The Globe and Mail

  Mattel, the company that brought you Barbie, is hurting and not a buy yet, our contrarians say.


Saturday, May 27, 2000

As her President 2000 Barbie bid is launched, the doll who in previous incarnations worked as a marine, professional ball player, doctor and Baywatch Babe must be seething as her former Mattel boss, chief executive officer Jill Barad, received an estimated $50 million (US) severance package after resigning.

Perhaps the extravagant settlement could be justified if Ms. Barad had achieved some success during her three years at the helm of Mattel Inc. (MAT--NYSE). But her time there was a disaster and the stock price reflected this, dropping to under $12 a share from $27.75. It’s now trading in the $13 range.

Ms. Barad’s settlement included $26.4 million in cash, forgiveness of $7.2 million in loans, payment of $3.3 million in state and federal assessments associated with the loans, plus retirement benefits of $709,000 a year for life. Interim CEO Ronald Loeb justified the terms by saying, "We've acted very ethically in doing what we did. Our real focus was getting on with business and getting as many diversions as possible behind us."

While Mr. Loeb suggests $50 million is a diversion, we believe it clearly demonstrates the manner in which some executives mismanage public corporations. There’s a tendency to forget it’s the shareholders to whom they are accountable, rather than colleagues who are given their walking papers.

Small shareholders are not the only people up in arms. New York State Comptroller Carl McCall recently wrote the board, urging Mattel to reconsider. With 1.2 million Mattel shares in the state’s Common Retirement Fund, which represents 880,000 people, Mr. McCall was outraged. "We’re trying to make a point that this company and others have to move away from this trend of compensating people for poor performance," he complained.

Perhaps this situation is a classic case of the Peter Principle, where people tend to be promoted up the corporate ladder as long as they are achievers, but once they reach their level of incompetence, the promotions stop.

Ms. Barad appears to have followed this pattern, having worked her way through the toy company’s ranks over a 21-year career, helping Barbie grow from $320 million in sales in 1985 to more than $2 billion in 1998. Once she achieved the top post however, she made the decision to buy The Learning Company for $3.5 billion. The maker of Carmen Sandiego and other children’s software is now on the block for a third of that amount, after a $300 million dollar loss last year. Ms. Barad resigned under pressure and one can only speculate how monstrous her payout would have been had she achieved a modicum of success.

There are a number of reasons not to invest in this firm. It’s selling at about four times book value, and some of the financial ratios are less than inspiring. Short sellers, with more than 8.5 million shares in their cache, are cynical about this company. But if the stock price retreats to less than $10, where it was recently, this enterprise is worth a closer examination.

In the past 52 weeks, the stock has traded at more than $27. Just two years ago, it was more than $40, a far cry from its current level. Plus, the firm is the leader in its field, with the cash registers ringing in more than $5 billion in sales last year, making it fairly easy to cover the dividend, which exceeds 3 percent.

The key piece in the puzzle, though, is probably the potential saviour who arrived last week -- Robert Eckert, recently president and CEO of Kraft Inc. Commenting on his arrival in gamesland Mr. Eckert said, "I'll make more money by building shareholder value than I will by getting fired." Already he seems to be distancing himself from his predecessor, and his track record suggests the results will resonate more positively.

As often happens with the arrival of a new CEO, the stock price cruised upward. But it’s quite normal for a retreat in value to follow as the boss makes his imprint and changes the furniture. That usually means a few depressing writeoffs, turning investors pessimistic. Therefore at this price, we will steer clear, contemplating an entry point at a lower level.