Tyco Toys, Inc.

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Tyco Toys, Inc.

6000 Midlantic Drive
Mount Laurel, New Jersey 08054
U.S.A.
(609) 234–7400
Fax: (609) 273–2885

Public Company
Incorporated: 1926 as Mantua Inc.
Employees: 2,500
Sales: $753.1 million
Stock Exchanges: New York Philadelphia
SICs: 3944 Games, Toys & Children’s Vehicles; 3942 Dolls
& Stuffed Toys

Tyco Toys, Inc. ranks as the third largest toy manufacturer in the United States. Having undertaken a ten–year program of diversification, Tyco grew from a maker of toy trains and electric racing sets into a corporation distributing a broad range of toys throughout the world. In the mid–1990s, Tyco produced over a thousand different toys, making it one of the most diversified toy companies in the world. The company has never relied upon or become identified with one overwhelming hit toy. Rather, it has used good management and a diverse product line to lift it to the top ranks of this extremely lucrative industry.

Tyco was founded in 1926 by John N. Tyler. Tyler named the company Mantua Metal Products, after the town of Mantua, New Jersey, where he ran his small business out of his home. Tyler’s company built H–O model trains, track, and other accessories. H–O model trains were half the size of the O standard, hence the name H–O. Tyler initially produced products that would be compatible with existing model train sets built by other companies. Model train building was as old as trains themselves, so Tyler’s little company had a guaranteed market if he could produce a good product. In the 1930s he took the first step toward the present–day company when he started producing and marketing his own brand of complete toy train kits.

During this period Tyler’s company was as much a part of the hobby industry as a toy manufacturer. While there was some crossover between these two sectors, the hobby industry targeted both adult and child consumers, whereas the toy industry attempted to gauge the changing tastes of children. As the company shifted its focus to toys, the marketing strategy, and indeed the company philosophy, changed dramatically. From a middle–of–the–pack competitor in a fringe sector for over 30 years, Tyco went on to become the third largest toy manufacturer in America.

The first step in this transition occurred in the late 1940s, when Mantua’s marketing director, Milt Grey, convinced Tyler to produce a ready–to–run H–O train set rather than continue with model kits. Pre–assembled train sets had been on the market for years, but they were almost always sold in the O scale. Grey argued that the smaller scale would be attractive to kids as well as take up less space on retailers’ shelves and stockrooms. With the increase in profit per unit of shelf space, the toys would also be attractive to buyers from the increasingly popular discount chain stores.

The change was risky. It meant marketing a product that was pre–assembled rather than a product whose whole appeal lay in the fact that the purchaser was to assemble it himself. The production and assembly line had to be completely altered to produce assembled sets rather than specific parts. Despite these difficulties, Mantua’s preassembled sets were a runaway hit, and industry leaders Lionel and Marx were suddenly forced to take notice of the small New Jersey firm. This success was largely due to the fact that the small pre–assembled sets retained the accuracy of hobby sets, but they could be liberated from hobby stores and therefore reach a much wider potential market. Model manufacturers quickly followed Mantua’s lead and competition for this new market became fierce. Several manufacturers were put out of business by the price wars that followed, but Mantua survived and thrived.

Although for years Mantua had been commonly referred to as Tyco after its charismatic owner John Tyler, the company name was finally officially changed from Mantua to Tyco in the 1960s. It was during this decade that the company expanded its line to include electric race–car sets, a logical extension of the already–established niche of preassembled train sets. The addition of electric race–car sets accentuated Tyco’s subtle move away from the hobby sector and toward toys. Race cars continued to be a staple of Tyco’s product line in the 1990s, and the company would also eventually capture the largest market share in radio control toys.

Tyco remained a private, relatively small–scale company producing model trains and racing sets until the Tyler family sold the company to Consolidated Foods in 1970. Like many large food industry corporations at that time, Consolidated Foods, a subsidiary of the Sara Lee Corporation, was looking to diversify. The large corporation placed one of its top executives in charge of the small toy company, only to discover that selling model trains and race cars had very little in common with selling frozen cake. Tyco earnings began to drop at an alarming rate, and Sara Lee eventually realized that it needed a management team with experience in the toy industry to make Tyco profitable once again.

