"You got to pay Daddy because my wife costs a fortune my kids cost a fortune. I need dough and I need dough every month you got to pay Daddy number one!" ..... Kevin O'Leary resident a-hole on the Dragons' Den

The real (and shocking) story of Kevin O'Learys' business career

By Bruce Livesey in News | January 26th 2016

Is Kevin O'Leary a good or bad businessman?

Buried in the back pages of the financial press last October was a story about the sale of his mutual fund company, O’Leary Funds, to Canoe Financial, an investment firm run by former Dragons’ Dencast member and entrepreneur Brett Wilson.

O’Leary had launched his funds with great fanfare back in 2008, introducing them to viewers on his Business News Network (BNN) show, SqueezePlay. Before the cameras, wearing a natty navy-blue suit and matching azure tie, O’Leary resembled a proud father with a new infant as he explained to co-host Amanda Lang how his fund was designed to produce yield on a monthly basis.

“You got to pay Daddy,” he declared, “because my wife costs a fortune, my kids cost a fortune. I need dough and I need dough every month. You got to pay Daddy number one.”

In those days, O’Leary’s star was ascending. He was one of the so-called “Dragons” on Dragons’ Den, which was becoming a bonafide Canadian hit. The following year he and Lang moved their daily business show over to the CBC, renamed The Lang & O’Leary Exchange.

O’Leary’s popularity and persona as a business guru soon drove investors to his mutual funds, with O’Leary Funds roaring to as much as $1.5-billion in assets (and probably more). O’Leary boasted of being an investing whiz, with access to the movers and shakers in the business and political worlds — those ties giving him unique insider knowledge.

The reality was quite different. O’Leary was not even licensed to manage or invest other people’s money. Instead, he hired Connor O’Brien, a former Wall Street investment banker, to run O’Leary Funds. Moreover, by 2012, the funds were in trouble, falling to $1-billion in assets by the end of that year.

This past fall, when he finally sold his company to Canoe, the funds were down to $800-million in assets. This was due to redemptions — investors pulling their money out because of the funds’ performance. “The majority of the funds performed poorly for an extended period of time and the majority of (Bay Street) brokers refused to sell any new funds,” says Mark McQueen, CEO of Wellington Financial LP, a $900-million Bay Street finance firm and one of O'Leary's long-time critics. “It’s not personal. The industry lives and dies on performance.”

Yet the demise of the O’Leary Funds is, in fact, just the latest in a series of failures in Kevin O’Leary’s business career.

While O’Leary recently grabbed headlines with his promise to invest $1-million in Alberta if premier Rachel Notley stepped down, and is toying with running for leadership of the federal Tory party, these stunts overshadow a history of ineptness as a businessman.

Disaster at Mattel
O’Leary is unquestionably a media star: He has written best-selling books, been a fixture on at least four televisions shows, including the current ABC hit program Shark Tank, revels in making outrageous statements, and crafted an image as the “mean” Dragon, able to reduce inventors to tears with putdowns like “this is the worst idea I have ever heard in my life it’s so bad!”

But what exactly is O’Leary’s business experience? Born in Montreal in 1954, O’Leary had ambitions of being a photographer. Instead, he did an MBA at the University of Western Ontario. After business school, he set up a television production company that produced shows for people like Don Cherry. From watching Cherry, O’Leary learned that it was important never to be boring or small on TV.

By 1983, O’Leary saw the potential in the emerging software and personal computer industries. He formed SoftKey Software Products Inc. in the basement of his Toronto home, convincing computer companies to bundle his software into their products.

SoftKey moved to Boston and focused on the booming field of educational software. By 1993, it was trading on Nasdaq and had revenues of $110-million—and a loss of $57-million. The company grew by making a string of acquisitions.

SoftKey’s most prominent takeover was of San Francisco-based The Learning Company (TLC). Prior to the sale, TLC hired the Center for Financial Research and Analysis (CFRA), a forensic accounting firm, to examine its suitor’s financials.

