obligations, union work rule limitations, increasing fuel and ingredients costs, and the 2008–2009 US
recession.
Hostess’s product offering included such well–known brands as Twinkies, Wonder Bread, Nature’s
Pride, Dolly Madison, Drake’s, Butternut, Home pride and Merita. While each brand had a strong
consumer following, the firm was an operational nightmare. Hostess consisted of a patchwork of disparate
operations and work rules having grown through a series of acquisitions. Beginning with its founding as the
Schulze Baking Company in 1927, acquisitions over the years resulted in 372 labor contracts, 80 separate
health and benefit plans, 5,500 delivery routes, and vastly different production processes across its
facilities.
The emergence from bankruptcy was possible only after substantial concessions from the firm’s unions
totalling $110 million in annual labor costs and from lenders. Hedge funds Silver Point Capital LP (Silver
Point) and Monarch Alternative Capital LP (Monarch) agreed to provide a new secured loan of $360
million, forgive half of the existing debt, and to exchange the remaining debt for a payment-in-kind loan.
Silver Point and Monarch are hedge funds focused on buying so-called distressed debt (i.e., debt of
troubled firms that can be purchased at a steep discount from its face value).
With its equity investment worthless and subordinated debt deeply underwater, Ripplewood stopped
attending negotiating sessions with the unions, leaving only Silver Point and Monarch at the negotiating
table. The firms would not invest more in Hostess without union concessions and proposed that the unions
receive a 25% ownership stake in Hostess, board representation, and $100 million in subordinated debt in
exchange for wage, benefit, and work rule concessions.
Silverpoint and Monarch viewed such concessions as critical if a successful turnaround were to be
achieved. Work rules made it difficult to improve productivity and spend money efficiently. With sales of
$2.5 billion in 2011, Hostess lost $341 million. According to bankruptcy filings, the firm incurred $52
By September 2012, the Teamsters union agreed to lower pay and benefits but the Bakery Workers
union rejected the deal. With the Teamsters union having agreed to significant contract concessions, the
federal bankruptcy court gave Hostess unilateral authority to modify collective bargaining contracts. The
court allowed Hostess to force the Bakers’ union to accept a new 5-year labor contract that included an 8%
wage cut the first year, new pension plan restrictions, and a 17% increase in employee payments for
healthcare coverage.
These actions prompted the Bakery Workers union to strike on November 9, 2012. Despite warnings
from the firm that it was about to file for bankruptcy, the strike continued forcing Hostess to shut down
The shutdown of Hostess entailed closure of 30 bakeries, 565 distribution centers, 5500 delivery routes,
and 570 bakery outlet stores throughout the United States, and the phased layoff of 18,500 workers.
Hostess stressed that it had to move quickly in the sale of its brands to capitalize on the outpouring of
nostalgia and media coverage surrounding its demise. The brands still had significant value. For 2012,
Twinkies pulled in about $76 million, Hostess Donuts $385 million, and Hostess Cup Cakes $138 million.
However, the longer Hostess cakes and breads were off store shelves, the more consumers would become
accustomed to eating cakes and breads from competitors. The bankruptcy court approved retention bonuses
for workers required during the liquidation process.
The announcement of the firm’s pending liquidation and the surrounding publicity that followed brought
in more than 80 bidders in a few days. The Section 363 process began in early 2013 with the selection of
Two private equity firms, C. Dean Metropoulos & Company and Apollo Global Management agreed to
pay $410 million to buy the Hostess business, including Twinkies. Flowers Foods agreed to buy Wonder
and Hostess’s other bread businesses for $360 million and to pay $30 million for Beefsteak. McKee Foods
paid $27.5 million for Drake’s bread. If those firms making stalking horse bids were outbid by others
during the auction, the winning bidders would have to pay the stalking horse bidders a breakup or topping
fee.
Secured creditors have four options to recover all or a portion of their loans by pursuing the sales of
collateral underlying their loans under the U.S. Bankruptcy Code or out of court sales under state law
according to Article 9 of the Uniform Commercial Code. The U.S. Bankruptcy Code allows for debt
recovery according to Chapter 11 (a court-approved plan of reorganization), Chapter 7 (trustee directed
liquidation), and under Section 363 sales (expedited court sponsored auctions) of the U.S. Bankruptcy
Code.
Article 9 determines the legal right of ownership under the Uniform Commercial Code governing
secured transactions and determines the legal right of ownership if a debtor does not meet their obligations.
