Alec Gores has quietly carved out a very nice living for himself by surgically removing hemorrhaging units from big parent companies, and nurturing those units to profitable health.
Late last month, he suddenly emerged from his relative obscurity by taking on his most troubled patient yet the Learning Co., which has hemorrhaged more than $300 million since Mattel Co. bought it last year.
His Los Angeles-based Gores Technology Group bought Learning Co. for a song in fact, not a cent up front a far cry from the $3.5 billion Mattel put up for the company 17 months ago.
And Gores insists he can make the educational software maker profitable within six months, a feat that eluded Mattel’s former CEO Jill Barad and ultimately led to her ouster.
The Learning Co. acquisition is the biggest deal in the nine-year history of Gores’ privately held acquisitions firm, and its turnaround would be monumental.
Nonetheless, Gores is confident his team can succeed where Mattel failed.
“I’ve never owned a business that hasn’t made money,” Gores said. “Our job, right off the bat is to really predict future revenues. We’re like weather forecasters.”
Founded in 1992, Gores Technology has completed more than 30 transactions with a combined value of well over $500 million. It now has almost two dozen companies in its portfolio with combined annual revenues in the billions. (The company declined to release financial details.) With 1999 sales of $750 million, Learning Co. is the biggest company Gores has taken on.
Gores Technology has built a quiet but sterling reputation by identifying and acquiring niche software companies, usually struggling entities within larger businesses, and turning them around. The trick is finding prospects that have potential but don’t quite fit within the parent company’s model.
In 1997, for example, Gores Technology purchased ailing project management software supplier Artemis Management Systems from Computer Sciences Corp. Then in 1999, Gores picked up Aonix, a money-losing analysis and design software company, and merged it with Artemis this past January. In August, the revamped Artemis was sold to fast-growing Finnish Internet technology solutions company Proha PLC for $50 million in cash and stock, giving Alec Gores a seat on Proha’s board of directors.
“They (Gores Technology) have a model that is fairly unique,” said Jeff Raich, managing director and head of West Coast mergers and acquisitions for Donaldson, Lufkin & Jenrette, which advised Gores on the Artemis deal. “They find companies, largely underperformers within a public company, and find a way to get value. They quickly stop the bleeding. It’s a very effective model.”
The model comes from a lesson Alec Gores learned the hard way. He started his own software company in 1978 with $10,000 he borrowed from his father, sold it in 1986 to a larger company and watched in horror as it was run into the ground. From that experience was born the idea that he could profit by rescuing such mismatched or mismanaged units of large companies.
“Lots of times big companies buy small companies and mess them up, because they don’t really know anything about it,” Gores said.
Taking the money he had made on the sale of his company, Gores set about picking up prospects, slowly at first. Early acquisitions often were funded in part through corporate debentures, but the money made through one deal went back into the next. The fund the company has is entirely private.
Gores Technology stayed below the radar screen until now because that’s the way its founder likes it. The firm’s name did surface last year when it unsuccessfully tried to buy Cray Research from Silicon Graphics Inc., losing out to another L.A. boutique takeover firm, Intellect Capital Group, led by ex-Drexel Burnham Lambert junk-bond star Terren Peizer, who has nothing but praise for his cross-town rival.
“I’m impressed by the (Mattel) transaction,” Peizer said. “(Gores) is going to come in and turn around (Learning Co.) and create value for themselves. It’s a phenomenal deal for Gores.”
Mattel announced in April it would try to shed itself of Learning Co., and Gores Technology quickly approached the toymaker. In the beginning, the price wasn’t right.
Industry analysts expected Mattel would ask at least $200 million and at one point software maker Havas, a U.S. subsidiary of France’s Vivendi, reportedly offered $400 million, then backed off, as did others. Gores Technology didn’t.
Ironically, the only real competitor for Learning Co. was Platinum Equity Holdings, an acquisition firm that was the fastest-growing private business in L.A. in 1999, according to the Business Journal. It is run by Tom Gores, Alec’s younger brother. Neither knew the other was in the bidding until the deal was done.
“I was totally surprised,” Alec Gores said.
Surprising to others was the fact that the deal calls for Gores Technology to pay no money up front. Instead, Mattel receives an undisclosed percentage of any future earnings. At the very least, Learning Co. will no longer be a burden. And that alone is significant, considering the Learning Co. will be responsible for an after-tax loss of $430 million for Mattel this year.
“Mattel had to solve a problem,” DLJ’s Raich said. “They had a business that was creating havoc within their company. They preserved the ability to have some participation in the future upside of Learning Co. It’s a good deal for Mattel, and it’s a great deal for Gores.”
While resigned to the greater publicity in the wake of the deal, Gores is working overtime to correct Learning Co.’s weaknesses. An important one is that shipping product is taking too long, and costing too much. That is partly because of a management structure that Gores believes is top-heavy, and layoffs are likely.
But just as important is identifying the company’s potential.
“When Mattel took over this business there were a lot of misunderstandings about what the business was, what the revenue should be. The projections were all wrong,” Gores said. “We take a very conservative approach; we’re not going to try and double revenue.”
