Mattel (MAT -1.87%) is betting that its better-than-expected first-quarter earnings results mean it's turned the corner, and that it can therefore afford to go it alone. The toymaker has rejected a second buyout offer from privately held MGA Entertainment, and based on the conditions Reuters says MGA wanted to impose, management was correct to do so.

Tie-up talks are nothing new

Sales have been sliding for Mattel, which posted revenue of $4.5 billion in 2018, down 7.6% from the prior year and some 25% below the figure from five years ago. But Barbie has made a comeback, Matchbox and Hot Wheels are no longer spinning their tires, and a new management team finally intends to use its portfolio of brands to make theatrical-release movies, much the way rival Hasbro (HAS -2.09%) has monetized its toy box.

Girl with Barbie Dreamhouse

Image source: Mattel.

Although there have been rumors over the years that Mattel might merge with Hasbro -- and even some actual negotiations -- that all came to naught, likely in large part because an attempt to unite the two giant toymakers would attract significant antitrust attention.

The combination of Hasbro and Mattel today would control as much as 33% of the toy market, and while that shows how fractured and diversified the industry is, its annual revenue of around $9 billion would dwarf what would be the second-largest toymaker, Lego, which had around $5.5 billion in revenue in 2018.

It would also eliminate the ability of third-party players to use the competition between them to their benefit. Disney (DIS -1.08%), for example, was able to take its Frozen and princess lines of dolls from Mattel and award it to Hasbro. The fact that partners and potential partners can play the two companies against one another keeps both on their toes.

An offer it could refuse

The same issues would not have applied to an acquisition of Mattel by MGA Entertainment, which generated about $2 billion in annual revenue last year. MGA owns not only the Bratz doll line and Little Tikes, but also L.O.L. Surprise!, which NPD Group says dominated the list of most popular traditional toys in 2018, taking the top four spots and eight of the top 10. But a combination could arguably have made the toymaker a more effective rival to Hasbro.

Still, it looks like Mattel's board of directors made the right call when they unanimously rejected MGA's offer, describing it as "not in the best interests of Mattel and its shareholders."

Though Mattel currently has a market cap of around $3.5 billion, MGA founder and CEO Isaac Larian told the Los Angeles Times there "absolutely" would have been a premium offered for the company, though no buyout price was actually given at the time of the bid. Larian told the LA Times he planned on having an investment banker or some other outside party come up with an appropriate valuation.

However, in the wake of the offer rejection, Larian told CNBC he thought Mattel's stock was worth $6 a share at most -- about half of where it's trading now -- and asserted that the company would probably be bankrupt within a year if its situation does not change. That raises the question of just how much of a premium he actually intended to offer.

History of bad blood

What likely also stuck in Mattel's craw was that Larian made the offer conditional on him becoming Mattel's chairman and CEO, and included a demand that its board of directors resign en masse without any further compensation.

That was a bold strategy, to be sure, and also a curious one as the two companies have been at loggerheads in court for 15 years over who should own the Bratz intellectual property. Mattel contends that one of its former employees who was hired away by MGA had designed the dolls while on Mattel company time. MGA disputes that claim. Mattel won a summary judgment dismissal last year of MGA's trade secrets violation claim, but MGA filed an appeal, and the battle continues to wind its way along.

So all other things being equal, Mattel is unlikely to take a favorable view of any offers coming out of MGA Entertainment HQ, though it still has a fiduciary responsibility to its shareholders to seriously entertain all valid offers -- even those from its legal combatants.

It seems, though, there was little to warrant interest on the part of Mattel's board, and management still has its sights set on turning its business around by its own hand. With a portfolio of well-known and beloved brands it is finally taking better steps to monetize, it just might be able to pull it off.