CFRA alleged that SoftKey may have overstated its earnings by bundling various general and administrative costs into write-offs. CFRA was also unhappy with SoftKey’s decision to fire its auditor, Arthur Andersen, after the accounting firm found deficiencies in the company’s internal controls. CFRA noted that SoftKey’s audit committee “holds several questionable members, including the CEO… as well as an outside member associated with two public companies charged with financial improprieties and another member who is a paid consultant to the company.”

Yet SoftKey’s acquisition of TLC went through, and SoftKey adopted the TLC name. By 1996, TLC had 3,000 employees and was the biggest educational software company in the world. It continued to grow via acquisitions, driving revenues up over $800-million.

But SEC filing shows that TLC suffered net losses of $376-million in 1996, $495-million in 1997 and $105-million in 1998. Moreover, TLC’s accumulated deficit topped $1.1-billion by the end of 1998.

That same year, toy giant Mattel Inc. made a takeover bid for TLC, without doing proper due diligence. Desperate to reverse a steep slide in the company’s stock price, Mattel CEO Jill Barad seized on educational software as a driver of future growth. The takeover shocked many, largely because TLC was seen, according to software-industry analyst Sean McGowan, as a well-known “house of cards” that was burdened with tired brands—not helped by the fact that O’Leary had slashed R&D from 24 down to 11 percent of expenditures. “There was a lot of [TLC] inventory out there that was not moving very well,” McGowan says. “They pumped up the sales by repackaging and distributing to convenience stores and drugstores.”

Indeed, TLC was later accused in a shareholders’ lawsuit and by a Mattel executive of “stuffing the channels”—shipping product at the end of a quarter and recording it as revenue, even though much of the merchandise would be returned. “Stuffing the channels was part of the business back then,” says a former TLC sales rep based in California.

In the end, Mattel purchased TLC for about $4-billion in the spring of 1999. O’Leary took over as president of Mattel’s new TLC digital division. Weeks after the sale, CFRA produced a critical report on Mattel, claiming TLC was already experiencing collapsing revenue, a surge in receivables and a deterioration of operating cash flow.

In the third quarter of 1999, Mattel expected profits of $50-million from the TLC division. Instead, it was a loss of $105-million (the next quarter losses rose to $206 -million), which wiped out more than $2-billion in shareholder value in one day, as the company’s share price slid from nearly $17 to $11.69.

In short, O’Leary had sold Mattel a turkey.

One investor’s lawsuit says O’Leary cashed in his Mattel shares just before the losses were announced when the stock was at its peak, pocketing almost $6-million.

In November of 1999, O’Leary was fired, six months into a three-year contract. Four months later, Mattel’s CEO, Jill Barad, was forced out too. “There is nothing I can say to gloss over how devastating The Learning Company’s results have been to Mattel’s overall performance,” Barad said as she went out the door.

Mattel hired Bernard Stolar, a video-game executive, to see if he could salvage TLC. “It was an absolute disaster,” he says. In 2000, Mattel handed over its multi-billion-dollar acquisition to another firm for a mere $27-million and a share of its future profits.

Mattel’s purchase of TLC was later labeled by Businessweek magazine as one of “the Worst Deals of All Time.” Shareholders launched a class-action lawsuit, naming O’Leary as a defendant, accusing him of insider trading and of being part of a scheme to obscure TLC’s financial state. While O’Leary denied the allegations, in 2003, Mattel settled the lawsuit for $122-million—considered a “mega-settlement” at the time. O'Leary has blamed Mattel's management for the problems with the TLC division, not his own involvement.

While O’Leary’s actions cost Mattel’s investors hundreds of millions, he netted $11.2-million between his severance package and sale of his Mattel stock.

Sued for wrongful dismissal

After getting canned by Mattel, O’Leary’s business career sputtered and meandered.

In 2003, O’Leary invested in a self-storage company called StorageNow Holdings Inc., which he learned about from Reza Satchu, a Toronto entrepreneur. Satchu’s high-school acquaintance, Jonathan Wheler, had a background in real estate and saw that a lot of money could be made by building self-storage warehouses in accessible locales. Wheler had even found a perfect piece of land in Toronto to erect such a facility. According to court documents, O’Leary put in about $500,000 and ended up with almost 13 percent of the company.