Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company, a leading developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion. Mattel had determined that TLC’s receivables were overstated because product returns from distributors were not deducted from receivables and its allowance for bad debt was inadequate. Also, a $50 million licensing deal also had been prematurely put on the balance sheet. Nevertheless, driven by the appeal of rapidly becoming a big player in the children’s software market, Mattel closed on the transaction, aware that TLC’s cash flows were overstated. Despite being aware of extensive problems, Mattel proceeded to acquire The Learning Company. Why? What could Mattel have done to better protect its interests? Be specific.
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