores, mass merchants and convenience stores. Finally, we shortened our story arcs, the number of issues it takes to complete a story, to four or six issues. In the past the arcs could be endless, making it difficult for a new reader to jump in.
The result was that our North American comic book market share grew from about 25 per cent in 1999 to between 45 per cent and 50 per cent today. It is my belief, albeit biased, that today this business is the most profitable print publishing business in the world.
It's also noteworthy that we focused on print publishing and intentionally avoided investing in the Internet. Keep in mind that we were rebuilding at the start of the 2000s, when dot-com was all the rage. We were under tremendous pressure from a board member to use the Web to expose our characters. We resisted that, however, because the board couldn't find a partner that had a business model that would make money. Thus we were protected from the subsequent Internet economy meltdown.
Of course Marvel has a completely different relationship with the Internet today. As it has matured as a medium, we have made important internal and external investments in it, and we're optimistic about its potential as a revenue stream.
By 2002 the turnaround phase at Marvel was complete. What follow-on strategies did you employ?
With our newfound financial health, the board made three key strategic decisions. First, we expanded our international presence, replacing our representation firms and their high commissions with our own people. Today, international licensing is virtually on a par with domestic.
The second decision was to self-produce some animated television shows. Television remains the best medium for keeping our characters in front of the global public between movie releases.
Our final and most transformative move was to raise $525 million in funding and launch Marvel's in-house movie studio in 2005. We had the talent, and we'd been apprenticing under the big studios long enough to have the knowhow. We felt we could produce quality motion pictures and keep all the profits, rather than receive a small revenue participation from a typical studio license deal. Marvel Studios' first films, Iron Man and The Incredible Hulk, were both financial successes. Iron Man 2 will be released in May. Thor and Captain America are targeted for release in the summer of 2011, followed by The Avengers in 2012.
You often talk about Marvel's board of directors. Why are they so important to this story?
A cornerstone of our effort to rebuild Marvel was establishing a very active board of directors. In order to execute this turnaround we knew we had to be supported and surrounded by the brightest, most aggressive minds we could attract. The individual members of Marvel's board were encouraged by Ike Perlmutter to be much more involved in the business than merely attending quarterly meetings. These board members shared offices at Marvel. They guided the company on a weekly basis, regularly interacting with senior management in person.
The board members' role was to advise senior executives on current and future business developments but never to make decisions for them. For example, Mort Handel, our non-executive chairman for the past 12 years, has been actively involved in the business daily. For such an active board to work over a 10-year period, however, you need to have a series of CEOs in place who aren't threatened by having board members work closely with senior management. Rather they recognize that this kind of help from talented board members is both inexpensive and invaluable.
Marvel is known for having an extremely cost-conscious culture. Why was that so vital for you?
People joke about Marvel counting paper clips every month, and really that's only a small exaggeration. We wanted all of our employees thinking about spending every day. Marvel's offices are spartan, because the leadership doesn't want to waste money on accoutrements, on non-productive spending. Investors visiting our offices appreciated our frugality, a concept strongly promoted by Ike Perlmutter, the majority shareholder in Marvel.
Yet we were committed to paying for performance, focusing on productivity from both financial and creative viewpoints. We made cash the core measurement for the company's success and its employees' performance metric. Bonus targets were tied to cash flows rather than profitability.
Marvel maintained a very low head count of approximately 250 employees, all full time. In order to save the company about half a million dollars annually, I served as both the chief executive and chief financial officer for about two years during the turnaround phase. This was pre-Sarbanes-Oxley Act. This also allowed me to stay close to the numbers and follow the details of our progress during that critical early stage.
All these steps and this frugal culture have clearly benefited Marvel. We've won several awards for our productivity as measured by cash flow per employee, which recently has been well in excess of $1.5 million per year.
This whole culture, by the way, has been magnetic for some of the best executives in the business. Savvy people are drawn to the pay-for-performance model and the philosophy behind conscientious daily spending but with big rewards for accomplishments. Our best employees have always been people who would desire the big bonus check over the luxury office suite. Plus, the low headcount has meant minimal layers of management and bureaucracy, so that each individual had the power to focus on solving his or her problems and could have a visible hand in building the business. This atmosphere has attracted self-starters and creative thinkers all of whom have contributed greatly to Marvel's decade of growth and success.
What do you think attracted Disney to Marvel?
I believe Disney recognized the value of Marvel's intellectual property and how it could be integrated into its other businesses. Bob Iger reached out personally to Perlmutter and has shown a great deal of imagination in envisioning how to integrate Marvel's content and outstanding talent into Disney's array of businesses. Marvel's worldwide presence will greatly expand in this way.
Marvel's core male demographic complements the demographic for the Disney library of characters. Of course, some of Marvel's franchises, like Spiderman, appeal to consumers of all ages.
Bob Iger is a smart, people-oriented leader who knows how to allow different cultures to coexist in one entity, as evidenced by the successful purchase of Pixar. I think he will take a similar approach with Marvel. I know Disney will respect Marvel's creativity, and I wish them all the best.