In 1998, toy giant Mattel Inc. made a takeover bid for TLC. Desperate to reverse a steep slide in the company’s stock price, Mattel CEO Jill Barad seized on educational software as a driver of future growth.
The takeover offer shocked many. Software-industry analyst Sean McGowan couldn’t believe that Barad zeroed in on TLC, given that it was a well-known “house of cards” that was burdened with tired brands—not helped by the fact that O’Leary had slashed R&D from 24% down to 11% of expenditures. “There was a lot of [TLC] inventory out there that was not moving very well,” McGowan says. “They pumped up the sales by repackaging and distributing to convenience stores and drugstores. And that’s stuff which sits there and gets returned.” Indeed, TLC was accused in a shareholders’ lawsuit and later by a Mattel executive of “stuffing the channels”—shipping product at the end of a quarter and recording it as revenue, even though much of the merchandise would be returned. “Stuffing the channels was part of the business back then,” says a former TLC sales rep based in California. The suit’s allegation is denied by former TLC executives such as former CFO Scott Murray. “There was no overstocking in the channels or overinventorying in the channels,” he says.
Mattel purchased TLC for about $4 billion in the spring of 1999. (Depending on how debt is considered, the figure ranges from $3.4 billion to $4.2 billion.) O’Leary took over as president of Mattel’s new TLC digital division, having received a hike in salary from $400,000 to $650,000 and an increase in his severance package from $2.1 million to $5.25 million. A few months after the sale went through, O’Leary sold most of his Mattel stock and pocketed nearly $6 million, according to a court document.
Weeks after the sale, CFRA produced a critical report on Mattel, claiming TLC was already experiencing collapsing revenue, a surge in receivables and a deterioration of operating cash flow. In the third quarter of 1999, Mattel expected profits of $50 million from the TLC division. When Mattel revised that estimate to a loss of between $50 million and $100 million, the announcement wiped out more than $2 billion in shareholder value in one day, as the company’s share price slid from nearly $17 to $11.69. The actual divisional loss for the quarter turned out to be $105 million; the next quarter, the loss was $206 million.
In November of 1999, O’Leary was fired, six months into a three-year contract. Four months later, Barad, the CEO, was forced out too. “There is nothing I can say to gloss over how devastating The Learning Company’s results have been to Mattel’s overall performance,” she said.
Mattel hired Bernard Stolar, a video-game executive, to see if he could salvage TLC. “It was an absolute disaster,” he says. “TLC had a lot of overhead and product wasn’t selling. They were way overstaffed. They had 20 offices when they only needed two.”
In 2000, Mattel handed over its multibillion-dollar acquisition to another firm for $27.3 million and a share of its future profits. Mattel’s purchase of TLC was eventually labelled by Businessweek as one of “the Worst Deals of All Time.” Shareholders launched a class-action lawsuit, naming O’Leary as a defendant, accusing him of insider trading and of being part of a scheme to obscure TLC’s financial state. In court documents, O’Leary denied the allegations.
In 2003, Mattel settled the lawsuit for $122 million—considered a “mega-settlement” by Cornerstone Research, a litigation consulting firm. O’Leary has sometimes been called a billionaire due to the size of the original deal. That overstates things: O’Leary in fact netted $11.2 million between his severance package and sale of his Mattel stock. The real money in the transaction was made by Bain and its partners.
O’Leary has no regrets. He says that TLC’s problems were due to Mattel’s mismanagement after the sale went through. “The legacy of The Learning Company I’m pretty proud of,” he says. “It’s sort of an unfortunate transaction. There have been many others since like it, where you try to merge cultures. I look historically back at that deal, I’m very proud of what we created there. We had some fantastic assets in that company and great people too.”