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A Tough Taskmaster For Learning Co.

Information Technology: Software

A Tough Taskmaster for Learning Co.

Can turnaround artist Alec Gores succeed where Mattel failed?

In 1993, Los Angeles investor Alec Gores acquired the customer-service arm of a struggling maker of word-processing machines. One of the assets he got was the firm's 800 number, 800 CALL NBI. The last three letters, the company's initials, also happened to spell MCI on a telephone keypad. A year later, a representative of AT&T called Gores and offered him $550,000 for the number. AT&T didn't want archrival MCI to be able to use it. Gores took the money, twice what he had paid for the entire business. Says Gores: "There are hidden assets in every company."

Gores is hoping for a similarly cheery outcome to his most recent acquisition, the troubled Learning Co. In mid-October, Gores acquired the maker of entertainment and educational CD-ROMs such as Where in the World is Carmen Sandiego? from Mattel Inc. The toymaker gave the business away to Gores in exchange for a split of the profits--should there be any. Learning Co. is losing more than half a million dollars a day, says Mattel's new chairman, Robert A. Eckert. To finance the deal, Gores has pumped more than $20 million of his own money into Learning Co., vowing: "It will be profitable in six months." That's when Gores hopes to sell the pieces of the company."DAUNTING TASK." Gores has his work cut out for him between now and the spring. In May of last year, Mattel paid $3.5 billion in stock for the software maker, hoping it would launch the maker of Barbie into new high-tech toy markets. But Learning Co. turned out to be one of the worst acquisitions in corporate history. Revenues appear to have been inflated by aggressive sales policies, say sources close to the deal. Soon after the acquisition, sales slumped and losses piled up. Instead of a hoped-for $50 million profit in the first quarter after the acquisition, Mattel announced a $50 million-plus loss. The deal cost Jill E. Barad her job as Mattel's chairman. In June, Mattel sold the company's Cyber Patrol unit, which makes software that prevents kids from accessing inappropriate Web sites, for $100 million to JSB Software Technologies. But Mattel couldn't find a buyer for the rest of the company, so it dumped it on Gores. "It was just too much of a daunting task to turn Learning Co. into a sellable asset," says Robert A. Kotick, chairman of rival entertainment software maker Activision Inc., who passed on the acquisition while Mattel was trying to sell it.

If anyone can bring this sorry software maker back to life, it's Gores. His privately held Gores Technology Group has acquired 36 companies worth $1 billion over two decades and has turned many of them around. His secret? Gores and former associates say it's his ability to cut costs and quickly focus on profitable ventures. "He's got a tremendous ability to reduce expenses and identify hidden assets," says Foothill Capital Corp. Senior Vice-President James Marasco, who has worked with Gores on three previous deals and lent him $100 million to fund this turnaround.NET CHARGES. Gores will turn to his playbook to salvage the CD-ROM maker. He and his 40-person staff are interviewing Learning Co.'s employees and looking for places to pare costs. Gores has not announced layoffs at the 1,400-person company, but some are likely. Presently, Learning Co. has seven divisions, each with its own accounting, marketing, and information-technology department. Those units are likely to be consolidated around each of Learning Co.'s three major businesses: education, entertainment, and productivity-enhancing software. Next, Gores will try to increase revenues, which he estimates will be less than $500 million this year, down from $847 million the previous year. And Gores hopes to shift more of Learning Co.'s software sales to the Internet. He'll charge consumers when they download a game.

The good news: Mattel has fixed some of the problems. To boost sales, Learning Co.'s prior management had been shipping products to retailers with a 100% return policy. The company also offered consumers rebates that sometimes ended up covering the full cost of the product. Mattel halted both policies.

Gores discovered his calling as a turnaround artist when a company of his was ruined by a poorly executed acquisition. Born in Israel, he moved to Michigan with his family when he was 13. After graduating from Western Michigan University with a degree in computer science, Gores worked briefly for General Motors Corp. before starting a distributor business for CADO Inc., a maker of computer workstations. After seven years, Gores sold the business to local telephone company Contel Corp. for $10 million. Contel cut commissions to salespeople, divided up work groups, and let slide a profitable sideline software business. Gores tried to buy the company back, but got outbid. Soon after, he decided to specialize in buying up shaky technology companies.

Ironically, Gores found out later that his younger brother, Thomas, had bid for Learning Co. Tom Gores runs Platinum Equity Holdings, another privately held Los Angeles tech buyout firm. Tom thought the losses were too steep to finance without help from Mattel. If Alec is successful, he could add a new rule to his playbook: If you like a deal, go so far as to outbid your brother.By Christopher Palmeri in Los AngelesReturn to top

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