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Chapter 5
Implementation: Search through Closing—Phases 3 to 10
Examination Questions and Answers
1. The first step in establishing a search plan for potential acquisition or merger targets is to identify the primary
screening or selection criteria. True or False
2. The number of selection criteria should be as extensive as possible to ensure that all factors relevant to the firm’s
decision-making process are considered. True or False
3. Only acquiring firms perform due diligence. True or False
4. Banks are commonly used to provide bridge or temporary financing to pay all or a portion of the purchase price
and meet possible working capital requirements until permanent financing can be found. True or False
5. The targeted industry and the maximum size of the potential transaction are often the most important selection
criteria used in the search process. True or False
6. Advertising in the business or trade press is generally a very efficient way to locate attractive acquisition target
candidates. True or False
7. An excessively long list of screening criteria used to develop a list of potential acquisition targets can severely
limit the number of potential candidates. True or False
8. The appropriate approach for initiating contact with a target firm is essentially the same for large or small, public
or private companies. True or False
9. In contacting large, publicly traded firms, it is usually preferable to make initial contact through an intermediary
and at the highest level of the company possible. True or False
10. Rumors of impending acquisition can have a substantial deleterious impact on the target firm. True or False
11. So-called permanent financing for an acquisition usually consists of long-term unsecured debt. True or False
12. Confidentiality agreements are usually signed before any information is exchanged to protect the buyer and the
seller from loss of competitive information. True or False
13. Confidentiality agreements often cover both the buyer and the seller, since both are likely to be exchanging
confidential information, although for different reasons. True or False
14. Confidentiality agreements usually also cover publicly available information on the potential acquirer and target
firms. True or False
15. A letter of intent formally stipulates the reason for the agreement, major terms and conditions, the responsibilities
of both parties while the agreement is in force, a reasonable expiration date, and how all fees associated with the
transaction will be paid. True or False
16. The signing of a letter of intent usually precludes the target firm from suing the potential acquiring company if the
acquirer eventually withdraws its initial offer. True or False
17. “No shop” provisions are seldom found in letters of intent. True or False
18. The letter of intent often specifies the type of information to be exchanged as well as the scope and duration of the
potential buyer’s due diligence. True or False
19. Letters of intent are usually legally binding on the potential buyer but rarely on the target firm. True or False
20. The actual price paid for a target firm is unaffected by the buyer’s due diligence. True or False
21. Total consideration refers to what is to be paid for the target firm and usually only consists of cash or stock,
exclusively. True or False
22. The total purchase price paid by the buyer should also reflect the assumption of liabilities stated on the target’s
balance sheet, but it should exclude all off balance sheet liabilities. True or False
23. Discretionary assets are undervalued or redundant assets not required to run the acquired business and which can
be used by the buyer to recover a portion of the purchase price. True or False
24. The actual purchase price paid for a target firm is determined doing the negotiation process and is often quite
different from the initial offer price stipulated in a letter of intent. True or False
25. Buyers routinely perform due diligence on sellers, but sellers rarely perform due diligence on buying firms. True
or False
26. Due diligence is the process of validating assumptions underlying the initial valuation of the target firm as well as
the uncovering of factors that had not previously been considered that could enhance or detract from the value of
the target firm. True or False
27. It is usually in the best interests of the seller to allow the buyer unrestricted access to all seller employees and
records doing due diligence in order to create an atmosphere of cooperation and goodwill. True or False
28. Buyers should not be concerned about performing an exhaustive due diligence since in doing so they could
degrade the value of the target firm because of the disruptive nature of a rigorous due diligence. The buyer can be
assured that all significant risks can be handled through the standard representations and warranties commonly
found in agreements of purchase and sale. True or False
29. Bridge financing refers to the temporary financing obtained by the buyer to pay all or a portion of the purchase
price until so-called permanent financing can be arranged. True or False
30. Seller financing represents a very important source of financing for buyers. True or False
31. Elaborate multimedia presentations made to potential lenders in an effort to “shop” for the best financing are often
referred to as the “road show.” True or False
32. The buyer’s ability to obtain adequate financing is a closing condition common to most agreements of purchase
and sale. True or False
33. Closing is a phase of the acquisition process that usually occurs shortly after the target has been fully integrated
into the acquiring firm. True or False
34. Shrewd sellers often negotiate a break-up clause in an agreement of purchase and sale requiring the buyer to pay
the seller an amount at least equal to the seller’s cost associated with the transaction. True or False
