Would Regulators Allow Mattel and Hasbro to Merge?

Sometimes you hear great merger stories. Other times merger stories sound like they could be made up. And then there are the mergers that would get a close review from the Federal Trade Commission or the U.S. Department of Justice. So what happens when rumors break that the two U.S. toy giants, Mattel Inc. (NASDAQ: MAT) and Hasbro Inc. (NASDAQ: HAS) have held discussions regarding a possible merger?

Rather than rehashing the Bloomberg news break, 24/7 Wall St. has pondered what this means for consumers. Selling toys is not as an easy business like you might think. Kids are hard to keep loyal to your products. There are serious budgetary issues in the world of toys too. And there is the follow-on effect of what might happen for leverage over brick-and-mortar retailers.

Merging the makers of Barbie, Hot Wheels, Star Wars, Frozen, Play-Doh and thousands of more toy franchises would create a massive powerhouse in toys and games. It would not be a monopoly, as Lego is still on its own. Still, these are the two largest toy makers in America. These would undoubtedly create a mega-powerhouse in toys.

Now we have to consider the sales figures. With 2014 being the most recent for both, Mattel’s revenue was $6.0 billion and Hasbro’s revenue was almost $4.3 billion. Those are of course not just in the United States for large international sales, but the Toy Industry Association has used NPD Group’s Retail Tracking Service data to account for roughly 80% of the U.S. toy retail market: the U.S. toy market grew to $19.45 billion in 2015 (from $18.23 billion in 2014). When factoring up to 100% for a total market figure, NPD’s estimate for the total toy industry to be in the $24 billion range in 2015 for the entire U.S. market size.

The regulatory powers that be have had issues with many mergers of late. These include GE’s appliances units, and they are trying to block Staples and Office Depot/OfficeMax from becoming one. Despite four players in telecom, AT&T was blocked from buying out T-Mobile, and T-Mobile and Sprint were effectively told to not try to merge. The New York Stock Exchange and Nasdaq were not allowed to merge, even if NYSE and ICE merged.
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There are three types of antitrust issues to consider:

• The Sherman Antitrust Act outlaws all contracts, combinations and conspiracies that unreasonably restrain interstate and foreign trade, and it includes agreements among competitors to fix prices, rig bids and allocate customers, which are punishable as criminal felonies.
• The Clayton Act is a civil statute (carrying no criminal penalties) that prohibits mergers or acquisitions that are likely to lessen competition.
• The Federal Trade Commission Act prohibits unfair methods of competition in interstate commerce, but it carries no criminal penalties.

Again, would the government allow this toy merger to go through?

Mattel shares were up 5.3% to $33.53 on Thursday and are already above the consensus analyst target price of $29.73. Its new 52-week range is $19.45 to $34.36, after hitting a new high on Thursday. Mattel’s market cap is $11.4 billion.

Hasbro shares were last seen up 1.5%, at $76.09 in a 52-week trading range of $55.26 to $84.42. Its consensus analyst target is $78.70, and its market cap is $9.5 billion.