Does a Hasbro-Mattel Merger Really Raise Antitrust Concerns?
Toymaker Mattel (NASDAQ: MAT) rejected the merger offer reportedly made by rival Hasbro (NASDAQ: HAS) because it attempted to lowball the value of the company and failed to take into consideration potential antitrust objections that would likely be raised by joining the two companies together.
Without knowing exactly how much Hasbro supposedly bid for Mattel, it's hard to say whether it was too low, but since the toymaker's sales were sent reeling by the bankruptcy of Toys R Us and it was forced to suspend its dividend to conserve cash, it must have been an especially paltry sum to be "too low." Mattel is now counting on the Christmas shopping season to salvage its business.
A toymaking behemoth
But are there really antitrust concerns the two should worry about? It's true Hasbro and Mattel are the two of the biggest toymakers out there, with the latter generating $5.1 billion in sales over the last 12 months and the former making $5.2 billion. Together, their combined revenue of $10 billion would dwarf the next closest competitor, LEGO, which reported that over the first six months of 2017 it generated sales of $2.4 billion, down 5% year over year.
And smaller toymakers don't even come close: JAKKS Pacific (NASDAQ: JAKK) has trailing sales of $643 million, and niche players like Build-a-Bear Workshop (NYSE: BBW) have about half that amount. While they might be a source of complaint against a tie-up, just because Has-Mat might be big doesn't necessarily rule it out.
Certainly, the Department of Justice hasn't been a friend to mergers between industry leaders before, no matter how much their respective businesses are ailing. The Staples merger with Office Depot, for example, could not have been more necessary, but it was blocked because the 100 largest corporations may have ended up paying a little bit more on their business supplies. Both are ailing and Staples ultimately sold itself to private equity.
Toys R Us might not welcome a merger, either. Despite its bankruptcy filing, it's not closing down any stores and in fact remains the last national toy store in existence. It has been able to survive as long as it has in the face of competitive threats from Amazon.com and Wal-Mart because of support from the toymakers. They'll undoubtedly need to continue propping up Toys R Us, as it accounted for 11% of sales at Mattel last year and 9% at Hasbro, the second-biggest customer of each after Wal-Mart. But a combined company might not ship as much merchandise as the separate companies do.
Not a monopoly
Yet would any of these players have a leg to stand on in opposing a merger? While the toy industry is dominated by the top five toy companies in the U.S., these toymakers have significantly less market share in Europe.
But Hasbro and Mattel are undoubtedly major players globally. It was recently determined that Hasbro and Mattel control about 22% of global toy sales, a not-insignificant number, but also not one approaching monopolistic proportions.
Hand in glove
Regulators don't necessarily need to follow such justifications to their logical endpoint to make a determination that a merger would be bad for competition and would lead to higher prices for consumers. The vertical integration between the two could also raise objections because Hasbro is not only a toymaker, it's also making TV shows for kids and movies.
Still, while some might see risks associated with such a set-up, a tie-up between Hasbro and Mattel makes a lot of sense, as they are very complementary businesses.
Although both sell toys, Mattel is highly geared to the girls' market with brands like Barbie, American Girls, and Monster High, while Hasbro, with Transformers, Star Wars, and Nerf, is something more of a boys' toy company. Together they would balance each other out and could save significant amounts of money by eliminating manufacturing redundancies in China and elsewhere.
It's not the first time the two toy companies have talked about a tie-up, with discussions stretching back decades, and what the right price is for Mattel is hard to say at the moment as it scrambles to retain relevance in the marketplace. But assuming Hasbro could come up with a fair offer, the antitrust issues might not pose so high of a hurdle that they wouldn't be able to surmount them.
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