Collateral can include receivables and business inventory. If an individual has their computer serviced but
In contrast, Chapter 11 facilitates the sale of the debtor assets as a going concern by allowing the debtor
to continue operate the business while foregoing payments to creditors. A creditor has a better chance of
recovering accounts receivable under Chapter 11 because relationships are seen as on going. Moreover,
Chapter 11 requires the judge to disperse the proceeds of any payments to creditors according to the
absolute priority rule which places secured parties first in line for distribution under a court-approved or
confirmed reorganization plan. However, Chapter 11 is an expensive process such that any value recovered
in excess of the liquidated collateral is used to pay administrative fees rather than to compensate unsecured
creditors.
When a business is unlikely to reorganize successfully in Chapter 11 but has assets than have a going-
concern value that exceeds shutdown value, a Section 363 sale may be the best option for the secured
creditor and debtor. The 363 sale offers a rapid resolution through auction and the ability to deliver assets
free and clear of all liens under a court order and establishes a bidding procedure to maximize value.
Was the auction process sanctioned under Section 363 of the bankruptcy code the right one for Hostess?
Time appears to have been a critical factor. The intangible value of the Hostess brand would diminish with
time. This process allowed for a rapid sale of the firm’s operating assets, perhaps at the best prices possible
at that time. While secured lenders were able to recover much of what they were owed, unsecured creditors
Discussion Questions and Solutions
1. How might the way in which Hostess Brands Inc. grew have contributed to its eventual financial
distress?
Answer: Hostess grew through a series of acquisitions which it failed to fully integrate in a
consistent manner. Beginning with its founding as the Schulze Baking Company in 1927,
acquisitions over the years resulted in 372 labor contracts, 80 separate health and benefit plans,
2. What are the primary objectives of the bankruptcy process? Speculate as to why this process may
have failed in reorganizing Hostess Brands?
Answer: Bankruptcy enables a failing firm to reorganize, while protected from its creditors, or to
cease operation by selling its assets to satisfy all or a portion of the firm’s outstanding debt. U.S.
Having been through the bankruptcy process, why was it not possible to rehabilitate the
business? There were many factors at work: some external and some internal to the firm. External
factors included a long-term change in consumer tastes away from the types of product the firm
produced and the onset and severity of the 2008-2009 recession. The internal problems included
3. What types of businesses are most appropriate for Chapter 11 reorganization, Chapter 7
liquidation, or a Section 363 sale? What factor(s) drove Hostess into a Section 363 sale?
Answer: Although intended to give firms time to restructure, whether a business is likely to be
successful in Chapter 11 in part depends on the type of business and the circumstances under
which it seeks the protection of the bankruptcy court. For example, a firm may be technically
Chapter 7 liquidations appear to be as costly in terms of legal expenses and related fees, as well
as the time required to complete the proceedings, as Chapter 11 reorganization. However, studies
show that Chapter 11 reorganization allows creditors to recover relatively more of their claims
than under liquidation. In liquidation, bankruptcy professionals, including attorneys, accountants,
and trustees, often end up with the majority of the proceeds generated by selling the assets of the
failing firm.
4. The Hostess Brands Inc. case study illustrates options available to the creditors and owners of a
failing firm. Describe the available options. How do you believe creditors and owners might
choose from among the range of available options?
Answer: A failing firm’s strategic options are to merge with another firm, reach an out-of-court
voluntary settlement with creditors, or file for Chapter 11 bankruptcy. Note the prepackaged
5. Financial buyers (both hedge funds and private equity investors) clearly are motivated by the
potential profit they can make by buying distressed debt. Their actions may have both a positive
and negative impact on parties to the bankruptcy process. Identify how parties to Hostess
bankruptcy may have been helped or hurt by the actions of the hedge funds and private equity
investors.
Answer: Hedge funds and other investor groups provide liquidity in the distressed debt and equity
markets by enabling those creditors and shareholders desirous of selling their claims on the failing
firm to cash out. Moreover, these financial investors may provide a more vigorous competitive
6. Hostess’s assets were sold in a 363 auction. Such auctions attract both strategic and financial
bidders. Which party tends to have the greater advantage: the strategic or financial bidder? Explain
your answer.
Answer: Strategic buyers are by definition interested in buying a business and integrating it into
their existing operations because they perceive significant synergy. Acquisitions out of bankruptcy
often provide a means of acquiring valuable assets free and clear of all liens at a significant
discount from their book value. In contrast, financial buyers such as hedge funds rely on their
7. Comment on the fairness of the 363 auction process to Hostess shareholders, lenders, employees,
communities, government, etc. Be specific.
