DirectorsatWork 213Cascades of stupid acquisitions come pouring in, often drowning the
board’s better judgment.
These timing problems make it difficult to design a governance
mechanism that would alleviate this pressure on the board. The ego
problems are just as intractable, as another Buffettism suggests:
“While deals often fail in practice, they never fail in projections—if
the CEO is visibly panting over a prospective acquisition, subordi-
nates and consultants will supply the requisite projections to ration-
alize any price.”^13
Mattel, for example, is a worldwide leader in the design, man-
ufacture, and distribution of toys. In May 1999 it bought the Learn-
ing Company, a producer of educational software for personal com-
puters. Mattel paid for the $3.8 billion purchase by using Mattel
stoc kat a time when the stoc kwas trading at about $26 a share
(down already from an average trading price over the prior year of
around $40). Mattel’s chair, Jill Barad, announced in July 1999 that
the Learning Company was contributing to Mattel’s overall opera-
tions with “exceptionally strong growth” in revenues and margins and
said this “was one of the reasons this merger made so much sense
for Mattel.”^14
Barad did not say how the computer software business related
to Mattel’s traditional products, such as Barbie dolls, Fisher-Price
toys, and Hot Wheels. But just three months later, in October
1999, Mattel announced that the Learning Company division’s rev-
enues had declined and it had lost money because of, among other
things, higher than expected product returns from customers and
write-offs of bad debts.^15 Instead of earning $50 million that quar-
ter as Barad estimated, it lost over $100 million, and Mattel’s stock
plummeted to about $11 a share. Many analysts, at least in hind-
sight, reported that these problems at the Learning Company were
not new and should have been uncovered and discounted before
Mattel bought it.
These analysts also thought that Mattel fit the description of a
company about to make a bad acquisition. If sales growth in your
core business is declining and you can’t seem to do anything about
it through product, marketing, or distribution improvements, one
impulse is to buy yourself some growth through an acquisition. Mat-
tel’s sales growth, incidentally, was declining in its core products
right before the Learning Company acquisition. So too, for that mat-
ter, was the Learning Company’s. (Mattel’s board ousted Barad in
early 2000, awarding her an exorbitant severance package, and re-
placed her with Kraft Foods CEO Robert Eckert.)