The Toy Industry and Acquisitions; Do They Work?

Guest-blogger
Andrew's picture colourAndrew Dobbie is  the owner and managing director of Gameplan Europe LTD which consults, conducts executive searches and publishes industry directories.  Andrew is a long established player in the global business of play and as a result has a keen eye and a direct style.  It's a long piece but take your time and read it to the end…it will be worth it.

Puzzle-pieces

Following the proposed acquisition by Mattel of Megabrands the ether is currently awash with opinions, mostly ill-advised, about the supposedly lamentable history of acquisition in the toy industry.   It all depends which evidence one takes. No industry veteran will forget the unfortunate acquisition by Mattel  in 1998 of The Learning Company for $3.6 billion.  After one year of struggling with a company which was haemorrhaging money, Mattel sold it for virtually nothing. It wiped out a major part of the market capitalisation of the company. 

How did this come about? Well firstly we have to recall 1998 was the frenetic time of .com launches when companies with no sales let alone profits were seeing share prices rocket because so many people thought the business world as we knew it was coming to an abrupt end. Doubtless the top management felt that Mattel had to get into direct selling via the  Internet in order to survive. Nevertheless, it would be interesting to know what rigour of due diligence was pursued at the time.

This was not the first time an acquisition nearly caused the collapse of Mattel. When I joined the company in 1984 it was reeling from the outcome of having acquired Intellivision. It just survived , helped by the huge success of Masters of the Universe. More recent acquisitions show a mixed bag of successes and failures. Tyco cost about $700 million and within a few years there was hardly a vestige of the company left. It must be said however that a fair bit of the acquisition price was recovered over several years through the success of Barney .  Power Wheels and Radica were also acquired and you have to look hard now to find remnants of those companies. On the other hand Fisher Price was a huge success and one can only say that Mattel handled it well.

The history of the development of Hasbro is very different. Would you believe that in 1980 the global sales of Hasbro were less than $100 million. In the same year Mattel had revenue of approximately $400 million. The growth of Hasbro in the 1980’s was due to the hugely successful acquisitions of Milton Bradley and Kenner Parker Tonka.  I remember being at one of Sean McGowan’s conferences twenty years ago when the Chairman of Toys R Us, Charles Lazarus, told us that his company buys product from Hasbro which he once bought from 34 separate companies.  Many of the acquired companies disappeared without trace , although  Tiger , which may look to have withered, in fact spawned Furby.

So what can one conclude from the evidence? Only that acquisitions in the toy industry have sometimes been very successful, and sometimes they have been spectacular failures. Having run my consultancy for over two decades I am frequently bemused by the decisions of top management of toy manufacturers, because I keep my ear close to the ground by visiting stores and listening to the managers or owners. If I can draw any conclusions about acquisitions there are perhaps two points I would make. Firstly that adding a completely new range and keeping the same sales force is often counter-productive. Sales resource which remains the same will necessarily have to reduce the sales pressure on the existing brands. To justify an acquisition the board of a public company usually shows to the stock market calculations of incremental revenue with little increased fixed cost. Often this is just wishful thinking.

If the chief executives were to spend the odd day talking with their sales reps and their customers they would often realise the folly of their calculations on strategic acquisitions.  Decisions taken in the board room are often miles away from the reality of getting business in a competitive marketplace. If the guys at the bottom don’t believe in the strategy set at the top then they will usually thwart the plans of the CEO.   If the CEO strongly incentivises sales people to perform on new ranges in which they don’t believe, the result for the company is likely to be lower sales of the core brands.

I have seen this happen many times, such as when Hasbro tried to launch Sindy fashion doll in Europe in the nineties.  If the CEO had heard what the sales reps, his own employees,  were saying to their customers, he would have wept.  What the CEO should never forget is that some salesmen have known their customers for many years and are emotionally closer to them than to their own paymaster.  This is particularly the case with subsidiary sales companies outside the US, because the head office often imposes ranges which the local companies believe, with good reason, to be unsuitable. It is not good for one’s career to press the argument, or even present the evidence, against the will of a CEO who believes everyone everywhere will want the same product. Sometimes they will, but there are occasions when it doesn’t work.  For example in the 1980’s Mattel Disney pre-school sold extremely well in Spain because Spanish moms will buy anything with a Mickey or Donald stuck to it.  In Spain 35% of the toy market value is in licenses. In Germany moms refused to buy Mattel Disney because German parents have a uniquely philosophical view of buying toys for their kids. A large proportion of German moms consider that if a toy bears a character license it must have low intrinsic play value because otherwise it wouldn’t have to be adorned with a Mickey or Donald. At the time the percentage of the German market made up of licenses was half the level in Spain. In the case of Mattel Disney the license was actually a deterrent to purchase in Germany for most parents .

CEOs who lack experience of living in different cultures will be hard put to distinguish between a local general manager who is talking sense and providing well evidenced arguments, and one who is just pig-headed and with poor vision and judgement!

Which brings me to the proposed acquisition of Megabrands.  How should Mattel proceed?  Well first of all I would listen to the views of the general managers of the Mattel subsidiaries in the top international markets, because the major opportunity for sales increases is more outside the US than within. Megabrands already has a significant category share in north America, but much lower in the rest of the world. For example in Germany Lego had a 17.6% share of the toy market in 2012 and Megabrands had approximately 0.5%.  To get a significant share of the German market Mattel will have to be very shrewd. Lego will lash out like a wounded animal if Megabrands succeeds in damaging Lego in this market. 

It has already shown a lively interest in thwarting Megabrands even though the latter has less than 10% of Lego’s sales worldwide.  It may be appropriate to set up separate sales units for construction in order to grow strongly. Remember that every manager in Lego lives or dies by the success of Lego alone. This would not be the case if Megabrands were to be  totally integrated into Mattel. Imagine a subsidiary or a salesman who is not succeeding with Megabrands but is doing above plan with Barbie, Hot Wheels etc. He will not have to worry about his job. Whereas the Lego salesman who is selling way under plan will be quaking.  I have observed it happen several times, that a small brand survives only because of the dedicated attention of the management, and this dedication is diluted or disappears when the brand is subsumed within a much larger organisation, and the brand declines eventually into oblivion.

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