Answer: The 363 auction process is intended to maximize the value of the Hostess assets through
an auction process in the shortest time possible. Assuming a sufficient number of viable bidders,
American Airlines Emerges from the Protection of Bankruptcy Court
Key Points
• Chapter 11 provides an opportunity for debtor firms to reorganize and for creditors to recover a
portion of what they are owed.
• Firms emerging from Chapter 11 often do so by being acquired or by being an acquirer.
• Gaining consensus among creditors requires aggressive negotiation by the debtor firm.
• By buying the bankrupt firm’s debt, hedge funds provide liquidity for creditors unwilling to wait
for the completion of the Chapter 11 process.
American Airlines emerged from Chapter 11 bankruptcy protection on December 9, 2013, merging with
U.S. Airways as the cornerstone of its reorganization plan approved by the bankruptcy court judge. Chapter
11 of the U.S. Bankruptcy Code gives debtors protection from creditors until the court can decide if the
debtor can be reorganized into a viable business or if it must be liquidated. The judge approved the plan
immediately following American’s resolution of a lawsuit filed by the U.S. Justice Department which
argued the combination would result in higher consumer airline fares.
The strategy of entering Chapter 11 only to exit by merging with another airline has been used several
times before by airlines attempting to escape the debilitating effects of high fuel costs, strained labor
relations, and bone-crushing debt. The tactic generally is used as a means of lightening a firm’s debt load
and to renegotiate better terms with unions, suppliers, and lessors.
While United and Delta went through bankruptcies and mergers in the last decade, American has been
steadily losing ground while racking up losses totaled more than $12 billion since 2001. It was the last
Tom Horton, CEO of American Airlines parent AMR Corp., had spent months trying to convince the
Justice Department the merger would help customers and boost competition by creating a more effective
competitor to larger United and Delta airlines. While in Chapter 11, American had cut labor costs,
renegotiated aircraft and other leases and earned $220 million in the second quarter of 2013, its first profit
in that quarter in 6 years. It also was proposing to lease hundreds of new planes, when it emerged from
Chapter 11.
The deal arose in a highly unconventional way for American’s board and senior management and for
airline industry observers. In April 2012, Tom Horton of American received a surprise letter from Doug
Parker of U.S. Airways apprising him that Parker would bid for American once it filed for bankruptcy,
which it had done in November 2011. U.S. Airways, about half the size of American, was proposing to take
By February 2013, the 10-month-long duel between Parker and Horton ended in an agreement to
combine the two airlines. The combined airlines would have total revenues of $39 billion annually and a
market value of $11 billion. Parker was to become the CEO with Horton serving as Chairman for no more
than 12 months.
Parker often is described as flamboyant, charismatic, and the consummate dealmaker. At age 39, he
headed America West and later bought U.S. Airways out of bankruptcy in 2005. In 2006, Parker tried to
Parker engineered an audacious merger of America West and the larger U.S. Airways in 2005 and then
spent the next 7 years looking for another target. First, Delta rebuffed him and later United twice rejected
his overtures. He then went after American, the only remaining big airline. Parker had clearly learned that
to win American he would have to get labor’s backing. He approached American differently by initially
lining up early support from American’s labor unions, and he courted creditors from the outset.
In contrast, Horton is often described as unflappable and a believer in detailed planning. Horton saw
The ad hocs were convinced that American emerging from bankruptcy as a standalone or independent
business was a better way for them to realize a windfall for their debt holdings they had purchased at a deep
discount. In contrast, a merger would saddle the combined firms with U.S. Airways debt. As such, they
supported Horton’s stand-alone strategy. At the same time, they agreed with Horton not to talk to Parker.
Horton also agreed with other unsecured creditors to talk to other potential merger partners. When JetBlue
backed out, this left only U.S. Airways.
Horton also pressured the unions to accept concessions and threatened that American would leave
Chapter 11 without labor contracts leaving the destiny of labor unclear. The unions eventually agreed, but
The $16 billion all-stock deal gives creditors of AMR control of the combined firm due to an agreement
to exchange creditors’ debt for equity in the new firm. U.S. Airways stockholders received one share of
This merger is unusual in that it provides for full recovery for secured creditors and a sizeable portion of
debt owed to unsecured creditors, as well as providing for 3.5% of the new shares to be issued to
Blockbuster Acquired by Dish Network in a Section 363 Sale
______________________________________________________________________________________
Key Points
Section 363 auctions are an increasingly common means of preserving asset value when failing firms are
hemorrhaging cash flow.