35. The purchase price for a target firm may be fixed at the time of closing, subject to future adjustment, or be
contingent on future performance. True or False
36. Brokers or finders should never be used in the search process. True or False.
37. More and more firms are identifying potential target companies on their own without the use of investment
bankers. True or False
38. Fees charged by investment bankers are never negotiable. True or False
39. Debt-to-equity ratios may be used to measure a firm’s degree of leverage and are frequently used as a search
criterion in looking for potential takeover candidates. True or False
40. Even though time is critical, it is always critical to build a relationship with the CEO of the target firm before
approaching her with an acquisition proposal. True or False
41. There is no substitute for performing a complete due diligence on the target firm. True or False
42. Confidentiality agreements are rarely required when target and acquiring firms exchange information. True or
False
43. The financing plan may be affected by the discovery during due diligence of assets that can be sold to pay off debt
accumulated to finance the transaction. True or False
44. There is no need for the seller to perform due diligence on its own operations to ensure that its representations and
warranties in the definitive agreement are accurate. True or False
45. The closing often involves getting all the necessary third-party consents and regulatory and shareholder approvals.
True or False
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46. The purchase price may be fixed at the time of closing, subject to future adjustment, or it may be contingent on
future performance of the target business. True or False
47. Earnouts are generally very poor ways to create trust and often represent major impediments to the integration
process. True or False
48. Loan covenants are promises made by the borrower that certain acts will be performed and others will be avoided.
True or False
49. Buyers generally want to complete due diligence on the seller as quickly as possible. True or False
50. A data room is a method commonly used by sellers to limit buyer due diligence. True or False
1. Each of the following is true about the acquisition search process except for
a. A candidate search should start with identifying the primary selection criteria.
b. The number of selection criteria should be as lengthy as possible.
c. At a minimum, the primary criteria should include the industry and desired size of transaction.
d. The size of the transaction may be defined in terms of the maximum purchase price the acquirer is willing
to pay.
e. A search strategy entails the use of electronic databases, trade publications, and querying the acquirer’s
law, banking, and accounting firms for qualified candidates.
2. The screening process represents a refinement of the search process and commonly utilizes which of the following
as selection criteria
a. Market share, product line, and profitability
b. Product line, profitability, and growth rate
c. Profitability, leverage, and growth rate
d. Degree of leverage, market share, and growth rate
e. All of the above
3. Initial contact should be made through an intermediary as high up in the organization for which of the following
firms
a. Companies with annual revenue of less than $25 million
b. Medium sized companies between $25 and $100 million in annual revenue
c. Large, publicly traded firms
d. Small, privately owned firms
e. Small, privately owned competitors
4. All of the following statements are true about letters of intent except for
a. Are always legally binding
b. Spells out the initial areas of agreement between the buyer and seller
c. Defines the responsibilities and rights of the buyer and seller while the letter of intent is in force
d. Includes an expiration date
e. Includes a “no shop” provision
5. All of the following are true about a confidentiality agreement except for
a. Often applies to both the buyer and the seller
b. Stipulates the type of seller information available to the buyer and how the information can be used
c. Limits the use of information about the seller that is publicly available
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d. Includes a termination date
e. Limits the ability of either party to disclose publicly the nature of discussion between the buyer and seller
6. The actual price paid by the buyer for the target firm is determined when
a. The initial offer is made
b. As a result of the negotiation process
c. When the letter of intent is signed
d. Following the completion of due diligence
e. Once a financing plan has been approved
7. Total consideration is a legal term referring to the composition of the purchase price paid by the buyer for the
target firm. It may consist of which of the following:
a. Cash
b. Cash and stock
c. Cash, stock, and debt
d. A, B, and C
e. A and B only
8. In a merger, the acquiring firm assumes all liabilities of the target firm. Assumed liabilities include all but which
of the following?
a. Current liabilities
b. Long-term debt
c. Warranty claims
d. Fully depreciated operating equipment
e. Off-balance sheet liabilities
9. The negotiation process consists of all of the following concurrent activities except for
a. Refining valuation
b. Deal structuring
c. Integration planning
d. Due Diligence
e. Developing the financing plan
10. All of the following are true of buyer due diligence except for
a. Due diligence is the process of validating assumptions underlying valuation.
