Mattel and Learning Co. Plan $3.8-Billion Merger

As earnings from lines such as Barbie and Hot Wheels took a dramatic fourth-quarter tumble, toy manufacturer Mattel Inc. on Monday announced a $3.8-billion merger with Learning Co., the nation’s second-largest software company and owner of popular titles including “Carmen Sandiego,” “Riven” and “Myst.”

The merger announcement, made before New York Stock Exchange trading began Monday, wasn’t enough to keep Mattel’s stock from plunging $8.13 to close at $22 after Mattel said that post-Thanksgiving toy orders from major retail chains had stalled. Learning Co. shares fell $3.31 to $25, also on the NYSE.

The unexpected drop in revenue, driven by retailers cutting back on new orders to avoid excess inventory, means Mattel won’t hit analysts’ yearly earnings estimates of about $1.85 per share. The El Segundo company expects yearly earnings to fall to about $1.20 per share.

Despite the stock price plunge, industry observers generally applauded the merger deal, which would give the world’s largest toy maker an immediate presence in the fast-growing world of high-tech games and software.

“The transaction as described makes for an excellent fit,” said David Leibowitz, a toy industry analyst with Burnham Securities in New York. “Each company brings lots to the table, which is what you want in a marriage of this sort, so this one looks to be a win-win.”

Observers say Learning Co. would give Mattel a hefty edge in its ongoing battle with Hasbro Inc., the No. 2 toy manufacturer. Earlier, Hasbro purchased electronic games company Tiger Electronics Inc. and software games maker MicroProse Inc.

And while “Mattel and Hasbro have had tough times in the past making the adjustment to interactive kinds of stuff, this deal would seem to get thumbs up from everyone involved,” said Eric Johnson, a marketing professor at Vanderbilt University in Nashville who studies the industry.

Mattel Chairman and Chief Executive Jill Barad said the deal, which now must be approved by federal regulators and shareholders at both companies, would help Mattel’s ongoing transformation “from a toy company to a global children’s products company. As a result of this merger, we will achieve our goal of building a $1-billion interactive software business.”

The deal is also designed to help smooth out yearly sales at Mattel, which, like all toy manufacturers, is unusually dependent upon fourth-quarter sales made through major retailers such as Toys R Us Inc. and Wal-Mart Stores Inc. Learning Co. would give Mattel access to retailers like the upscale Zany Brainy chain, as well as myriad software resellers.

Monday’s stock price plunge surprised analysts who had expected Mattel’s Barbie and Hot Wheels lines to enjoy a bright holiday season. Sales were strong into the Thanksgiving weekend, Barad said, but “everything came to a screeching halt” as inventory-conscious retailers stopped placing orders. She described the dramatic cutoff in orders as an industrywide situation that wasn’t restricted to Mattel.

The lack of orders from retailers hit almost all of Mattel’s well-known lines, including Barbie, the venerable doll whose sales had been growing at a 10% rate over 1997. The doll line that celebrates its 40th anniversary in 1999 will finish the year on a downturn, the first time in more than a decade.

Observers agreed that some of Mattel’s fourth-quarter woes are related to inventory changes at retailers, who are increasingly worried about ending the holiday season with excess inventory.

“They’re much more careful when it comes to just placing one huge order and then discounting it at the end of the Christmas season if it doesn’t sell,” said Barton Weitz, a marketing professor at the University of Florida in Gainesville.

But other observers suggested that retailers will continue to order more toys if consumer demand continues to be strong. “I didn’t see inventory concerns preventing any retailer from asking for more Furbys,” Leibowitz said, referring to a fuzzy, interactive, talking ball that is one of this season’s hottest sellers.

Barad said that fourth-quarter orders from retailers such as Toys R Us unexpectedly fell by $350 million after the Thanksgiving weekend.

Mattel then opted to delay delivery of $150 million in 1999 toys until early next year. That accounting move pushed the total order shortfall to $500 million, but analysts said it should give Mattel a brighter start for 1999. Toy manufacturers have typically shipped those “pre-orders” during the fourth quarter.

Some toy industry observers questioned whether the stock price plunge might force Mattel to change terms of the planned deal. Mattel had agreed to pay the equivalent of $3.8 billion in its own stock for Learning Co.--about $33 per share of Learning Co. stock.

But Barad said the deal remains on track. “You don’t look at closing a deal based on the price on the day it was announced. Looking over the longer term, I think we will be much better positioned on share price.”

Mattel, with $4.85 billion in annual revenue, will grow dramatically if the deal is completed. Learning Co. has projected 1998 revenue of $850 million. The deal is just one avenue that Mattel is exploring because consumers are buying more nontraditional toys such as electronic and computer games.

Earlier this year, Mattel acquired American Girl, a mail-order doll company that does $600 million in direct-to-consumer sales. Mattel also plans to start catalog and online sales of its lines in 1999, Barad said.

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MERGER PRIMER

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Software Scorecard

Software sales leaders in the last year, measuring retail sales of all computer software from November 1997 through October 1998:

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Market Share Rank Company Retail sales (% of dollar volume) 1 Microsoft $1.2 billion 22.9% 2 Learning Co. 592.8 million 11.7 3 Cendant Software 419.5 million 8.3 4 Intuit 296.3 million 5.8 5 Symantec 216.2 million 4.3 6 Electronic Arts 158.3 million 3.1 7 Adobe Systems 155.4 million 3.1 8 Network Associates 132.2 million 2.6 9 GT Interactive 120.6 million 2.4 10 Hasbro Interactive 102.7 million 2.0

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Source: PC Data