Such sales allow buyers to purchase assets at potentially bargain prices.
While not without risk, 363 sales are often viewed as a more efficient way to exit bankruptcy than via a
more conventional reorganization plan.
______________________________________________________________________________
Despite facing challenges reminiscent of a Hollywood movie thriller, Blockbuster, the movie rental giant,
went from a mundane prepackaged bankruptcy agreement to acknowledging its own insolvency to facing
the real possibility of liquidation in the span of six months. What follows is a discussion of the sometimes–
unpredictable twists and turns of a highly contentious Section 363 bankruptcy filing.
Blockbuster had been in a downward spiral years before approaching its creditors for a negotiated
reduction in its debt burden in mid-2010. The ability to download movies via the Internet had come to
dominate the video rental business, thanks largely to DVD rental provider Netflix Inc. and video-on–
The circumstances changed unexpectedly when famed billionaire investor Charles Icahn bought 31% of
the firm’s existing senior notes in late September, making him a major creditor and a key participant on the
creditor committee in the subsequent negotiations. Icahn and Blockbuster had had a tumultuous history
together. He had purchased shares in Blockbuster in 2004. The next year, following a bitter proxy battle, he
won three seats on the firm’s board of directors. Eventually, Icahn was able to oust then–board Chairman
John Antioco. In 2010, due to increasing demands on his time, Icahn stepped down from the board and sold
his shares in Blockbuster.
and, as such, are often viewed as relatively low risk.
Movie studio creditors, critical suppliers to Blockbuster, supported the plan because they were promised
payments for what they were owed on a priority basis out of the operating cash flows once the firm
emerged from bankruptcy. Senior secured note holders, owning 80.1% of the firm’s debt, also were willing
to accept the Icahn proposal. With the blessing of its major creditors, Blockbuster undertook an expensive
Blockbuster feared that it would be liquidated if it were acquired by Icahn, and it accelerated efforts to
conduct a 363(k) auction for selling the firm’s assets in the hope it could emerge from bankruptcy as a
going concern. On February 21, 2011, Blockbuster filed a motion with the U.S. Bankruptcy Court seeking
authorization to conduct an auction for selling the company’s assets, which would be conducted under the
Court’s supervision and in accordance with Section 363 of the U.S. Bankruptcy Code. Following approval
by the Court, Blockbuster initiated the bidding process. The auction allowed for a 30-day period during
which potential bidders could perform due diligence. At the end of this period, interested parties would
have one week to submit bids, with the winning bid to be announced shortly following the close of the
auction.
Icahn’s, Monarch’s, and the Gordon Brothers’ strategies appeared to be similar: Close the Blockbuster
stores, liquidate the inventories, and sell the digital download business. In contrast, SK Telecom and Dish
offered the prospect of Blockbuster’s emerging from bankruptcy as a reorganized but going concern. Dish
believed the chain’s brand could be valuable for its video–on-demand services. Dish also saw an
opportunity to sell subscriptions through Blockbuster’s stores and believed the Blockbuster buyout could
give it some leverage in negotiating future business with movie studios.
Discussion Questions
1. What are the primary objectives of the bankruptcy process?
2. What types of businesses are most appropriate for Chapter 11 reorganization, Chapter 7 liquidation, or
a Section 363 sale?
3. The Blockbuster case study illustrates the options available to the creditors and owners of a failing
firm. How do you believe creditors and owners might choose among the range of available options?
Explain your answer.
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The Deal from Hell: The Tribune Company Emerges from Chapter 11
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Key Points
Tribune Company’s LBO failed because it was structured without any margin for error.
Large secured creditors failing to recover what they are owed often exchange their debt for equity in the
restructured company.
The extreme length of time in Chapter 11 reflected the absence of prenegotiation with creditors due to the
firm’s rapid entry into bankruptcy, the deal structure’s complexity, and fraud allegations.
______________________________________________________________________________________
Four years after its ill-fated leveraged buyout left the media firm with an unsustainably large debt load,
Tribune Company (Tribune) emerged from Chapter 11 bankruptcy on December 31, 2012. Founded in
1847, Tribune publishes some of the best-known newspapers in the United States, such as the Los Angeles
Times, the Baltimore Sun, and the Chicago Tribune. The firm also owns WGN in Chicago and 22 other
television stations as well as the WGN radio station. Over the years the firm has spent hundreds of millions
of dollars in an attempt to become a diversified media company.