b. Can be replaced by appropriate representations and warranties in the agreement of purchase and sale.
c. Primary objectives are to identify and to confirm sources and destroyers of value
d. Consists of operational, financial, and legal reviews.
e. Endeavors to identify the “fatal flaw” that could destroy the deal
11. Which of the following are commonly used sources of financing for M&A transactions?
a. Asset based lending
b. Cash flow based lending
c. Seller financing
d. A and B only
e. All of the above
12. Which of the following is generally not true of a financing contingency?
a. It is a condition of closing in the agreement of purchase and sale
b. Trigger the payment of break-up fees if not satisfied.
c. Protects both the lender and seller
d. Primarily protects the buyer
e. Primarily protects the seller
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13. Which of the following is generally not true of integration planning?
a. Is of secondary importance in the acquisition process.
b. Is crucial to the ultimate success of the merger or acquisition
c. Represents an opportunity to earn trust among all parties to the transaction
d. Involves developing effective communication strategies for employees, customers, and suppliers.
e. Is often neglected in the heat of negotiation.
14. All of the following are true of closing except for
a. Consists of obtaining all necessary shareholder, regulatory, and third party consents
b. Requires significant upfront planning
c. Is rarely subject to last minute disagreements
d. Involves the final review and signing of such documents as the agreement of purchase and sale, loan
agreements (if borrowing is involved), security agreements, etc.
e. Fulfillment of the so-called closing conditions
15. Which of the following do not represent typical closing documents in an asset purchase?
a. Letter of intent
b. Listing of any liabilities to be assumed by the buyer
c. Loan and security agreements if the transaction is to be financed with debt
d. Complete descriptions of all patents, facilities, and investments
e. Listing of assets to be acquired
16. Which of the following is not typically true of post-closing evaluation of an acquisition?
a. It is important not to change the performance benchmarks against which the acquisition is measured
b. It is critical to ask the tough questions
c. It is an opportunity to learn from mistakes
d. It is commonly done
e. It is frequently avoided by acquiring firms because of the potential for embarrassment.
17. Which of the following is true about integration planning? Without integration planning, integration is not likely to
a. Provide anticipated synergies
b. Proceed without significant disruption to the target business’ operations
c. Proceed without significant disruption to the acquirer’s operations
d. Be completed without experiencing substantial customer attrition
e. All of the above
18. Which of the following statements are true about due diligence?
a. The seller should perform due diligence on its own operations.
b. The seller should perform due diligence on the buyer.
c. The seller should perform due diligence on the lender used by the buyer to finance the transaction.
d. A & B
e. A, B, & C
19. Which of the following is not true of the financing plan?
a. It is rarely affected by the discovery during due diligence of target assets not required to operate the
business.
b. It may include both stock and debt.
c. It may include a combination of stock, debt, and cash.
d. It serves as a reality check on the buyer.
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e. None of the above.
20. Refining the target valuation based on new information uncovered during due diligence is most likely to affect
which of the following
a. Total consideration
b. The search process
c. The business plan
d. The acquisition plan
e. The target’s business plan
21. The negotiation process consists of all of the following except for
a. Refining valuation
b. Due diligence
c. Closing
d. Developing a financing plan
e. Deal structuring
22. Closing is included in which of the following activities?
a. Development of a business plan
b. Development of an acquisition plan
c. The search process
d. The negotiation process
e. None of the above
23. Integration planning is included in which of the following activities?
a. Development of a business plan
b. The search process
c. Development of a financing plan
d. Post-closing integration
e. None of the above
24. The development of search criteria is included in which of the following activities?
a. Development of a business plan
b. Development of the acquisition plan
c. Post-closing integration
d. Post-closing evaluation of the acquisition process
e. None of the above
25. The financing plan is included in which phase of the acquisition process?
a. The development of the business plan
b. The negotiation phase
c. The integration planning phase
d. The development of the acquisition plan
e. None of the above
26. Which of the following is not true of the acquisition process?
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a. It always follows a predictable sequence of steps.
b. It sometimes deviates from the sequence outlined in this chapter.
c. It involves a negotiation phase
d. It involves the development of a business plan
Case Study Short Essay Examination Questions:
Oracle’s Efforts to Consolidate the Software Industry
Key Points:
• Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its
business strategy.
