M&A Is Not a Kid's Game

By Tom Taulli

FAO Schwarz is a legend in the toy business. As with all legends, it won't seem to go away. The company has filed for bankruptcy twice this year.

As with most bankruptcies, the shareholders have been virtually wiped out. Yet, the company still has valuable assets, such as inventory. In the midst of Christmas season, such things can be very attractive, so long as the price is right.

But, the most valuable asset actually has no physical form. It's intellectual property; that is, it's the name of the company.

The Real Asset

This should be a good thing for the company, right? Well, the company does not own the name. Rather it is a licensee. The name, instead, belongs to the heirs of the founder of the company and is held by a foundation.

You see, the family does not just want any ole' company to use their name. A licensee must meet rigorous "first quality" standards. Essentially, companies like Saks Fifth Avenue, Bloomingdale's and Harrods fit the bill.

Keep in mind that the company was founded 141 years ago by Frederick August Otto Schwarz. The royalties paid under the foundation's licensing agreement go to various charitable activities.

If someone wants to use the name, they must deal with the foundation. However, if a prospective licensee does not meet the strict requirements, it looks like they will be out of luck.

Conclusion

The FAO Schwartz situation is a very interesting predicament in the M&A context. In fact, we are likely to see more of these issues regarding heirs, foundations and intellectual property.

A huge part of the success of FAO Schwartz has been its incredible brand of quality. It certainly makes sense for the foundation to safeguard it. But, the world has changed quite a bit and the foundation may hamstring itself if it gets too stringent on its standards. With the emergence of Wal-Mart and other discount retailers, the toy industry has been transformed. Sure, FAO Schwartz can maintain its premium brand, but it will probably not attract much interest or profits.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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