Mergers & Acquisitions: Mattel and Texas Instruments Case Study

Introduction

One of the more fascinating and complex areas of corporate strategy is when companies engage in mergers and acquisitions as a means to further their growth, development, and diversification. This report examines two companies in particular: Mattel and Texas Instruments. After drawing on a thorough literature review, questions about both firms are posed and answered. While there is more than one way to launch a takeover or acquisition bid, some methods are clearly better suited than others depending on the strategic context.

Mattel: Acquisition Strategy and Market Positioning

Mattel has demonstrated a clear concern with branching out and modernizing its product mix in response to changing technologies, consumer tastes, and market trends. Mattel has made significant profits from Barbie and other traditional toys over the years. However, as proven by the demise of firms like Blockbuster, standing pat and failing to evolve in terms of product type and product mix can be the death of a company in the long term. It should therefore come as no surprise that Mattel has been branching out into more modern products and marketing channels such as tablets and video games, just to name two examples. Rather than relying solely on reputation and history, Mattel is interested in products that generate ongoing buzz in the marketing sphere. Diversifying in this way is intended to maintain or improve the company's brand name and market share (Brown, 2013).

Per the advice of Chang et al., Mattel would be wise to recruit advisers who previously worked for firms it is considering acquiring, so as to ensure that any target firm would be as complementary as desired (Chang, Shekhar, Tam & Yao, 2016). If obtaining first-hand information about a target firm is not feasible, the analysis and perspective of investment bankers and stock analysts can serve as a valuable alternative. Like Mattel, these professionals are viewing the target from the outside in. However, investment bankers engage in this type of analysis professionally and tend to have a well-developed ability to spot red flags and positive signals regarding whether a firm is sound acquisition material (Haushalter & Lowry, 2010).

The complementary nature of an acquisition is important because the ultimate goal is to expand shareholder wealth. If an acquisition were to excessively fragment or dilute Mattel's core strengths, the opposite outcome could easily result (Alexandridis, Petmezas & Travlos, 2010). A word of caution, however: there will always be some degree of uncertainty and unknowns in any acquisition. Even with the most thorough due diligence, there will be things that are not discovered — or not discovered quickly enough — during the acquisition process. Furthermore, market volatility can wreak havoc even when every other element appears to be aligned.

When it comes to maximizing and upholding shareholder wealth in the context of mergers and acquisitions, an important part of the calculation is executing transactions at the right time. There is such a thing as waiting too long and missing an opportunity. Equally, waiting just a little longer can sometimes make a significant difference in price and outcome. Mattel is large and powerful enough to be selective. The company can obtain what it needs from an acquired firm without overpaying, and careful timing can save millions — if not billions — of dollars (Tarsalewska, 2014). If the surrounding market is in poor shape — including episodes of financial instability such as bank runs, as seen during the Great Recession of 2007–2009 — Mattel should probably take a conservative approach, even if it has the resources to act otherwise (He & Manuela, 2016).

Mattel is large enough that it rarely needs to worry about absorbing a firm anywhere near its own size. Snapping up smaller firms is more about expanding market share and gaining strategic advantage than eliminating the largest competitors (Degryse, Masschelein & Mitchell, 2010). That said, Mattel should remain mindful that competition is both domestic and international, and that firms in other markets may operate with significantly lower labor and other costs. Even when Mattel operates internationally, it must abide by the standards of corporate social responsibility and ethics as defined by its home markets (Brealey, Cooper & Kaplanis, 2009). Simple legal compliance is something that lawyers and compliance experts can help Mattel navigate, but the obligations do not stop there (Bris & Cabolis, 2008).

Mattel: Organic Growth, Due Diligence, and Capital Structure

When considering alternatives to acquisition, Mattel's basic options are organic growth and inorganic growth, with acquisitions representing the latter. Within the realm of organic growth, there are sub-options such as maintaining the ground-based retail strategy of the past or expanding into online sales through its own website as well as platforms like Amazon. In practice, ignoring online sales is not a viable option. Online sales giants have demonstrated that even previously dominant brick-and-mortar retailers such as Walmart and Best Buy are beginning to feel the pressure from e-commerce. Despite this, real barriers to entry do exist in the toy industry. Industry leaders like Mattel have the size and power to dominate retail shelf space, which tends to keep out smaller startup firms and regional competitors. Their scale allows them to charge lower prices while still protecting their margins.

In terms of how Mattel can and should protect itself through due diligence, the company needs to apply precepts from the academic literature, including engaging advisers who formerly worked at target firms or who are deeply knowledgeable about the toy industry. Mattel must also ensure that firms it is considering acquiring are being fair and transparent, while accounting for the international implications of any merger. Mattel is an industry giant, and firms that are fearful of or even open to being acquired by Mattel may not always be fully honest about their operations. For this reason, some targets may be less than transparent about what is truly happening within their organization (Gompers, Kaplan & Mukharlyamov, 2016).

Even given the proverbial landmines that Mattel faces in acquisitions, and the dishonesty that sometimes arises, Mattel must remain mindful of the "eat or be eaten" mentality. Firms that were once the unquestioned leaders of their industries — such as McDonald's and Walmart — are now being threatened by competitors and upstarts. Just as the internet is chipping away at Walmart's dominance, the same dynamic can and will affect Mattel if the company becomes complacent. Mattel must find a way to adapt to new market realities, or risk being overtaken by other firms, including those outside the toy sector (Gorton, Kahl & Rosen, 2009).

There are ways for mergers to go wrong, but most pitfalls can be avoided with proper preparation and caution (Duchin & Schmidt, 2013; Devos, Kadapakkam & Krishnamurthy, 2008). One important example is the capital structure used to finance the deal. Mattel is in a position where it can use cash or cash equivalents more easily than many other firms. Leveraging that financial strength is generally advantageous, as excessive reliance on debt can create both short- and long-term problems. That said, debt can be deployed strategically to help grow the firm at minimal cost. As with most financial decisions, balance is key — but using financial muscle will generally be the best approach in most cases (Golubov, Petmezas & Travlos, 2015).

Conclusion

As the literature and the analyses above demonstrate, even market powers and firms worth billions of dollars must concern themselves with valuation, mergers and acquisitions, and portfolio diversification. These considerations are deeply interconnected, and the firms involved must navigate them thoughtfully so as to retain or gain market share rather than fade and miss opportunities. Mattel understands that it must act to preserve its market position, while Texas Instruments must pursue acquisitions that are strategically advantageous. Even so, it is clear that target firms wield considerable power in these negotiations. There are indeed firms that actively position themselves to be acquired. The medium of exchange used during that process — whether by Mattel, Texas Instruments, or any other acquirer — is often the key determinant of how things play out and who ultimately benefits most (Fishman, 1989).

How things ultimately unfold for these firms depends heavily on what is driving the acquisition in the first place. Mattel seeks to protect and sustain its market power and position. Texas Instruments seeks to grow and become a more dominant force. Target firms generally understand these motivations and negotiate accordingly, with the goal of maximizing the payout to their ownership and investors. The major shareholders of any firm being acquired stand to gain significantly, and they will negotiate with that objective firmly in mind (Petmezas, 2009).

References

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