5.10 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overstated, a $50 million licensing deal had been prematurely put on the balance sheet, and TLC brands were becoming outdated.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 R&D for new software products.

Nevertheless, driven to become a big player in children’s software, Mattel closed on the transaction, aware that TLC’s 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 better protect its interests? (Appendix)