"The lines of distinction between consumer software and toys begin to gray or blur when you get out past two years," said Kevin O'Leary, president of The Learning Company, in an interview with ZDNN.
O'Leary said that children's toys will be much more interactive as technology becomes more advanced and PCs become cheaper.
"One day we could have an interactive Barbie or interactive Reader Rabbit. Instead of being on a screen, children could interact with [Reader Rabbit] as a plush toy that can change its content by downloading [information] from the Internet," he said.
O'Leary wouldn't say how long it would take for such a toy to appear.
When it does, the two should have a well-established strategy for selling it on the Internet. Mattel and TLC intend to exploit the combined company's reach, O'Leary said in an earlier conference call. "We're looking at selling our products to consumers over the Internet in the near future," he said. "Together we reach almost every home in America with our products."
O'Leary told ZDNN that TLC had already processed 15 million transactions over its Web site this year, a figure he expects will double next year.
"One of the assets we have is that as a combined entity we will ship over 50 million CDs worldwide. They can be developed so they point users back to a commerce site," he said. "We also have the considerable resources of Mattel's ad budgets to let consumers know we're online."
Profits a problem
Meanwhile, Mattel's profit problems hurt shares of both companies, despite the news of the $3.8 billion stock swap.
Shares of The Learning Company (NYSE:TLC) fell 1 15/16 to 26 3/8 and Mattel (NYSE:MAT) plunged 20 percent to 23 11/16. Shares took a hit after Mattel said sales will be flat this year as profits were being squeezed by an inventory problems.
The acquisition of The Learning Company (financials) gives Mattel such software titles as Reader Rabbit, Carmen Sandiego, Riven and Myst. Mattel has been transitioning itself from a toymaker into more interactive items.
Mattel said it will now have a $1 billion interactive software business with The Learning Company's $850 million in estimated 1998 sales in the fold.
Mattel CEO Jill Barad said the company expects to have direct Internet sales for all of its brands and projects a $1 billion in sales online over the next few years.
"We have systems prepared for the end of the first quarter able to have online transactions take place across all of our brands," said Barad. "Because of TLC we can merge that all together and be more aggressive."
Under the terms of the deal, each share of The Learning Company (chart) would be exchanged for $33 of Mattel stock as long as the average price of Mattel shares are between 27 1/2 and 33 in the 20-day period before the merger closes. The 20-day period will end five days prior to the closing date.
The Learning Company, which acquired Broderbund in June, said the exchange ratio was fixed at 1.20 at or below 27 1/2 and 1.0 at or above 33.
The 33 price is about a 16 percent premium over The Learning Company's closing price of 28 5/16 on Friday. Mattel closed at 30 1/8.
Barad said the two companies had been talking about a merger for awhile. "They began in July, or August and had accelerated since then," she said. "But we spoke to them as far back as a year ago about our intent in their company."
Still, the parameters of the deal indicate The Learning Company could be a little concerned about Mattel shares holding value. Michael Perik, CEO of The Learning Company, downplayed concerns.
"We are joining the company and intend to stay with it," said Perik.
But Mattel shares (chart) have been battered lately. Mattel also said Monday that fourth quarter earnings will take a hit because retailers aren't reordering toys. Retailers such as Toys R Us, which is also struggling, have cut inventory instead of chasing incremental sales. Mattel said Toys R Us has cut inventory by 50 percent.
Mattel and toy retailers are going through an inventory correction, similar to the one that plagued PC makers last year and the first half of this year. Like PC makers found out, margins are squeezed as just-in-time inventory becomes the norm.
Now Mattel sees 1998 revenue flat with a year ago with earnings projected at about $1.20 a share, 33 percent below earlier guidance.
ZDNN's Margaret Kane contributed to this report.