5.10 Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion. Mattel had determined that TLC receivables were overstated, a $50 million licensing deal had been prematurely put on the balance sheet, and TLC brands were becoming outdated. TLC also had substantially exaggerated the amount of money put into research and development for new software products. Nevertheless, driven to become a big player in children’s software, Mattel closed on the transaction, aware that TLC cash flows were overstated.
After restructuring charges associated with the acquisition, Mattel’s consolidated net loss was $82.4 million on sales of $5.5 billion. Mattel’s stock fell by more than 35% to end the year at about $14 per share. What could Mattel have done to protect its interests better?