They gotta lose that girl.
Mattel Has Nobody to
Blame but Itself for The
Learning Co. Fiasco
By Herb Greenberg
Senior Columnist
10/4/99 12:28 PM ET
From the "never mind that note earlier today that said I
wouldn't write until Tuesday" department: Every now
and then, a company that has been a long-term target
of criticism by short-sellers for accounting gimmickry
gets out of a jam by getting itself acquired by another
company. Only the company doing the buying is so
desperate to get out of its jam that, long after the deal
is done, it winds up getting blindsided by problems it
never knew existed at the company it bought.
Quaker Oats' (OAT:NYSE) purchase of Snapple a
number of years ago was a classic. So too, it will be
proved, was Mattel's (MAT:NYSE) purchase of The
Learning Company. This morning, Mattel warned that
it would post "significantly" lower-than-expected
third-quarter earnings, thanks to a variety of problems
with The Learning Co., especially higher-than-expected
product returns, which led to a $50 million bad-debt
writeoff.
Surprise, surprise! No stranger to this column, The
Learning Co. had been a target of short-seller scrutiny
for years before the Mattel purchase. The shorts
claimed, among other things, that TLC's accounting
was too aggressive, its distribution channel was
overstuffed with product and that, based on its income
statement and balance sheet, it was headed for trouble.
Yet last year, just when red flags were flying high over
The Learning Co., it agreed to sell itself to a gullible
Mattel. And the purchase came just as Mattel itself was
warning that its earnings wouldn't be all they were
cracked up to be.
At the time, even this column raised questions about
the deal. What was written in that column is important
to review today because it makes you wonder how
much due diligence Mattel really did. To quote from that
column:
Sounds to some skeptics like two
desperate companies doing one
desperate deal. Why else, they wonder,
would Mattel, which trades at 2 times
sales, swap its stock for a company that
trades at 4.5 times projected sales?
Why else, they wonder, would Mattel buy
a company that has been the target of
charges, for years, of stuffing the
distribution channel to make its numbers
look better than they really are? Along
those lines, why else, they wonder, would
Mattel buy a company whose receivables,
in recent quarters, have been rising faster
than sales -- if you included the amount of
receivables that had been sold off to
investors?
Why else, they wonder, would Mattel buy
a company that itself has done upwards
of $1.3 billion in takeovers, with much of
the combined purchase price being
written off? (Makes some critics wonder
what was in those writeoffs, and adds
further doubt to the quality of TLC's
earnings.) And why else, they wonder,
would Mattel buy a company that has
bought numerous other companies,
including Broderbund, whose
fundamentals have been failing?
Why else, they wonder, would Mattel buy
a company whose operating earnings are
an unusually robust 26%, twice the
margins of Electronic Arts
(ERTS:Nasdaq), which is with little doubt
one of the best operators in the game
industry? (Such a big discrepancy doesn't
sit well with some critics.)
Why else, they wonder, would TLC's
management sell the company, at this
time, if the biz is so good?
Maybe the answer is that before getting
into the software biz, TLC Chairman and
CEO Michael Perik was a currency trader
in Canada. Mattel's purchase of TLC, it
would appear, is the ultimate trade.
And what a deal it was. In August, less than three
months after the Mattel-TLC marriage was final, TLC
Chairman and CEO Michael Perik and TLC President
Kevin O'Leary both filed to sell 250,000 shares of their
Mattel stock worth $5.8 million. Both are still
employees of Mattel, with annual salaries of $650,000.
Perik didn't return my call; O'Leary was said to be
traveling today and unavailable for comment.
As for Mattel, it says it first learned of trouble with TLC
last week. What's more, a spokesman insists the
company did its pre-deal due diligence.
Maybe so, but apparently it wasn't diligent enough.
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