Barbie Stops the Bleeding

There are vicious rumors swirling on Wall Street that Barbie may be forced
to put both her Dream House and Corvette up for auction on eBay
following news that parent, Mattel Inc. , has finally sold its hemorrhaging subsidiary, The Learning Co., to L.A.-based
investment firm Gores Technology Group for next to nothing. Mattel acquired
the money-losing games software maker for a staggering $3.5 billion last
year in what is largely considered today to be one of the worst
high-profile acquisition blunders in history.


Under the terms of the sweetheart deal, so-called corporate
turnaround-aficionado Gores Technology won’t pay one penny up front in
exchange for the struggling software firm, but will instead pay Mattel a
portion of future earnings should The Learning Co. ever return to
profitability or be sold off in the future. Mattel also plans to take an
after-tax loss of $430 million related to the deal and layoff more than 350
employees, or about 10% of its workforce. It’s a bitter pill to swallow,
but the toy maker finally cuts loose the constant cash-drain that some
estimated to be costing the company up to $1 million per day.


That’s little consolation for investors that have seen Mattel’s shares fall
to within a stone’s throw of its 52-week low. The Learning Co. land-grab
was originally touted by Mattel executives as an exciting move into the
digital interactive entertainment industry. The sibling software developer
publishes a bevy of semi-popular gaming and educational titles that include
Carmen Sandiego, Myst, PrintShop, and The Oregon
Trail
. But without question, Mattel grossly overpaid for a poorly run
upstart that already had an openly suspect reputation for questionable
accounting practices. The failure to perform badly-needed due diligence
ultimately came home to roost on Mattel’s own bottom line and led to a
spate of shareholder lawsuits as a result.


Then-CEO Jill Barad was instrumental in brokering the doomsday deal, and it
ended up costing Barad her job earlier this year after The Learning Co.’s
stench began lingering on Mattel’s underwhelming stock performance. The
company’s president and chief financial officer were also handed pink
slips, and Robert Eckert took over the reigns as top banana to turn things
around. The sale of The Learning Co. should help stop the bleeding, but
without receiving a dime up front in return for the once-prized holding, it
certainly won’t help ease the sting for Mattel or its investors.


Other suitors did materialize, bidding pennies on the dollar for The
Learning Co., including Havas Interactive, the U.S.-based subsidiary of
French media giant Vivendi. Rumors had the offer in the neighborhood of
$200 to $400 million, but potential regulatory roadblocks in both the U.S.
and abroad made the deal less favorable. In the end, The Learning Co.’s
limited potential fell victim to the fickle nature of young consumers who
were quick to embrace the Internet medium over plain vanilla CD-ROMs. And
in hindsight, Mattel is clearly best suited to return to its core business
roots selling Barbie Dolls and Tickle Me Elmo.


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