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Rob magazine please don't use (Shanghoon/Westside Studio)
Rob magazine please don't use (Shanghoon/Westside Studio)

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The Empire Strikes Back Add to ...

Rose Art had three business units: activity kits, where it was the low-cost market leader; stationery and crayons, a very competitive segment dominated by Crayola; and Magnetix. The Bertrands had little experience with the first two categories, so they left them in the Rosens' care in New Jersey. Mega focused on mining Magnetix's potential by boosting its international distribution. But the supply chains soon got tangled, and inefficiencies multiplied. Suddenly transformed into a half-billion-dollar company, Mega lacked the infrastructure to handle its expanded product menu. Retailers were complaining about orders arriving late and ridden with errors.

When Mega decided to close Rose Art's New Jersey manufacturing plant, the Rosens, who were proud of their record as employers, weren't pleased. "This was not part of the game plan" when the company was sold, Larry Rosen grumbled. The Bertrands' problem was threefold, according to Lutz Muller, who runs toy-industry consultancy Klosters Trading Corp.: "They didn't have the supply-chain management they needed, they didn't have control over manufacturers in China, and they didn't have control over the Rosens."

Tensions between the two families soon broke out into open conflict. The precipitating incident came in November, 2005, just five months after the merger was announced. A Seattle-area toddler died after he swallowed loose magnets from his older brother's Magnetix set. Whether the risk of such an accident was disclosed ahead of the sale is a point hotly argued by the Rosens and the Bertrands. In any case, the U.S. Consumer Product Safety Commission has revealed that complaints about magnets coming loose from the toys go back to 2000. (In mid-April, Mega agreed to pay $1.1 million to CPSC for failing to "provide the government with timely information about dangers to children with Magnetix magnetic building sets.")

Initially, Mega merely added more glue to the magnets and relabelled some of the products aimed at younger children, meanwhile negotiating the terms of a recall with the CPSC. In March, 2006, the company recalled a limited number of toys, but the recall wording confused retailers. Some, including Toys R Us, yanked all Magnetix products off the shelves, while others held on to sets they shouldn't have. After reports of more hurt children surfaced, the company made a second, wider recall, in April, 2007.

The timing was terrible: Dangerous, Chinese-made toys were becoming a front-page scandal in the U.S., with Congress investigating after Fisher-Price, Mattel and others were found to be selling tainted products. In the spring of 2007, the Chicago Tribune ran a series on Mega's alleged "botched recall," using the company as a case study of how, it said, manufacturers haggled with regulators over recall criteria and wording to minimize fallout for themselves.

The Bertrands had never handled a recall before, and this one ultimately became a doozy, ending in the spring of 2007, when every last Magnetix box was taken off the shelves and scrapped. All told, more than seven million units were pulled worldwide. "That's a huge, gigantic recall," especially for a company Mega's size, says analyst Caron. The fact that it took three recalls to solve the problem infuriated many retailers. "Buyers hate recalls," says Lutz Muller, "but they understand that sometimes you could be unlucky. But...many got totally frustrated when they didn't want Magnetix up on the shelves but Mega wouldn't take it back."

The Rosens and the Bertrands were by then in the courts. As worries stemming from customer complaints about Magnetix mounted, the Bertrands withheld about $50 million in performance-related payments to the Rosens while the company investigated the problem. When the Rosen family sued for the money, the Bertrands fired the Rosen brothers and counterclaimed a failure to disclose material information prior to the sale. Last year, the Rosens additionally alleged that Mega's principals engaged in insider trading before news of Magnetix-related injuries became public.

Caron estimates the total cost of the fiasco at $150 million. Meanwhile, he figures, Magnetix went from a $75-million business to zero. Asked about that time, Marc Bertrand says, "The easy way to put it is, there's been no injury related to any products we've manufactured." The cold language belies what has been a deeply traumatic experience for the brothers, according to two people close to the company. At the New York fair, Bertrand says quietly, "We had a successful business, and this has been a very difficult period." As he talks, he absent-mindedly plays with a battleship built out of MagNext pieces-the line Mega introduced last year in place of the tainted Magnetix. When a part disconnects in his hands, he takes the opportunity to point out that the new line is sturdier and has bigger pieces. "And the product is now ingestible," he says. For a moment, it appears he might pop a part in his mouth to prove the point.

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