Mattel to Buy The Learning Company

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World's largest toy maker Mattel Inc., in a bid to sell more interactive products and expand its direct channels, is set to buy computer games and educational software firm The Learning Co. for about $3 billion.


Mattel, El Segundo, CA, sees the acquisition as key to its goal of reaching $1 billion in annual direct sales. About 14 percent of TLC's volume is sold directly, and added to Mattel's earlier acquisition of Pleasant Co., a mail-order marketer of collector dolls, the combined entity will reach $600 million in direct sales. The merger of the companies, announced last week, is expected to receive shareholder approval and be finalized in March or April.


TLC, Cambridge, MA, the second largest consumer software company behind Microsoft Corp., also makes it possible for Mattel to apply some of its more well-known brands, such as Barbie, Hot Wheels and Matchbox, toward new interactive and educational products like CD-ROMs. Mattel seeks to build its interactive business to $1 billion over the next five years, from an annual $100 million now, said Mattel CEO Jill Barad.


"We're in the process of transforming ourselves from a traditional toy company into a global children's products company, becoming an even more relevant part of kids' lives. To do this, we needed to expand our presence in the interactive arena," Barad said, adding that technology is also redefining marketing and distribution. "There could be no better catalyst for our transformation than the plan … to merge with The Learning Company."


And Mattel has reason to want to take its products directly to consumers and circumvent retail giants like Toys 'R' Us Inc., whose order volume greatly impacts Mattel's sales, especially during the Christmas shopping season.


Retail order cutbacks prompted Mattel to warn investors -- on the same day it announced the TLC acquisition -- that its profits would be short of street expectations. The company said it now expects 1998 earnings per share of about $1.20, well short of the $1.80 to $1.85 range it had affirmed only six weeks earlier. The discrepancy, Barad said, was caused by retailers who cut off their orders after being disappointed with sales on the weekend following Thanksgiving. The stores diminished their stock, even on some fast-selling items that would run out before Christmas.


As a result of the order cutbacks and Mattel's decision to cancel early shipments of merchandise earmarked to sell in the first half of 1999, the company anticipates revenues $500 million lower than forecasts and pretax profits $250 million lower than earlier expectations.


Mattel's projected shortfall prompted some market watchers to question the wisdom of fiscally healthy TLC joining forces with a toy giant experiencing slowed growth. But TLC dismisses such concerns.


"As we look at the business of educational software and where it's going two or three years down the road, it's clear that one of the things that's going to be very important is interactive toys … and interactive educational tools," said TLC spokeswoman Susan Getgood, adding that a huge partner like Mattel will help the company develop more software products.


TLC has experience in taking familiar names like LEGO and Sesame Street and developing software titles around them. Additionally, TLC sees its own brands like Reader Rabbit -- a computer character that helps teach reading skills -- possibly evolving into an interactive doll to be sold through the company's catalogs and online store at www.shoptlc.com.


"Basically, our market is the same as Mattel's. It's parents, it's families, it's children," Getgood said. "We're solidly committed to this deal and that it's the best move for our shareholders going forward."


Getgood noted that TLC's marketing, creative and development employees are also valuable assets to Mattel, though she indicated that "duplications" might exist between the companies' back office areas.


In the meantime, Wall Street last week seemed more interested in Mattel's earnings forecast than the TLC merge. Mattel shares tanked out on the revised earnings projections, falling 8 1/8, or 27 percent, to finish at 22 Monday; it closed at 22 3/4 on Wednesday. TLC's stock slipped 3 5/16, or 11.7 percent, to 25; it closed at 24 11/16 on Wednesday.


At least for now, Mattel's stock plunge also cuts into the value of the deal, which TLC originally announced as worth $3.8 billion. Under the companies' agreement, if Mattel stock slides below $27.50 -- where it is now -- each TLC share will be exchanged for 1.2 Mattel shares. With Mattel shares at 22, the transaction is worth roughly $3.04 billion. However, each outstanding share of TLC will be exchanged for $33 worth of Mattel stock if Mattel's shares trade for an average of more than $27.50 for a set period prior to the closing date.
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