• A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing
business environment.
• Increasingly, the major software competitors seem to be pursuing very similar strategies.
• The long-term winner often is the firm most successfully executing its chosen strategy.
_____________________________________________________________________________________________
Oracle ‘s completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat
more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of
proprietary database and middleware services (accounting for about three-fourths of the firm’s revenue), Oracle is now seen
as a leader in enterprise resource planning, customer relationship management, and supply chain management software
applications. What spawned this rapid and dramatic transformation?
The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate
computing market was characterized by IBM selling customers systems that included most of the hardware and software in
a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial
pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended
by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative
software market. Customers could choose the technology they preferred (i.e., “best of breed”) and assemble those products
in their own data centers networks to support growth in the number of users and the growing complexity of user
requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems)
became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and
more software firms entered the fray.
Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of
slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such
computing environments tend to be highly complex and require multiple software applications that must work together on
multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of
getting the disparate software applications to work together. Although some buyers still prefer to purchase the “best of
breed” software, many are moving to purchase suites of applications that are compatible.
In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of
its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there,
Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm’s software applications
business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008–2009 recession.
Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in
which business software is sold. Customers buy licenses to obtain the right to utilize a vendor’s software and periodically
renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently,
it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and
potentially diluting existing shareholders.
In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply
chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring
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other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning
unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead
structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the
additional revenue would fall to the bottom line.
For example, since acquiring Sun, Oracle has rationalized and consolidated Sun’s manufacturing operations and
substantially reduced the number of products the firm offers. Fewer products results in less administrative and support
overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing
approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for
inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially
the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied
immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase
discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by
being known as a full-service provider of integrated software solutions.
Prior to the Sun acquisition, Oracle’s primary competitor in the enterprise software market was the German software
giant SAP. However, the acquisition of Sun’s vast hardware business pits Oracle for the first time against Hewlett-Packard,
IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent
years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems
diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware
vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the
networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an
effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a “me too”
strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end
service provider. Which firm is most successful in the long run may well be the one that successfully integrates their
acquisitions the best.
Investors’ concern about Oracle’s strategy is that the frequent acquisitions make it difficult to measure how well the
company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of
Oracle’s acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated
to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to
which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring
new revenue streams. Ironically, in the short run, Oracle’s acquisition binge has resulted in increased complexity as each
new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply
be masking underlying problems brought about by this growing complexity.
Discussion Questions and Answers:
1. How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some
combination of all three)? Explain your answer.
2. Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the
development of Oracle’s business strategy. Be specific.
3. In what way do you think the Oracle strategy was targeting key competitors? Be specific.
4. What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry
consolidation? Be specific.
Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction
Cingular outbid Vodafone to acquire AT&T Wireless, the nation’s third largest cellular telephone company, for $41 billion
in cash plus $6 billion in assumed debt in February 2004. This represented the largest all-cash transaction in history. The
combined companies, which surpass Verizon Wireless as the largest U.S. provider, have a network that covers the top 100
U.S. markets and span 49 of the 50 U.S. states. While Cingular’s management seemed elated with their victory, investors
soon began questioning the wisdom of the acquisition.
By entering the bidding at the last moment, Vodafone, an investor in Verizon Wireless, forced Cingular's parents, SBC
Communications and BellSouth, to pay a 37 percent premium over their initial bid. By possibly paying too much, Cingular
put itself at a major disadvantage in the U.S. cellular phone market. The merger did not close until October 26, 2004, due to
the need to get regulatory and shareholder approvals. This gave Verizon, the industry leader in terms of operating margins,
time to woo away customers from AT&T Wireless, which was already hemorrhaging a loss of subscribers because of poor
customer service. By paying $11 billion more than its initial bid, Cingular would have to execute the integration, expected
to take at least 18 months, flawlessly to make the merger pay for its shareholders.
