April 4, 2000

Mattel Decides to Put on Sale Software Unit Bought in May

By LAWRENCE M. FISHER

attel Inc. said yesterday that it would seek a buyer for the Learning Company, its educational software unit, which is expected to fetch only a fraction of the $3.6 billion Mattel paid for it in May.

Intended to broaden Mattel's reach, the unit has instead contributed to $300 million in losses, a $7 billion drop in the company's market valuation and the resignation of Jill Barad as chief executive.

Sales of so-called edutainment software on CD-ROM have slumped as consumers have shifted their interest to the Internet and video games. And Learning Company's core offerings -- like Reader Rabbit and Carmen San Diego -- are seen as tired entries in a maturing market, analysts said.

"They obviously bought a business they didn't understand, which was already on a down slope," said Michael Perkins, co-author of "Kidware: The Parents' Guide to Software for Children," and an editor with Red Herring magazine. "I don't think they're going to find a buyer."

Mattel said that it had retained Credit Suisse First Boston to sell Learning Company. Control of any Mattel brands will not be part of any deal, it added. The software business will be treated as a discontinued operation in Mattel's financial statements effective March 31, which means that its losses will not affect the company's bottom line.

Mattel shares rose 43.75 cents, to $10.9375, on the New York Stock Exchange. The Wall Street Journal reported yesterday that the Learning Company had been put on the block.

The entire educational software business has been through a sweeping consolidation, with three or four companies now accounting for most titles, and even those struggling to remain profitable, said Jeffrey Tarter, publisher of Softletter, an industry newsletter. "One of the biggest problems was the virtual collapse of the retail channel, especially for consumer products," he said. "Computer stores just don't get Main Street traffic and nobody ever figured out how to get these titles in supermarkets and bookstores."

The price: probably far short of the $3.6 billion paid for the Learning Company.

The Learning Company that Mattel bought was actually a collection of once-leading producers of software for children amassed in an acquisition spree by Kevin O'Leary and Michael Perik, founders of a Canadian software company called Softkey International Inc. Softkey, previously known primarily for publishing a CD-ROM version of the Sports Illustrated swimsuit calendar, acquired the original Learning Company in a hostile takeover in 1995, and adopted its name.

Softkey also acquired the Minnesota Educational Computing Corporation, known as MECC, Compton's New Media and Broderbund Software Inc., and pursued a strategy of cutting prices and increasing distribution. For a time this plan resulted in increased revenue, but the new ownership also resulted in an exodus of talent, many no doubt dismayed by Mr. O'Leary's oft-quoted remark that creating software titles was no different from blending new flavors of cat food.

Learning's revenue growth had already slowed before Mattel closed its acquisition. And in August, Mr. Perik and Mr. O'Leary sold a majority of their Mattel stock for $5.9 million each. They left the company in November, after Learning reported a third-quarter loss of $100 million; They each received $5.2 million in severance pay.