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Kevin O'Leary: He's not a billionaire, he just plays one on TV Add to ...

Although he had ambitions of being a photographer, O’Leary entered the MBA program at the University of Western Ontario. After business school, he started Special Event Television, which produced shows including Don Cherry’s Grapevine. From watching Cherry, O’Leary learned some critical lessons about being on television: Never be boring. Never be small. Make every gesture dramatic and bold. While the show was a success, O’Leary was eventually axed as a cost-cutting measure.

By 1983, O’Leary saw the potential in the emerging software and personal computer industries. With a programmer partner, he formed SoftKey Software Products Inc. in the basement of his Toronto home. O’Leary was a talented salesman, knocking on doors of computer companies to convince them to bundle SoftKey’s software into their products. The company eventually moved to Boston and focused on the burgeoning field of educational software. As president of the company, O’Leary broke certain taboos in the industry: Instead of selling software disks solely through computer retailers, he put them into big-box, book, video, music and even grocery stores, at cut-rate prices. By 1993 SoftKey was trading on Nasdaq and had revenues of $110 million—and a loss of $57 million (all currency in U.S. dollars unless otherwise noted). The company went on to make a string of acquisitions. But a case study by Dartmouth’s Tuck School of Business found that “two of [SoftKey’s] deals…rank among the 10 worst U.S. acquisitions during 1994-1996 as measured by shareholder value two years after the deal.”

SoftKey’s most prominent takeover was the consummation of its 1995 hostile bid for San Francisco-based The Learning Company (TLC). As part of its due diligence, TLC hired the Center for Financial Research and Analysis (CFRA), a forensic accounting firm, to examine its suitor’s financials.

Thus began the counternarrative to O’Leary’s heroic foundation story. Reports by CFRA were the first in a series of analyses that stand in stark contrast to the O’Leary version of events. One of CFRA’s reports alleged that SoftKey may have overstated its earnings by bundling various general and administrative costs into write-offs. CFRA was also unhappy with SoftKey’s response after its auditor, Arthur Andersen, found deficiencies in the company’s internal controls.

SoftKey had reacted by hiring a consultancy to strengthen financial controls—but the consultancy was headed by a SoftKey vice-president. Andersen expressed dissatisfaction with this outcome, suggesting more reforms. SoftKey then fired Andersen. CFRA thought the appointment of the vice-president was a clear conflict of interest and also noted that SoftKey’s audit committee “holds several questionable members, including the CEO… as well as an outside member associated with two public companies charged with financial improprieties and another member who is a paid consultant to the company.” Over all, says former CFRA president Howard Schilit, his firm found evidence that SoftKey was making “operating profit from normal activities look stronger.”

When asked about accounting complaints from this period, O’Leary says, “That does not sound right. We didn’t have small-time accountants. We had Big Five firms. We were a public company.”

In any case, SoftKey’s acquisition of TLC went through, and SoftKey adopted the TLC name. By 1996, the company had 3,000 employees and was the biggest educational software company in the world. TLC continued to grow via acquisitions, driving revenues up over $800 million.

But while O’Leary says in his memoir, Cold Hard Truth, that TLC was a money-making machine, an SEC filing shows that TLC suffered net losses of $376 million in 1996, $495 million in 1997 and $105 million in 1998. Moreover, TLC’s accumulated deficit topped $1.1 billion by the end of 1998. In an interview, Scott Murray, TLC’s former CFO, attributed the losses to goodwill write-offs that stemmed from buying other firms. He concedes there were a lot of “accounting losses” but contends that if one looked at EBITDA—earnings before interest, taxes, depreciation and amortization—it was a different matter. “So the company was making $800 million in revenues and about $120 to $125 million of operating income before goodwill, depreciation and amortization,” Murray says.

Still, in 1997, TLC called in a group of investment firms, including Mitt Romney’s Bain Capital Inc. Together, they pumped in $123 million in exchange for an ownership stake and the right to name three board members.

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