What happened

Shares of toy maker Mattel (NASDAQ:MAT) soared on Monday following reports that rival Hasbro (NASDAQ:HAS) had made a recent takeover approach. If an acquisition were to take place, it would create a toy behemoth with more than $10 billion of annual revenue. Shares of Mattel were up about 20% at 11:10 a.m. EST, while shares of Hasbro were up about 6.5%.

So what

Neither company has commented on the reports, and it's unclear whether talks are still ongoing. Mattel has been struggling to turn itself around for the past few years, and the recent bankruptcy of Toys "R" Us has only made things more difficult. Net sales tumbled 13% during Mattel's third quarter, and the company was forced to eliminate its dividend entirely in order to preserve cash.

A notepad with M&A and a big fish eating a small fish drawn.

Image source: Getty Images.

Hasbro took a hit from Toys "R" Us as well, but it doesn't have any of Mattel's company-specific problems. Revenue grew 7% during Hasbro's third quarter. That's a slowdown compared to previous quarters, but it's far better than the numbers posted by Mattel.

If the two companies were combined, it would unite well-known brands like Barbie, Hot Wheels, Play-Doh, and Nerf under one roof. Hasbro would then face the challenge of turning Mattel's brands around, something that has eluded multiple Mattel CEOs over the past few years.

Now what

The terms of Hasbro's takeover offer haven't been disclosed. Mattel's market capitalization sank to about $4.5 billion prior to these reports, down from more than $10 billion one year ago. Meanwhile, Hasbro is valued at roughly $12 billion.

Any deal would likely face regulatory scrutiny, although both companies could argue that they compete not only with traditional toy companies, but with gadget makers and video-game companies as well. A combined company may be better able to adapt to a world where toys compete with tablets, phones, and video games for time.

If no deal takes place, expect shares of Mattel to give back these gains. With the company facing so many problems, a buyout might be the best option for investors.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool has a disclosure policy.