Toy Biz, Inc.

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Toy Biz, Inc.

333 E. 38th St.
New York, New York 10016
U.S.A.
(212) 682-4700
Fax: (212) 682-5317

Public Company
Incorporated: 1988
Employees: 106
Sales: $196.4 million
Stock Exchanges: New York
SICs: 3944 Games, Toys & Children’s Vehicles; 3942 Dolls & Stuffed Toys

Toy Biz, Inc. is one of America’s most profitable toy companies. Originally founded in Montreal, Quebec, the business was reincarnated as an American firm in 1988. Since that time, Toy Biz has focused strongly on creating toys based on Marvel Comic’s cast of characters, which includes the Amazing Spider-Man, the Incredible Hulk, and the Uncanny X-Men. By the mid-1990s, Marvel-related action figures and play sets generated about 50 percent of Toy Biz’s annual sales. In addition to its core Marvel license, Toy Biz held short-term rights to names and symbols associated with Gerber infant goods, the Muppet characters, Coleman camping equipment, Apple computers, Revlon beauty products, NASCAR auto racing, and others. One-third owned by Ronald O. Perelman’s Marvel Entertainment Group since 1993, the firm appeared poised to become a wholly-owned subsidiary of this $5-billion group of companies early in 1997.

Canadian Roots

The history of Toy Biz can be traced to Chantex Inc., a Canadian company created in the late 19th century. Sol Zuckerman, the founder’s grandson, inherited the business in 1961, when it was earning $160,000 in sales. The restless 21-year-old maintained the family firm as a core interest, bringing its sales to nearly $4.5 million by 1980. In the meantime, he devoted more of his concentration to the acquisition and operation of several Montreal nightclubs and toyed with the idea of running for public office. Zuckerman’s tony discotheques were frequented by celebrities and he earned a reputation as a fast-talking, fast-moving wheeler-dealer. But Zuckerman beat a hasty retreat from the disco scene in 1980 after witnessing the assassination of a colleague by letter bomb. In the 1980s, he revisited the infants’ and children’s goods business that had bored him in years past.

Zuckerman transformed himself into one of Canada’s highest-flying merger and acquisition artists during the ensuing decade, and his family business emerged as one of the country’s fastest-growing enterprises. In 1980, he merged Chantex Inc. with Earl Takefman’s Randim Marketing, Inc., a manufacturer and wholesaler of school supplies, to form Charan Industries Inc. By the time Charan went public in 1984 its annual revenues had multiplied fivefold from 1980, to $20 million. The firm’s Charan Toy Co., Inc. subsidiary emerged as a leading toy company with a particular emphasis on licensing. In 1985, it held the Canadian rights to nine of the top ten toys in the North American market, including the immensely popular Cabbage Patch Kids name and logo.

Charan employed what analyst Ira Katzin of Prudential-Bache Securities Canada Ltd. (Toronto) called “a very novel approach” to consumer goods branding, an approach that would be carried on when Charan Toy was reborn as Toy Biz. The company was among the first to implement its brands—both licensed and proprietary—very broadly, applying the venerable Cooper hockey equipment brand (acquired in the mid-1980s) to Charan’s existing childrenswear line, for example. This strategy would become commonplace throughout the consumer goods and entertainment industries and form a cornerstone of Toy Biz’s success in the 1990s.

Pearlmutter Acquisition Reinvigorates Toy Biz

Zuckerman did not see the benefits of these strategies, however, for he sold the toy business in the late 1980s. Charan soon re-emerged as an American-owned company, Toy Biz. In 1990, Toy Biz was acquired by independent investor Isaac Pearlmutter, who installed himself as chairman and brought in Joseph Ahern as chief executive officer. Cost controls, innovative licensing agreements, and fresh toy-designing talent allowed the new management team to ride a rising tide of interest in classic comic book characters during the decade.

Trained as an accountant, Ahern had previously worked to bring toymaker Coleco Industries Inc. out of bankruptcy. Ahern’s bottom-line focus was reflected in Toy Biz’s low overhead. The company owned no real property, instead leasing a modest headquarters in New York City and an Arizona warehouse. It also limited costs by outsourcing most manufacturing to China and concentrating most of its sales efforts on mass merchandisers. This low overhead structure gave Toy Biz a remarkably low employee-to-sales ratio, generating nearly $2 million in annual revenues for each employee in the mid-1990s.

But low overhead was just one factor in Toy Biz’s equation for success. As it had been in the 1980s, licensing continued to be an important element of the company’s strategy. But this time Toy Biz forged a singular agreement with Marvel Entertainment Group, best known for its well-established cast of comic book characters. Instead of signing the short-term (one-to five-year) license typical of the industry—an agreement it had previously utilized—in 1990 Toy Biz exchanged 46 percent of its equity for an “exclusive, perpetual, royalty-free license” to Marvel’s characters. Toy Biz focused its earliest efforts on just a few of the series’ more than 3,500 characters, especially emphasizing Spider-Man and the Uncanny X-Men.

This strategic alliance was mutually beneficial. For Toy Biz, it eliminated royalties that would otherwise have cost the company anywhere from 6 to 12 percent of its sales of Marvel character toys. Marvel’s top-ranked comic books and animated television shows amounted to free advertising for the action figures and other playthings marketed by Toy Biz. Harry De Mott, II, an analyst with CS First Boston, told Forbes’ Suzanne Oliver that “The cartoons are like a half-hour infomercial for Toy Biz products.” And Marvel’s stake in Toy Biz gave it much higher returns than it would have made from mere royalties.