The most significant development during the Consolidated Foods/Sara Lee era at Tyco was the decision in 1973 to hire Richard Grey as president and Harry Pearce as chief financial officer. Grey had been familiar with Tyco products since the late 1940s, when his father, Milt Grey, had convinced Tyler to market ready–to–run train sets. The young Grey had since graduated from the University of California at Los Angeles and become a manufacturer’s representative for Tyco, and he understood the toy business like few others could. Grey and Pearce, who joined the company from Arthur Anderson & Co., improved Tyco’s performance dramatically and quickly. Despite Grey’s success in turning Tyco around, however, the company was sold when Sara Lee streamlined its own operations. The new owners, Savoy Industries, decided to keep both Grey and Pearce in their management positions at Tyco, where they remained into the mid–1990s.

Savoy Industries was a publicly owned investment group run by financier Benson Selzer when it acquired Tyco from Sara Lee in 1981. Savoy specialized in leveraged buyouts of troubled companies, which the firm would restructure and then take public. The two main figures at Tyco during the 1980s were Grey and Selzer, who eventually became chairman of the board. Although Selzer gave Grey free reign in the day–to–day management of Tyco, the two men had differing ideas on the long–term goals of the company. Selzer wanted to use Tyco’s assets to build a diversified conglomerate, whereas Grey felt that Tyco could only be successful if it remained firmly rooted in the toy industry. As Grey stated to Business Week in 1992, “Not everything they [Selzer’s board] did was terrible but a couple of things were absolutely self–serving.”

The matter came to a head after Savoy took Tyco public in 1986. Tyco, under Selzer’s chairmanship, began to lend money to and make acquisitions from other Selzer companies—deals often completely unrelated to the toy business. It was in 1988, when Tyco purchased a struggling Puerto Rican underwear maker indirectly controlled by the Selzer family, that shareholders finally cried foul. A group of shareholders brought a suit against the company, and even members of Tyco’s board began to feel that the value of the company would suffer a serious blow if something was not done to control the Selzer family’s power. Under Grey’s persuasion, the board named two more outsiders as members, and in 1991 the Selzer family agreed to sell their stake in the company.

Not all of Tyco’s legal battles in the 1980s involved Selzer’s control of the company, however. Under Grey’s leadership, part of Tyco’s approach to product development was to see what was working for other companies and copy it. It seemed that the cost of litigation surrounding these imitations was simply factored into Tyco’s plans. The most striking example of this strategy came when the company marketed Tyco Super Blocks, a building block set designed to be interchangeable with the multi–million dollar selling Lego brand. Referring to Lego, Tyco president Richard Grey told Forbes in 1988 that “we knew they had a reputation for being litigious.” Soon, Lego did sue on both trademark and copyright infringement grounds. After an expensive three–year legal battle, Tyco won the case. The $3 million in legal fees proved to be well worthwhile, as Tyco Super Blocks became a stable $20 million product line for Tyco. Tyco had similar success with its own version of Kenner’s Play–doh molding clay, the Tyco formulation of which was called Tyco Super Dough. Tyco’s product was extremely popular and, as in the Lego case, suits were filed but successfully defended by Tyco.

Tyco began television advertising of its toy trains and cars in the 1960s, when television advertising aimed at children began to be a major force in the toy industry. Although originally prohibited by government regulation, the deregulation of the 1980s saw a new and very powerful phenomenon enter the toy industry—the toy–driven children’s television program. This phenomenon saw toy companies becoming television producers, as they wrote and produced kids’ shows featuring animated versions of their products. Instead of toys being created from popular kids’ culture, the culture was actually created to sell the toy.

