V-Tech to acquire LeapFrog

On Friday, VTech announced that it had entered into an agreement to purchase all outstanding stock of LeapFrog (NYSE: LF).  The combined new company would keep the LeapFrog name.  Here is what I found interesting - the purchase price was $72 million.

LeapFrog was founded back in 1995 by Michael Wood and Robert Lally.  The company traces its roots back to Michael Wood and his quest to find a toy that could help his 3-year-old son learn phonics.

LeapFrog attracted early interest from some big name investors, including former junk bond financier Michael Milken, and CEO of Oracle Larry Ellison (currently listed as the 3rd wealthiest individual in the United States by Forbes magazine).

Anyone in the toy industry would remember how LeapFrog became a toy industry success story with the launch of the award-winning LeapPad in 1999.

In 2002, the company went public on the NYSE at an IPO price of $13.00.  LeapFrog quickly became the darling of Wall Street, with the share price rising to $40.89 in the summer of 2003.  The stock has been on a downward slope since then - with the share price recently dropping to an all-time low of $0.52.  Revenue at LeapFrog, which peaked in 2003 at $680 million, had dropped to $284 million in the company’s latest fiscal year.

Hence the sale price of $72 million.

The news media often reports on the success stories of people who hit the big time with their inventions.  It is these news stories that attract starry-eyed newbies to the industry (like me in 1996).  You see it every year at NY Toy Fair, with toy and game inventors presenting their new products.  Of course, some do go on to become successful, but unfortunately most struggle to break even. Even an initial success - like LeapPad was for LeapFrog - is no guarantee of long term success.  The toy industry is a tough competitive industry!