Why Wall Street Has a Crush on Barbie
Hasbro Inc. looks at Mattel Inc.’s surprise merger offer and sees only obstacles. What Mattel sees, however, is a great opportunity to enhance what is already a phenomenal Wall Street growth story.
For Mattel CEO John Amerman, buying Hasbro would be a crowning achievement after nine years at the helm of the world’s biggest toy maker--a tenure during which the now 63-year-old Amerman took a near-bankrupt, misdirected business and made it a global marketing dynamo.
Anyone familiar with Walt Disney Co.’s history would recognize how Amerman has succeeded with El Segundo-based Mattel. By the mid-1980s, both Disney and Mattel were languishing because of abysmal management. Yet both also boasted extraordinary franchises: Disney with its animated characters, Mattel with its Barbie dolls and other well-known toy lines.
As Michael Eisner turned Disney inward, then outward--getting employees to focus on the company’s assets, then dramatically leveraging those assets via new movies, theme park attractions and consumer products--so too did Amerman focus on what Mattel already had, then hunted for new ways to extend, package and market those assets to a global audience.
“What Amerman saw were under-marketed brand names,” says Laurie Lively Smith, an analyst at Seidler Cos. in Los Angeles.
Indeed, rather than view itself primarily as a manufacturer, Mattel under Amerman has thought of itself first as a marketing company, Smith says.
Many analysts believe that Amerman now sees a similarly under-marketed franchise in Hasbro, a $2.9-billion (annual sales) company that would add such toy brands as Milton Bradley board games, GI Joe and Play-Doh to Mattel’s stable of Barbie dolls, Disney characters, Hot Wheels, Cabbage Patch Kids and Fisher-Price toys.
Mattel, which on Wednesday announced its desire to merge with Hasbro even though Hasbro said it isn’t interested, arguably needs Hasbro to fill in what still are significant product gaps, principally in board games and boys’ toys.
Yet Wall Street’s view is that while Hasbro would represent a coup for Amerman, Mattel has already proven that it can prosper by continually expanding its successful core products. “It’s a growth machine second to none in the industry,” says David Leibowitz at Burnham Securities.
Case in point: In just a few years’ time, Mattel has turned a Barbie “collector’s series” marketed to adults into a $150-million-a-year business.
And when Mattel introduces computer products this year, they too will be product extensions of sorts--for example, CD-ROMs that will allow girls to design their own cyber-fashions for Barbie.
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From shareholders’ point of view, Mattel’s track record has been spectacular. Since 1987, when Amerman became CEO, sales have rocketed from $1 billion to an estimated $3.75 billion in 1995 (full-year results haven’t yet been reported).
Earnings per share before extraordinary items are expected to near $1.60 for 1995, up from 88 cents in 1992--thus significantly beating Mattel’s stated goal of consistent 15% earnings growth.
Mattel stock has been one of Wall Street’s most dependable growth issues since 1988; adjusted for splits the price has risen 10-fold since.
One sign of Mattel’s stature is that its major shareholders include some of the savviest institutional investors, including Capital Group, Friess Associates and Warren Buffett’s Geico Corp.
On Thursday, as the market reacted for the first time to Mattel’s $5.2-billion stock-swap offer for Hasbro, Mattel shares edged down 50 cents to $31.50--a minor move considering that the stocks of acquiring companies often dive immediately on worries about potential earnings dilution.
While Hasbro may have its own selfish reasons for wanting to stay independent, most industry analysts say Hasbro shareholders will have a hard time finding a good reason to snub Mattel.
Besides offering renowned marketing prowess, Mattel has proven itself as a cost- and quality-conscious manufacturer. Instead of contracting out most of its manufacturing, Mattel owns most of its overseas plants (in China, Malaysia, etc.), giving the company greater control over costs, quality and turnaround-time, analysts say.
Amerman, an extremely charismatic executive by all accounts, also has built a strong management team in El Segundo. Jill Barad, Mattel’s 44-year-old president and Amerman’s probable successor, also is a marketing executive by training. “They are cut from the same cloth,” one analyst says of Amerman and Barad.
Perhaps most comforting to Wall Street as it mulls a Mattel-Hasbro combination is that Mattel has repeatedly demonstrated that it can acquire companies and bring out the best in them.
Mattel’s 1993 purchase of Fisher-Price, for example, “was a home run,” says analyst Jill Krutick at Smith Barney Inc. Yet Mattel didn’t shut down Fisher-Price’s home office in upstate New York. Instead, Mattel wisely opted against disbanding the creative staff that had made Fisher-Price’s preschoolers toys so hot.
Buying-and-nurturing rather than building from nothing has been key for Mattel when the company has looked for new lines far away from its core products. “Why reinvent the wheel and spend hundreds of millions of dollars [on toy development] with no assurance of success?” analyst Harold Vogel at Cowen & Co. asks rhetorically.
Instead, Mattel constantly builds on existing product hits--and when the opportunity arises, it buys what it doesn’t have.
Hasbro has a lot of what Mattel doesn’t have and vice versa. John Amerman won’t have to convince Wall Street of the merits of a deal--just Hasbro managers and the Justice Department.
* HIGH-STAKES GAME
Hasbro shares rocket as company raps Mattel offer. D2
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Toy Story
Mattle Inc. has been a spectacular growth company in recent years, more than doubling sales and earnings between 1990 and 1994 through internal growth and acquisitions.
SALES
In billions:
1994: $3.21
OPERATING PROFIT
In millions:
1994: $521
Note: Operating profit is earnings before restructuring and merger-related charges, taxes and interest.
Source: Mattle Inc.
Shareholders’ View
Mattel stock has been rising steadily since 1988 as the company has generated consistent earnings growth. Hasbro’s earnings, and stock, have been much more erratic. June 30 and Dec. 31 closing prices for the stocks each year, and latest:
Thursday:
Hasbro: $31.50
Mattel: $40.50
Note: Mattel trades on NYSE; Hasbro on Amex.
Source: TradeLine
