Institutional money managers think there's a 50% to 60% chance that G.I. Joe and Barbie will be wed in a merger between Hasbro Inc. and Mattel Inc.
Most say the marriage will have a stormy beginning, assuming the two make it to the altar. The managers say Hasbro, Pawtucket, R.I., is growing increasingly hostile to El Segundo, Calif.-based Mattel's all stock bid.
Institutional investors agree that, long term, the merger would be good. Still, they pursued differing investment strategies when they learned of the proposed deal.
Some sold Hasbro stock, which rose quickly after Mattel's announcement of its bid. Hasbro's share price rose to about $41 per share Jan. 31 from a pre-announcement level of $30.
Others snapped up Hasbro stock as it rose in price, hoping to ride on the coattails of what they think could be one of the strongest toy company mergers ever.
And still others are holding both Mattel and Hasbro shares close to their chests, hoping to collect richer rewards from a combined entity that will dominate the global toy market.
Mattel, the biggest U.S. toy company, made a 1.67 per share exchange offer, which totals $5.2 billion, for Hasbro, the second largest toy manufacturer.
Hasbro management is now strongly rejecting the deal. Mattel's offer, said some observers, may become hostile if Hasbro doesn't soften its stance.
Good for Hasbro shareholders
"We're very excited about the deal - it makes all the sense in the world to merge these two companies. It's really in the best interests of Hasbro shareholders," said John W. Rogers, president of Ariel Capital Management Inc., Chicago.
Ariel recently sold about a third of its position in Hasbro, because of the run-up in Hasbro's share price after the merger talks were announced. Ariel still holds about 1.3 million shares.
The company has no plans to reduce the Hasbro holding further. "Our equity analysts are convinced that Mattel is a serious player about this deal and will not go away quietly," Mr. Rogers said.
If the deal is not consummated, Mr. Rogers said, shareholders will be negatively affected, short term, as Hasbro stock likely will fall to the $36 to $37 per share range.
But long term, he said, Hasbro will still be a good investment because of its strong toy brands and management.
"Hasbro will still rise into the $50 range, even if it doesn't merge with Mattel," said Mr. Rogers. "It will just take longer to do it on its own."
Not everyone is willing to wait. Liz Miller, portfolio manager at Trevor Stuart Burton & Jacobsen, Inc., New York, said the firm had decided to sell Hasbro a few weeks ago, then did so with the runup that followed news of the proposed deal.
Trevor Stuart, a price-sensitive growth manager, decided to sell for fundamental reasons, she said. Hasbro stock acts like a retail stock and was being affected by distribution and inventory pressures. The toy industry is suffering from the same ailments as the retail industry, said Ms. Miller.
Ms. Miller owned Mattel until last summer and sold the stock "at similar levels as today." The stock had been strong on expectation of the Pocahontas dolls tied in to last summer's movie, but "we felt those expectations might have been too much."
Kemper fund buys shares
On the flip side, Gary Langbaum, executive vice president and manager of the Total Return Fund for Kemper Financial Services, Chicago, bought Hasbro right after Mattel announced its "friendly" bid.
Mr. Langbaum committed about $4 million to Hasbro because he thinks the deal stands a "reasonably good (or 60%) chance of getting done."
'If you like Mattel, this is a good way to play that company, by acquiring the Hasbro shares it wants. Arbitrage is adding about 20% to the price of Hasbro now and the incremental value of Mattel down the road is going to increase if the deal happens," Mr. Langbaum said.
But he acknowledges that to succeed, Mattel might have to sweeten its share offer a little and perhaps up the $100 million insurance policy it has offered Hasbro if the merger is denied by the Federal Trade Commission.
Rose Papp is director of research and co-manager of the L. Roy Papp Stock Fund from L. Roy Papp & Associates Investment Counsel, Phoenix. She gives the deal a better than 50% chance.
"Within two years, the shareholders of both companies will be better off," Ms. Papp said. "Hasbro shareholders get a big premium and Mattel gets more product."