Toy designer Avi Arad was yet another element of Toy Biz’s success. Over the course of his 20-year career, Arad had a hand in the creation of over 160 toys for such major manufacturers as Mattel Inc., Hasbro, Inc., Tyco Toys, Inc., Nintendo, and Sega. Upon joining Toy Biz on a part-time basis in 1993, Arad received a 10 percent stake in the company in addition to his salary. His 22-person product development staff accounted for about 20 percent of Toy Biz’s total employment. As executive producer of animated television programs for Marvel and the creator of toys for Toy Biz, he personally represented the intersection of Marvel and Toy Biz’s interests. Arad could, for example, coordinate the launch of characters on television screens and toy store shelves. He specialized in action figures and earned a reputation for combining materials in unique ways. But Arad’s creativity wasn’t limited to cartoons and action figures; his resume included Baby Bubbles and Roller Blade Baby.

The combination of strict cost controls, an advantageous licensing agreement, and top talent helped Toy Biz achieve the industry’s fattest profit margins. Its 24 percent margin topped giant Mattel’s profit ratio by over one-fifth in 1995. Furthermore, the Toy Biz/Marvel confederation opened the door to a myriad of other synergistic business opportunities. Marvel Entertainment was just one segment of Ronald O. Perelman’s diverse empire, a group that had been launched in 1978 with a $1.9 million bank loan and had by the early 1990s grown to include Revlon Inc., Coleman Worldwide Corporation, Consolidated Cigar Corporation, New World Communications Group, and First Nationwide Bank, among others. Perelman, who was appointed board chairman of Toy Biz in 1995, sought to expand cooperation among his business interests. Toy Biz soon held licenses of a more typical short-term nature for other brands in the Perelman family. The toy company designed and distributed Revlon fashion dolls (à la Barbie) and Coleman toy camping equipment, for example.

Toy Biz also licensed brands from companies outside the Marvel/Perelman universe. Its Hercules and Zena Warrior Princess action figures were based on the MCA/Universal television series shown on many New World television stations. Licensing agreements with Gerber and NASCAR expanded the company’s toy-marketing realm to educational playthings for toddlers and racing-related cars, action figures, and computer games. These powerful trademarks commanded higher retail prices than generic toys, and held sway over quality- and brand-conscious parents as much as children. Popular proprietary Toy Biz toys included Baby Tumbles Surprise, Baby So Real, Wild and Wacky Painter, and Battle Builders.

Plans for the Next Century

Toy Biz boasted an impressive arsenal of growth strategies for the years leading up to the turn of the 21st century. At the core of its great potential was the largely-untapped cast of Marvel comic book characters. Noting that the company had started by promoting Marvel’s best-known characters, Ahern boasted that “We have only picked the low-hanging fruit.” As the marketing cachet of these personalities inevitably waned, Toy Biz looked forward to mining the potential of Captain America, the Fantastic Four, the Incredible Hulk, Ghost Rider, and literally thousands more characters. Early in 1996 the company launched its Classic Heroes candy division, which marketed candy/toy combinations featuring Marvel characters.

Company Perspectives:

The company is a toy entertainment company that designs, markets and distributes a diverse product line comprised of boys’, girls’, infant/pre-school and activity toys in the United States and internationally, based on popular entertainment properties, consumer brand names and proprietary designs. The company’s products are distributed to a number of general and specialty merchandisers and distributors, principally in the United States and around the world.

Toy Biz also hoped to benefit from the creation of Marvel Films, a production company expected to be launched in 1997. Led by Avi Arad, this new venture would produce both live action and animated films based on Marvel characters, adding yet another head to the Hydra-like entertainment company. Its first project was expected to feature the Incredible Hulk character.

Toy Biz entered what was expected to be the toy industry’s second-fastest growing segment, electronic learning aids (ELA), in 1996. The toy company signed a licensing agreement with Apple Computer that year to produce a line of electronic and soft toys with the Apple name and logo. Toy Biz hoped to benefit from Apple’s strong presence in educational computers, and Apple hoped that an association with play would cement its position in the hearts and minds of young consumers and future computer buyers. In addition, Toy Biz augmented its position in the industry through the 1995 acquisition of two toy companies, Spectra Star, Inc. and Quest Aerospace Education, Inc. Spectra Star specialized in kites and yo-yos, while Quest made small model rockets. Toy Biz expected acquisitions such as these to fuel continued growth in the late 1990s.

In spite of all these positive factors, continued prosperity was not a foregone conclusion. The toy industry was very competitive, and Toy Biz was a relatively small player in a world dominated by giants like Mattel, Hasbro, and Tyco. Like all its competitors, Toy Biz was subject to the vagaries of consumer tastes. Corporate executives realized that the leading products and characters of 1996 could be the big losers of 1997. But these general concerns paled in comparison with the issues raised by Ronald Perelman’s 1996 bid for full control of Toy Biz. This apparently logical move appeared less prudent in light of Marvel Entertainment’s financial difficulties mid-decade. Following a loss on the third quarter of 1996, Marvel slashed one-third of its comic book workforce and sought to restructure over $1 billion in debt. Ironically, Linda Sandier of the Wall Street Journal characterized the acquisition of Toy Biz as a scheme to boost Marvel’s value. Whether Marvel would reciprocate was another question entirely.