Hasbro has reportedly linked up with Mattel executives in a bid to form a combined toymaker bringing under the one roof the Barbie, Hotwheels, My Little Pony and Furby brands.
Mattel last October reported eight consecutive periods of falling sales. This resulted in a drastic rethink of its best seller Barbie, repositioning her as a more inspirational figure with an ad looking to encourage girls to take up non-traditional roles.
Having last month rolled out three new body shapes and seven skin tones to its range of Barbie dolls to make the toy "more reflective of the world girls see around them," Mattel reportedly hoped consolidate its position in a merger talk with Hasbro at the end of 2015.
With digital games and apps chewing into physical toys sales, the firms could come together to fight the decline.
International Business Times reports that Hasbro has a market value of around $9.2bn, slightly less than Mattel’s $10.7bn.
Hasbro carries the lucrative licence to produce Star Wars toys and will be taking over the rights to Disney’s Frozen later in 2016.