Ms. Papp bought Mattel a year ago at $21 per share and by year-end 1995, the firm had 466,000 shares of Mattel, worth about $15 million. Mattel is now one of the fund's 20 largest holdings.
While there are concerns that Mattel is paying too much for Hasbro, the breadth of product line Mattel will gain with Hasbro's popular board games and boys' action figures - such as G.I. Joe - could be worth the price, said Ms. Papp. About 25% of Mattel's business comes from the perennially popular Barbie line, and Ms. Papp said Mattel wants to broaden its revenue base with a wider product offering.
Shareholder appeal 'smart'
Mattel was smart to appeal directly to Hasbro's shareholders. Major institutions own about 36% of the company, and about five investors own nearly one-third of Hasbro.
According to last year's proxy statement, the current chairman of Hasbro, Alan Hassenfeld, owns 9% of the stock. Ms. Papp said Time Warner Inc., New York, owns 13.8%.
Other major institutional investors include Oppenheimer & Co., New York, with 8.7% of the shares; Ruane Cunniff & Co. Inc., New York, 7.7%; and Capital Management & Research Co., Los Angeles, has 5.5%., Ms. Papp said. These investors refused to comment on or did not return calls about the proposed merger.
But not everyone is optimistic that Mattel will ever gain control of Hasbro.
Said Jill Krutick, leisure analyst at Smith Barney & Co., New York: "We believed this deal was pretty speculative from the beginning." She cited antitrust concerns, and that Hasbro is very keen on remaining an independent company. Hasbro has several anti-takeover mechanisms including a poison pill, said Ms. Krutick.
Hasbro's reluctance to accept Mattel's offer has some managers wondering what Hasbro management is thinking.
If deal dies, then what?
"If this deal doesn't go through, the big question is what Hasbro's board of directors is going to do to increase shareholder value," said Ann Miletti, an analyst at Strong Capital Management Inc., Menomonee Falls, Wis.
Strong hadn't invested much in toy companies prior to its purchase of Hasbro shares last August. "It has basically been dead money ever since, with regard to the share price," said Ms. Miletti. The Strong Common Stock and Opportunity mutual funds own about 400,000 shares now.
But Strong has decided to hold onto Hasbro for the long term because two fundamental factors are in the company's favor. One is that there are only two major toy companies in the world, and even if they don't marry, Hasbro will remain a strong force.
Secondly, global distribution of toys is expanding rapidly, mainly through outlets like Toys "R" Us Inc., and Hasbro and Mattel will profit from that push by a U.S. retailer.
"But we still believe the Hasbro stock value was much too cheap prior to Mattel's offer. We and other investors are waiting to see what Hasbro management is going to do to enhance shareholder value if Mattel isn't accepted. In light of flat share prices, we wonder why Hasbro wouldn't accept an offer of $53 per share that even comes with a $100 million insurance policy if the merger gets bogged down in antitrust questions," Ms. Miletti said.
She said she thinks there would be ways for a combined company to avoid antitrust problems. She wagered that Mattel's chance of convincing Hasbro to go to the altar is about 60%.
Fund manager 'loves' Mattel
As for Mattel's stock, "I love this company," said Timothy E. Keefe, manager of the Federated Investors' American Leaders mutual fund, Pittsburgh.
"It has great management and it's a great company. A deal with Hasbro would be a positive for me as a shareholder; it would combine the strengths of both companies."
But after running probability analyses, Mr. Keefe said he really doesn't know which way the deal is likely to go, and said the market agrees with him, as seen in Hasbro's share price.
"I really don't know what's going to happen with this. It's the first time I can remember where I'm stuck in the middle of a deal like this. I've tried to see if I can get an edge on what's likely to happen with the deal and I just can't predict the eventual turnout.
"Both companies have compelling reasons for and against the deal and it's been hard for investors to decide who has the true story," Mr. Keefe said.
Mr. Keefe now holds about 400,000 shares of Mattel in the $750 million fund he manages. He has owned the stock since 1991 and it has made some good gains for him, he said.
"If the deal goes through, I'll be in great shape. If it doesn't, I'll still be in great shape because Mattel is not going anywhere except up."