Hoping to capitalize on this new trend, Tyco launched a set of action figures called Dino–Riders that were designed to cash in on the dinosaur craze of the late 1980s. A television series, comic books, and even a national Dino–Riders club were all part of the grand scheme. Although initial sales of Dino–Riders were well above expectations, the cost of producing the detailed figures became prohibitive. The market could not absorb an increase in the price of the units, so the Dino–Riders line was retired. The descendants of Dino–Riders were Cadillacs & Dinosaurs, which aired as a television series in 1993 and were introduced as toys the following year. However, these new dinosaur–based action figures failed to capture the fickle taste of American boys.

Convinced that hit toys were the ones that entered the deep structure of kids’ culture through media support, in the late 1980s and early 1990s Tyco also entered into a series of licensing agreements to produce toys based on characters with already–proven kid appeal. In 1993, for example, Tyco signed an exclusive master toy license with Warner Bros, to produce toys based on such popular Looney Tunes characters as Bugs Bunny, Daffy Duck, and Road Runner. This deal was a considerable coup for Tyco because it was the first of its kind for Warner’s. The Warner’s deal followed contracts with the Children’s Television Workshop to produce Sesame Street characters and with The Walt Disney Company for the rights to The Little Mermaid character. Tyco produced an Ariel The Little Mermaid doll to capitalize on the success of the hit Disney movie, but the strategy proved to have a built–in flaw. After impressive sales in 1992, its first year on the market, sales fell considerably the following season as children’s interests gravitated to newer items.

The late 1980s and 1990s witnessed a tremendous consolidation of the toy industry, as acquisition after acquisition concentrated a large percentage of the toy market into the hands of the top two toy companies, Hasbro and Mattel. In order to bolster its position in the industry, Tyco also took an active part in growth through acquisitions. By the early 1990s Tyco had purchased seven smaller toy companies, helping it climb from 22nd in the industry in 1986 to become the third–largest toy manufacturer by 1992. Tyco’s biggest acquisition was its 1992 purchase of Universal Matchbox Group at a cost of $106 million.

The acquisition of Matchbox was a return, in some respects, to Tyco’s roots in the miniature diecast car and train sector. Tyco’s purchase of Matchbox was also designed to increase its international presence, as Matchbox already had a well–established international distribution system. It was also hoped that the Matchbox cars would provide a direct challenge to Mattel’s perennial mega–hit Hotwheels brand. Other purchases included the View–Master/Ideal Group, makers of the kid–friendly 3–D Viewer and the very popular Magna Doodle drawing toy (with worldwide sales reaching 40 million units), as well as other successful toys, dolls, and games. Tyco’s Sesame Street license developed as the result of its June 1992 acquisition of Illco Toy Co. USA, at a cost of $52.1 million, which had already developed the rights to the popular characters extensively in preschool toys. Tyco’s many acquisitions helped to catapult it into the upper echelon of the industry, but they also contributed to Tyco’s huge losses in 1993 and 1994.

In November 1992, Tyco acquired a 75 percent interest in Croner–Tyco Toys Pty., Ltd., an Australian company, and in April 1993 acquired a 75 percent interest in EnsueÑo–Tyco Toys, S.A. de C.V., the company’s Mexican subsidiary. The company acquired the remaining 25 percent interest in EnsueÑo–Tyco in early 1995. In addition, a 50 percent interest was held in Rivergate Partnership L.P., an operator of warehousing space in Portland, Oregon.

As reported in Business Week in 1992, analysts worried that Tyco had bitten off more than it could chew with its major spate of acquisitions, but Grey remained sanguine. After all, Grey had brought Tyco to the number three position in the American toy industry without a single runaway hit product. His strategy had always been essentially conservative. Grey was convinced that the company could grow quickly without becoming unmanageable due to overextension. Along with his chief financial officer, Harry Pearce, Grey had kept the operation as sleek as possible, with as small a staff as they could manage. With the new acquisitions, Tyco consolidated warehouses and eliminated redundant staff so that its total employment remained under 3,000, including foreign subsidiaries. Despite this basic philosophy, however, Tyco was unable to avoid the pitfalls that analysts had predicted.