The bankruptcy court judge approved a reorganization plan that left the firm in the hands of a new
ownership group consisting largely of former creditors and hedge funds that had acquired some of the
firm’s outstanding debt. The largest owners included Oaktree Capital Management, JPMorgan Chase, and
Angelo, Gordon & Co., a firm that specializes in investing in distressed companies. Senior lenders now
own 91% of the firm’s shares in exchange for forgiving their credit claims. This group held most of
While the reorganization plan shielded JPMorgan and other lenders from lawsuits related to the
leveraged buyout, it did allow junior creditors to file lawsuits against other parties involved in the LBO
transaction. These could include Sam Zell (a well-known real estate investor), other Tribune officers and
directors, and Tribune stockholders who sold their shares in the buyout. Junior creditors who led the
opposition to the final reorganization plan alleged that the larger creditors that financed the LBO
transaction were well aware of the Tribune’s precarious financial position in 2007 and that they were
Despite these considerations, Tribune seemed ripe for a takeover, with its share price having lagged well
behind that of other media companies. This also was one of the most active periods in decades for LBO
transactions. With interest rates at near-record lows, prices paid for LBO targets soared. While the firm’s
cash flows from newspapers were declining, operating cash flow from its other media operations had been
relatively stable in recent years. With profit margins on loans squeezed, lenders were trying to offset
declining interest earnings by generating additional fee income that would result from originating loans and
later selling them to other investors.
On April 2, 2007, Tribune announced that the firm’s publicly traded shares would be acquired in a
transaction valued at $8.2 billion. The deal was implemented in a two-stage transaction in which Sam Zell
acquired a controlling 51% interest in the first stage, followed by a backend merger in the second stage in
which the remaining outstanding Tribune shares were acquired. In the first stage, Tribune initiated a cash
The purchase of Tribune’s stock was financed almost entirely with debt, with Zell’s equity contribution
amounting to less than 4% of the purchase price. The Tribune ended up with $13 billion in debt (including
the $5 billion it currently held). At this level, the firm’s debt was 10 times EBITDA, more than 2.5 times
that of the average media company. Annual interest and principal repayments reached $800 million (almost
three times their preacquisition level), about 62% of the firm’s previous EBITDA cash flow of $1.3 billion.
The conversion of the Tribune into a subchapter S corporation eliminated the firm’s current annual tax
liability of $348 million. Such entities pay no corporate income tax, but must pay all profit directly to
At the closing in late December 2007, Sam Zell described the takeover of the Tribune Company as “the
transaction from hell.” His comments were prescient, in that what had appeared to be a cleverly crafted deal
from a tax standpoint was unable to withstand the credit malaise of 2008. The end came swiftly when the
161-year-old Tribune filed for bankruptcy on December 8, 2008, to conserve its rapidly dwindling cash
flow.
Those benefiting from the deal included the Tribune’s public shareholders, such as the Chandler family,
which owed 12% of the Tribune as a result of its prior sale of the Times Mirror to Tribune, and Dennis
Fitzsimons, the firm’s former CEO, who received $17.7 million in severance and $23.8 million for his
Discussion Questions
1. What are the primary objectives of the bankruptcy process?
Answer: Bankruptcy enables a failing firm to reorganize, while protected from its creditors, or to
cease operation by selling its assets to satisfy all or a portion of the firm’s outstanding debt. U.S.
2. What types of businesses are most appropriate for Chapter 11 reorganization, Chapter 7
liquidation, or a Section 363 sale?
Answer: Although intended to give firms time to restructure, whether a business is likely to be
successful in Chapter 11 in part depends on the type of business and the circumstances under
which it seeks the protection of the bankruptcy court. For example, a firm may be technically
insolvent but still have sufficient cash flow to meet its immediate liquidity requirements;
3. The Blockbuster case study illustrates options available to the creditors and owners of a failing
firm. How do you believe creditors and owners might choose from among the range of available
options?
Answer: A failing firm’s strategic options are to merge with another firm, reach an out-of-court
voluntary settlement with creditors, or file for Chapter 11 bankruptcy. Note the prepackaged
4. Financial buyers clearly are motivated by the potential profit they can make by buying distressed
debt. Their actions may have both a positive and negative impact on parties to the bankruptcy
process. Identify how parties to a bankruptcy may be helped or hurt by the actions of the hedge
funds.