With AT&T Wireless, Cingular would have a combined subscriber base of 46 million, as compared to Verizon
Wireless's 37.5 million subscribers. Together, Cingular and Verizon control almost one half of the nation's 170 million
wireless customers. The transaction gives SBC and BellSouth the opportunity to have a greater stake in the rapidly
expanding wireless industry. Cingular was assuming it would be able to achieve substantial operating synergies and a
reduction in capital outlays by melding AT&T Wireless's network into its own. Cingular expected to trim combined capital
costs by $600 to $900 million in 2005 and $800 million to $1.2 billion annually thereafter. However, Cingular might feel
pressure from Verizon Wireless, which was investing heavily in new mobile wireless services. If Cingular were forced to
offer such services quickly, it might not be able to realize the reduction in projected capital outlays. Operational savings
might be even more difficult to realize. Cingular expected to save $100 to $400 million in 2005, $500 to $800 million in
2006, and $1.2 billion in each successive year. However, in view of AT&T Wireless's continued loss of customers,
Cingular might have to increase spending to improve customer service. To gain regulatory approval, Cingular agreed to sell
assets in 13 markets in 11 states. The firm would have six months to sell the assets before a trustee appointed by the FCC
would become responsible for disposing of the assets.
SBC and BellSouth, Cingular's parents, would have limited flexibility in financing new spending if it were required by
Cingular. SBC and BellSouth each borrowed $10 billion to finance the transaction. With the added debt, S&P put SBC,
BellSouth, and Cingular on credit watch, which often is a prelude in a downgrade of a firm's credit rating.
Discussion Questions:
1. What is the total purchase price of the merger?
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2. What are some of the reasons Cingular used cash rather than stock or some combination to acquire AT&T
Wireless? Explain your answer.
3. How might the amount and composition of the purchase price affect Cingular’s, SBC’s, and BellSouth’s cost of
capital?
4. With substantially higher operating margins than Cingular, what strategies would you expect Verizon Wireless to
pursue? Explain your answer.
Bank of America Acquires Merrill Lynch
Against the backdrop of the Lehman Brothers' Chapter 11 bankruptcy filing, Bank of America (BofA) CEO Kenneth Lewis
announced on September 15, 2008, that the bank had reached agreement to acquire mega–retail broker and investment bank
Merrill Lynch. Hammered out in a few days, investors expressed concern that the BofA's swift action on the all-stock $50
billion transaction would saddle the firm with billions of dollars in problem assets by pushing BofA's share price down by
21 percent.
BofA saw the takeover of Merrill as an important step toward achieving its long-held vision of becoming the number 1
provider of financial services in its domestic market. The firm's business strategy was to focus its efforts on the U.S. market
by expanding its product offering and geographic coverage. The firm implemented its business strategy by acquiring
selected financial services companies to fill gaps in its product offering and geographic coverage. The existence of a clear
and measurable vision for the future enabled BofA to make acquisitions as the opportunity arose.
Since 2001, the firm completed a series of acquisitions valued at more than $150 billion. The firm acquired FleetBoston
Financial, greatly expanding its network of branches on the East Coast, and LaSalle Bank to improve its coverage in the
Midwest. The acquisitions of credit card–issuing powerhouse MBNA, U.S. Trust (a major private wealth manager), and
Countrywide (the nation's largest residential mortgage loan company) were made to broaden the firm's financial services
offering.
The acquisition of Merrill makes BofA the country's largest provider of wealth management services to go with its
current status as the nation's largest branch banking network and the largest issuer of small business, home equity, credit
card, and residential mortgage loans. The deal creates the largest domestic retail brokerage and puts the bank among the top
five largest global investment banks. Merrill also owns 45 percent of the profitable asset manager BlackRock Inc., worth an
estimated $10 billion. BofA expects its retail network to help sell Merrill and BlackRock's investment products to BofA
customers.
The hurried takeover encouraged by the U.S. Treasury and Federal Reserve did not allow for proper due diligence. The
extent of the troubled assets on Merrill's books was largely unknown. While the losses at Merrill proved to be stunning in
the short run—$15 billion alone in the fourth quarter of 2008—the acquisition by Bank of America averted the possible
demise of Merrill Lynch. By the end of the first quarter of 2009, the U.S. government had injected $45 billion in loans and
capital into BofA in an effort to offset some of the asset write-offs associated with the acquisition. Later that year, Lewis
announced his retirement from the bank.