The year 1993 proved to be a disastrous one for Tyco. After recording an impressive operating income of $44 million in 1992, Tyco posted an operating loss of $57 million in 1993. These losses were due partly to the disappointing performance of key products—such as The Incredible Crash Test Dummies and The Little Mermaid—and partly to large price tags for major acquisitions. By far the greatest problem for Tyco, however, was poor timing and execution of its European operations. Now even Grey admitted that Tyco had taken on too much too quickly. “We just had too much on our plate,” Grey stated in a 1994 article in Business Week, though he remained optimistic that the large number of new products Tyco was developing would turn the dismal figures around in 1994. In an effort to reign in costs, in July 1993, Tyco consolidated its Tyco Preschool and Playtime direct import companies into a single unit, transferring all promotional products to the company’s domestic segment and eliminating duplicate functions expecting to result in increased operating efficiencies.

In 1994, Tyco took steps to combine the operations of Tyco Germany into the Matchbox Germany facility in Hoesbach, eliminating duplicated functions and overlapping staff to result in substantial operating efficiencies. Tyco also closed its Italian subsidiary that year. At home Tyco reduced its work force by five percent. The company also retained Allen & Company, Incorporated as financial adviser to assist the company in raising additional private equity to strengthen its financial position. In April 1994, Tyco issued $50 million in six percent Convertible Exchangeable Preferred Stock to a group led by Corporate Partners, L.P., and investment adviser and affiliate of Lazard Freres & Co. The company also announced that it was consolidating certain European operations in Belgium in order to streamline its activities, reduce operating expenses, and enhance its customer service.

Rumors of a Tyco takeover abounded. In an industry that was consolidating at a rapid rate, the troubled Tyco looked like a prime candidate for acquisition. Grey put on a staunch public face about the possibility, telling Business Week in February of 1994 that shareholders “were better served by Tyco remaining an independent toy company,” but he also did not entirely rule out an acquisition. In an interview with the Wall Street Journal later that year, Grey hedged his bets, stating that a deal where “the synergies are right and where two and two make six” would be attractive, but adding that Tyco had not had serious discussions with anyone concerning a sale.

Although income improved in 1994 with domestic sales rising approximately ten percent, Tyco still posted a net loss of $35 million, much of it associated with the European restructuring. Sales rose slightly to $753 million, but none of Tyco’s new toys became the hit that would have been required to bring the company back into the black. Despite the poor timing of European ventures and the lackluster performance of some of Tyco’s new products, however, several factors pointed to a recovery entering the late 1990s, including the exclusive master license with Warner Bros, for Looney Tunes plush characters, continued associations with Disney and Sesame Street, its number one position in radio–control toys, the expanded line of Matchbox diecast cars, its successful line of large dolls and the number one selling drawing toy, Magna Doodle. Tyco’s international subsidiaries also offered such popular product lines as Mighty Morphin Power Rangers, X–Men, and Gund plush toys. The international subsidiaries accounted for approximately 40 percent of 1994 consolidated sales.

Principal Subsidiaries

Tyco Industries, Inc.; Tyco (Hong Kong) Ltd.; Matchbox; Tyco Manufacturing Corp.; Tyco Distribution Corp.; Tyco Manufacturing (Europe), Inc.; Tyco Toys (U.K.) Ltd.; Tyco Toys (France) S.A.; Tyco Toys (Canada) Inc.; Tyco Distribution (Europe) N.V.; Tyco Toys (Benelux) N.V.; Tyco Matchbox (Deutschland) GmbH; Tyco Toys (España) S.A.; Tyco Playtime, Inc.; Tyco Toys (Switzerland) A.G.; Tyco Toys (Austria) GmbH; Tyco Toys (New Zealand) Pty., Ltd.; Croner–Tyco Toys Pty., Ltd. (50%); Rivergate Partnership L.P. (50%).