Answer: Hedge funds and other investor groups provide liquidity in the distressed debt and equity
markets by enabling those creditors and shareholders desirous of selling their claims on the failing
firm to cash out. Moreover, these financial investors may provide a more vigorous competitive
5. Do you believe that a strategic bidder has an inherent advantage over a financial bidder in a 363
auction? Explain your answer.
Answer: Strategic buyers are by definition interested in buying a business and integrating it into
their existing operations because they perceive significant synergy. Acquisitions out of bankruptcy
often provide a means of acquiring valuable assets free and clear of all liens at a significant
discount from their book value. In contrast, financial buyers such as hedge funds rely on their
6. Speculate as to why Blockbuster filed a motion with the Court to initiate a Section 363 auction
rather than to continue to negotiate a reorganization plan with its creditors to exit Chapter 11.
Photography Icon Kodak Declares Bankruptcy, A Victim of Creative Destruction
Key Points
Having invented the digital camera, Kodak knew that the longevity of its traditional film business was
problematic.
Concerned about protecting its core film business, Kodak was unable to reposition itself fast enough to
stave off failure.
Chapter 11 reorganization offers an opportunity to emerge as a viable business, save jobs, minimize
creditor losses, and limit the impact on communities.
_____________________________________________________________________________
Economic historian Joseph Schumpeter described the free market process by which new technologies and
deregulation create new industries, often at the expense of existing ones, as “creative destruction.” In the
short run, this process can have a highly disruptive impact on current employees whose skills are made
obsolete, investors and business owners whose businesses are no longer competitive, and communities that
are ravaged by increasing unemployment and diminished tax revenues. However, in the long run, the
process tends to raise living standards by boosting worker productivity and increasing real income and
leisure time, stimulating innovation, expanding the range of products and services offered, often at a lower
price, to consumers, and to increase tax revenues. Kodak is a recent illustration of this process.
Kodak closed 13 manufacturing plants and 130 processing labs and had reduced its workforce to 17,000
in 2011 from 63,000 in 2003. In recent years, the firm has undertaken a two-pronged strategy: expanding
into the inkjet printer market and initiating patent lawsuits to generate royalty payments from firms
allegedly violating Kodak digital patents. Kodak technologies are found in virtually all modern digital
cameras, smartphones, and tablet computers. Kodak had raised $3 billion between 2003 and 2010 by
reaching settlements with alleged patent infringement companies. But the revenue from litigation dried up
in 2011.
With only one profitable year since 2004, the firm eventually ran out of cash. Its market value on the
day it announced its bankruptcy filing had slumped to $150 million, compared to $31 billion in 1995.
Kodak said it had $5.1 billion in assets and $6.8 billion in debt, rendering the firm insolvent. The Chapter
11 filing was made in the U.S. bankruptcy court in lower New York City and excluded the firm’s non-U.S.
subsidiaries. The objectives of the bankruptcy filing were to buy time to find buyers for some of its 1,100
digital patents, to continue to shrink its current employment, to reduce significantly its healthcare and
equipment and services, a business that generated about $2 billion in revenue in 2012 but that may lack the
Discussion Questions
1. To what extent do you believe the factors contributing to Tribune’s bankruptcy were beyond the
control of management? To what extent do you believe past mismanagement may have
contributed to the bankruptcy?
Answer: Factors such as fluctuations in the economy are largely beyond the control of
management. However, responsible managers plan for the unexpected, particularly when
2. Comment on the fairness of the bankruptcy process to shareholders, lenders, employees,
communities, government, etc. Be specific.
Answer: The purpose of the bankruptcy option is to reduce the cost of borrowing by giving
creditors a mechanism for recovering their loans when the borrower defaults. Bankruptcy also
protects shareholders since their liability is limited to the extent of their investment. However, on
3. Describe the firm’s strategy to finance the transaction?
Answer: The transaction was to be financed primarily by debt. The expected $348
million in annual tax savings was to help pay for the increased interest and principal
4. Comment on the fairness of this transaction to the various stakeholders involved. How
would you apportion the responsibility for the eventual bankruptcy of Tribune among
Sam Zell and his advisors, the Tribune board, and the largely unforeseen collapse of the
credit markets in late 2008? Be specific.
Answer: The transaction was clearly highly leveraged by most measures. It was financed almost
entirely with debt, with Zell’s equity contribution amounting to less than 4 percent of the purchase
price. The transaction resulted in Tribune being burdened with $13 billion in debt (including the