Mortgage loan losses and foreclosures continued to mount throughout 2010, with a disproportionately large amount of
such losses attributable to the acquisition of the Countrywide mortgage loan portfolio. While BofA's vision and strategy
may still prove to be sound, the rushed execution of the Merrill acquisition, coupled with problems surfacing from other
acquisitions, could hobble the financial performance of BofA for years to come.
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When Companies Overpay—Mattel Acquires The Learning Company
Mattel, Inc. is the world’s largest designer, manufacturer, and marketer of a broad variety of children’s products selling
directly to retailers and consumers. Most people recognize Mattel as the maker of the famous Barbie, the best-selling
fashion doll in the world, generating sales of $1.7 billion annually. The company also manufactures a variety of other well-
known toys and owns the primary toy license for the most popular kids’ educational program “Sesame Street.” In 1988,
Mattel revived its previous association with The Walt Disney Company and signed a multiyear deal with them for the
worldwide toy rights for all of Disney’s television and film properties
Business Plan
Mission Statement and Strategy
Mattel’s mission is to maintain its position in the toy market as the largest and most profitable family products
marketer and manufacturer in the world. Mattel will continue to create new products and innovate in their existing toy lines
to satisfy the constant changes of the family-products market. Its business strategy is to diversify Mattel beyond the market
for traditional toys at a time when the toy industry is changing rapidly. This will be achieved by pursuing the high-growth
and highly profitable children’s technology market, while continuing to enhance Mattel’s popular toys to gain market share
and increase earnings in the toy market. Mattel believes that its current software division, Mattel Interactive, lacks the
technical expertise and resources to penetrate the software market as quickly as the company desires. Consequently, Mattel
seeks to acquire a software business that will be able to manufacture and market children’s software that Mattel will
distribute through its existing channels and through its Website (Mattel.com).
Defining the Marketplace
The toy market is a major segment within the leisure time industry. Included in this segment are many diverse
companies, ranging from amusement parks to yacht manufacturers. Mattel is one of the largest manufacturers within the toy
segment of the leisure time industry. Other leading toy companies are Hasbro, Nintendo, and Lego. Annual toy industry
sales in recent years have exceeded $21 billion. Approximately one-half of all sales are made in the fourth quarter,
reflecting the Christmas holiday.
Customers. Mattel’s major customers are the large retail and e-commerce stores that distribute their products. These
retailers and e-commerce stores in 1999 included Toys “R” Us Inc., Wal-Mart Stores Inc., Kmart Corp., Target,
Consolidated Stores Corp., E-toys, ToyTime.com, Toysmart.com, and Toystore.com. The retailers are Mattel’s direct
customers; however, the ultimate buyers are the parents, grandparents, and children who purchase the toys from these
retailers.
Competitors. The two largest toy manufacturers are Mattel and Hasbro, which together account for almost one-half of
industry sales. In the past few years, Hasbro has acquired several companies whose primary products include electronic or
interactive toys and games. On December 8, 1999, Hasbro announced that it would shift its focus to software and other
electronic toys. Traditional games, such as Monopoly, would be converted into software.
Potential Entrants. Potential entrants face substantial barriers to entry in the toy business. Current competitors, such as
Mattel and Hasbro, already have secured distribution channels for their products based on longstanding relationships with
key customers such as Wal-Mart and Toys “R” Us. It would be costly for new entrants to replicate these relationships.
Moreover, brand recognition of such toys as Barbie, Nintendo, and Lego makes it difficult for new entrants to penetrate
certain product segments within the toy market. Proprietary knowledge and patent protection provide additional barriers to
entering these product lines. The large toymakers have licensing agreements that grant them the right to market toys based
on the products of the major entertainment companies.
Product Substitutes. One of the major substitutes for traditional toys such as dolls and cars are video games and
computer software. Other product substitutes include virtually all kinds of entertainment including books, athletic wear,
tapes, and TV. However, these entertainment products are less of a concern for toy companies than the Internet or
electronic games because they are not direct substitutes for traditional toys.
Suppliers. An estimated 80% of toy production is manufactured abroad. Both Mattel and Hasbro own factories in the Far
East and Mexico to take advantage of low labor costs. Parts, such as software and microchips, often are outsourced to non-
Mattel manufacturing plants in other countries and then imported for the assembly of such products as Barbie within
Mattel-owned factories. Although outsourcing has resulted in labor cost savings, it also has resulted in inconsistent quality.
