Two Makers of Plush Toys to Join Forces : Merger: Applause and Dakin say that together the companies will be better able to withstand sudden market turns.

Applause Inc. and Dakin Inc., two Woodland Hills-based toy makers whose stuffed animals and licensed products have long competed with one another on toy store shelves, have agreed to merge.

The merger, to be completed through an exchange of stock prior to a planned initial public offering early next year, will bring together two privately held companies that sit atop the $1-billion-a-year plush-toy industry. The two companies hold licenses for toys tied to some of this summer’s biggest movies, including “Batman Forever,” “Casper” and “Pocahontas.”

Executives for both companies said the merger will yield significant cost savings, provide a cushion against rough spots in an often unpredictable industry, and shore up deficiencies each company has in certain market categories.

Applause and Dakin have traditionally sold their toys primarily in department stores, airport gift shops and independent toy stores, bypassing mass retail chains such as Toys R Us and Wal-Mart.

But Dakin Chief Executive Robert Solomon said the merger will help to expand his firm’s limited presence in those distribution channels, dominated by Mattel, Hasbro and other toy giants.

Solomon said the proposed merger has already received preliminary federal antitrust clearance.

Terms of the merger, expected to be completed within two months, were not disclosed. Applause had sales of $118 million last year, while Dakin had sales of $59 million, said Melvin Gagerman, who is chief executive of Applause and will retain the top post when the companies merge.

The new company, to be called Applause Enterprises Inc., will be controlled by the same investors who now control Applause, including Trefoil Capital Investors, Roy E. Disney of Walt Disney Co., Leon Black of Apollo Investments, venture capitalist Alan Patricoff and Loews Corp.

With longstanding licenses to make toys tied to popular Disney, Warner Bros. and Sesame Street characters, Applause is the dominant player in its niche. Dakin, founded in 1955, is perhaps the industry’s most widely recognized brand name, Gagerman said.

The merger could lead to savings of $5 million to $10 million, largely by consolidating distribution, accounting, credit and other administrative departments at each company, Gagerman said. Layoffs are likely, Gagerman acknowledged, though he offered no specifics.

Applause employs about 600 people worldwide, he said, including 225 at the company’s Woodland Hills headquarters, and 75 at a distribution center in Carson. Dakin employs about 300, including 20 at its Woodland Hills executive offices. Both companies get more than half of their products from suppliers in Asia.

The merger will also mean that the two companies will no longer be bidding against each other for product licenses, a situation that often led to escalated prices, Dakin’s Solomon said.

Solomon, who will serve as a consultant to the combined company, was chief executive of Applause until 1991, when he bought a controlling interest in Dakin. He said he approached Applause about the merger two months ago.

While Applause was profitable last year, officials said Dakin was not, and that together the companies will be in a better position to withstand sudden market turns.

Dakin’s sales topped $200 million in 1989, fueled by a craze for Garfield dolls. When that trend died in the early 1990s, Dakin’s revenue crashed to $75 million, and never bounced back.

Solomon said the planned initial public offering will allow the new firm to acquire other companies that make gift and novelty items.