Mattel needs a recess from tech

The world's largest toy manufacturer, which stormed into the high-tech industry by acquiring Learning Company in May, was forced to announce yesterday that the educational-software maker will lose between $50 million and $100 million for the third quarter, creating a dramatic shortfall in Mattel's expected profits.

Learning Company was expected to make $50 million, and the surprising downturn caused Mattel's stock value to fall 30 percent. The stock closed today at 12.75, hovering at a 52-week low.

Mattel is only the latest traditional retailer to stumble as it tries to keep pace with an increasingly tech-driven world. The Internet may prove to be the financial promised land, but as in the case of El Segundo, California-based Mattel and other companies deep-rooted in brick-and-mortar commerce, the journey is hazardous, as Home Depot and Toys "R" Us have already learned.

"The old-line companies have a tradition with failing at modernizing themselves," said Vernon Keenan, an analyst with Santa Fe-based research firm Keenan Vision. "Many of them do nothing more than pump a bunch of money into an acquisition and think they're an e-retailer. I see about only half of these acquisitions working out."

Mattel stands by its decision to acquire Cambridge, Massachusetts-based Learning Center and video-game maker Purple Moon earlier this year. At the time, company executives said they intended to turn Mattel's software assets into a billion-dollar business.

"And we are, thanks to the acquisitions of those companies," said Glenn Bozarth, Mattel's senior vice president of communications. "The long-term strategy of making these mergers, becoming a force in the software arena, makes as much sense as it did when we agreed to the transactions."

But from the outset--less than a year ago--Mattel's foray into the tech world appeared headed for trouble. In February, Mattel acquired and tried to revive the ailing Purple Moon, whose CD-ROM games and online community targeted girls ages 8 through 14, but at the time of the sale had laid off 400 employees and ceased doing business.

In May, analysts complained that the $3.5 billion Mattel paid for Learning Company was too much.

Another sign that Mattel's strategy may be faltering came Friday, when Mattel Media president David Haddad resigned to become chief executive of eParties.

Haddad oversaw Mattel's crossover into the digital entertainment market. He led Mattel into a partnership with Hewlett-Packard to sell Barbie color-ink jet printers and introduced a line of personal computers featuring Barbie and Hot Wheels themes.

The latest blow to Mattel's Internet foray came this week when the Learning Company said that it would post a surprising loss.

"Unfortunately, the Learning Company performance masks the underlying vitality of our core U.S. business," Mattel chief executive Jill E. Barad said in a statement. "This strength was most evident in over-the-counter sales improvements for Barbie, Fisher-Price, and our Wheels brands, as well as the fact that third-quarter shippable orders for these same brands exceeded what we could fulfill by more than $100 million. That $100 million will be shipped early in the fourth quarter."

"Everyone was excited over the upturn in Barbie sales," said Beth Burnson, an analyst with ABN Amro. "Unfortunately they went in the wrong direction with the Learning Company."

Other companies have struggled moving into the Information Age. Technical and personnel problems caused Home Depot and Toys "R" Us to delay launching Web sites in August.

Home Depot said it wanted to concentrate on increasing the size of its launch while Toys "R" Us was tripped up by the resignation of CEO Bob Moog. Later, a split with Benchmark, an important investor, also held up the site's unveiling.

"It's my experience companies that have management that's been around for a while react too slowly," Keenan said. "The hierarchical and militarist command structures can't react in Internet time."

Analysts are speculating that Barad, hired as CEO in 1997, may be on her way out. In recent weeks, Barad said that she would not seek reelection to Microsoft's board of directors to focus her attention on Mattel.

"Corporate heads usually fly when mergers fail to a tune of $50 million," Keenan said.