Gores Engineers Rapid Turnaround at Software Maker.

Having tamed the cash-eating monster that consumed Jill Barad, Alec Gores is being inundated with calls from others looking to have their monsters tamed.

The just-tamed monster, of course, is the Learning Co., which Gores Technology Group bought last year from Mattel Inc.

At that time, Gores raised more than a few eyebrows by proclaiming that within six months he would be drawing profits from the Learning Co., which had been costing Mattel $1.5 million a day. (Losses that ultimately cost Barad her job as Mattel CEO.)

But 75 days after the acquisition, Gores announced that the Northern California-based Learning Co. is indeed operating at a profit. It has been a stunning turnaround.

"I'm frankly surprised," said toy analyst Margaret Whitfield of Tucker Anthony Cleary Gull. "I was a disaster for Mattel."

GTG's profile has clearly been heightened in the wake of its success with the Learning Co. Deal flow "has gone up by 10 times, at least," Gores said, adding that the shakeout in technology companies has helped as well.

The West L.A. buyout firm's next deal seems to be the acquisition of Idaho-based Micron Electronics Inc.'s money-losing personal computer business, the finishing touches of which were being put together late last week, sources said. And while Gores himself declined comment, people familiar with the deal are confident that his team will succeed in making Micron's PC business profitable in six months or less, as well.

"In many ways, it's a much easier fix," one source said. "It's not bleeding as much as Learning Co. was."

The Learning Co. was a textbook example of a business built mostly by cobbled-together acquisitions, which were then purchased by a larger company with little idea of how to make the pieces fit together. Mattel paid $3.5 billion for the educational software maker in 1999, at the height of the market, then couldn't make it work, eventually prompting Barad's ouster.

Streamlining initiatives

When GTG Group President James Bailey convened his first management meeting as newly installed president of the Learning Co., he had to introduce some executives to each other.

"TLC was part of 60 different acquisitions," Bailey said. "There were seven separate Internet initiatives, all run by different people. Some of these people had never met each other, even though they worked in the same building."

The company had a hiring freeze on at the time, but certain divisions circumvented that by adding part-time staff and consultants. GTG went in with a scythe, eliminating 700 of those jobs, as well as 300 full-time employees.

The now-leaner company has re-employed around 50 of the full-time staff let go in the wake of the takeover, mostly in product development. While Gores would not disclose just how profitable the Learning Co. now is, he gave a few clues to its newfound success.

"We expect profit of between 5 percent and 20 percent of revenue, somewhere in that range," he said of a company that had $750 million in sales in 1999.

"I can tell you that the profit is material," Bailey added. "It's not a dollar, it's not $100. It's in the millions."

Moreover, the restructuring was done without borrowing a cent, although GTG put up undisclosed millions of dollars of its own money.

"We're sitting here with the Learning Co. in zero debt -- period," Gores said.

That being said, it begs the question of why Gores Technology was able to succeed where Mattel couldn't. Gores and Bailey have nothing but praise for current Mattel CEO Robert Eckert, but both said that the toy giant's purchase of the Learning Co was done without knowing what it was getting into.

"Mattel didn't understand software and software development," Gores said. "They didn't have the talent to go in and restructure (the Learning Co.)"

Clearly Mattel is positioned to do well by the deal.

It agreed to sell Gores the Learning Co. for nothing up-front, in exchange for a share of future profits.

Despite having to record a $34 million expense in the fourth quarter ended Dec. 31, 2000, most of which was related to writing the Learning Co. off its books, Mattel has returned to profitability.

And the toymaker's share price has done very well since the deal, rising from a 52-week low of $9.75 last September to as high as $19.05 in late March. Last week it was trading at around $17 a share.

"I think Bob Eckert, who came in new to the company, was very, very smart to realize (that the Learning Co.) wasn't good for them," Gores said. "He's picked up almost $10 a share. That's like $3 billion in market value."

Whether Mattel is benefiting directly from the Learning Co. turnaround just yet is another question. Gores wouldn't comment, citing a confidentiality agreement, and analyst Whitfield was cautious as well.

"We don't know the details, but someone close to the company told me it's possible Mattel hasn't seen a cent yet, given whatever arrangements were made," she said.

Whether GTG will sell the Learning Co. off in the future is undecided. Company officials say nothing is in the works, and Gores sounds as if he'd rather hang on to it.

"If at some point in time we'd create better value through a public offering, it's not what we typically do, (but) we could do it," he said. "We're not planning to do so."