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Hasbro Uses Antirust to Derail Merger Threat From Mattel

Mattel’s desire to acquire Hasbro has been going on in public since Jan. 24, 1996. However, on Friday, February 3, Mattel announced that it was abandoning the effort. Hasbro seems to have succeeded in defusing the takeover threat by involving the Justice Department’s antitrust division early on, in an attempt to "derail or long delay any merger." This tactic seems to have increased the cost of a takeover, thus making the acquisition deal less attractive to Mattel, the raider.

 This is another example of shark repellents (anti-takeover tactics) with a non-textbookish twist that involves antitrust. The objective of involving the antitrust division is an attempt by the target firm (Hasbro) to undo the threat of being acquired by Mattel, hence the word anti-takeover tactic. Such tactics are sometimes referred to as shark repellents, where "shark" is a reference to the raiding firm (Mattel in this case).

 Note that the crucial word is the threat of, not the actual, takeover that is necessary to discipline managers into acting in the agents’ (shareholders) best interest. Once again, the anti-takeover tactic has prevailed over the takeover threat; Hasbro’s managers are not maximizing shareholders’ wealth and have succeeded in keeping their jobs.

Market’s Reaction.

Hasbro’s shares plunged 15% to $34.625 after the announcement, but "didn’t fall further to the prebid level of about $30 a share, traders say, became of expectations that the company will have to do something to demonstrate its competitiveness after rejecting a bid that carried a 73% premium." This quotation illustrates two things:

(1) Financial markets can act as a disciplining mechanism so as to improve shareholder value. As you recall from the lecture on corporate governance, there is another source of disciplining that managers face. It comes from within the company as a threat of shareholders or the board of directors firing management.

(2) The consensus investor (average investor/"the market") must have thought that the deal would have been in Hasbro’s interest. Without the deal, Hasbro would be worth less; thus its stock price plummeted.

Q. Mattel shares, on the other hand, rose $1.25 Friday. So what should this suggest to you?

A. One possible explanation is that the market interpreted the news as favorable to Mattel, i.e., that the acquisition itself would not have added value to shareholders.

Q. What other piece of information would strengthen your explanation?

 A. The fact that the stock market (S&P 500) went down on Friday, reinforces the argument that Mattel’s stock price moved in the opposite direction of the market due to favorable news specific to the company. In principal, though unlikely, such a movement could have been pure coincidence and had nothing to do with this news event.

Story Source: WSJ, 2/5/1996, p. A3.

By Alex Tajirian