Berkshire's Oriental Trading Co. acquires toy company

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Posted: Thursday, June 27, 2013 12:00 am

Omaha's Oriental Trading Co. said Thursday it had acquired a “brainy” toy company, taking another step in expanding Warren Buffett’s presence in the business of selling goods to consumers through catalogs and online.

The subsidiary of Buffett's Berkshire Hathaway Inc. said Thursday it has purchased MindWare Holdings Inc. of suburban Minneapolis for an undisclosed amount of cash, its first acquisition under Berkshire ownership.

MindWare creates, wholesales and sells more than 1,000 educational games, toys and other products via catalogs and online sites.

Sam Taylor, CEO of Oriental Trading, said most of MindWare's full-time staff will remain at its headquarters in Roseville, Minn., continuing their work on product development, merchandising, marketing, creative, finance and e-commerce. At its holiday peak, the company employs about 125 people.

MindWare's warehouse and call center operations will move to Omaha, where Oriental Trading's existing fulfillment and call centers can handle MindWare's added business. Oriental Trading may add some Omaha employees, but Taylor said he didn't know when or how many.

“Our expectation is that this is the first of many acquisitions to come down the road,” Taylor said. “It gives us a chance to leverage our world-class, high-tech platform that we've built to sell products direct to consumers and to organizations.”

MindWare owner Martin Smith, who is retiring, said he wanted the company to have a permanent home.

“We talked to a number of potential suitors on the private equity side and strategic side, people in the business, as it were,” Smith said. “It just seemed, when it came down to it, that the better home for MindWare long-term was with a strategic buyer who understood what we were about and was interested in nourishing MindWare over the longer term.”

Buffett, the chairman and CEO of Berkshire Hathaway, announced his purchase of Oriental Trading in November, saying he was attracted by its underlying business, management team and other factors that “positioned it for long-term growth.”

Oriental Trading paid for MindWare out of its earnings, Taylor said. “We generate a lot of cash. That's one of the reasons Warren liked Oriental Trading.”

Starting in 2000, Oriental Trading was sold twice to investment companies, saddling it with debt that ate up its earnings and doomed it to bankruptcy during the 2009 recession. When it emerged from bankruptcy with rebuilt finances, Taylor approached Buffett about buying the company, resulting in a $500 million purchase that erased its remaining debt.

Taylor began looking for acquisitions, and companies began approaching the Berkshire subsidiary. “All of a sudden we're seeing a lot more deal flow,” he said. “We're very picky, just like Warren. We looked at about eight of them before pulling the trigger on this.”

Taylor said MindWare is a relatively small acquisition but one that can grow and one that broadens Oriental Trading's product offerings and customer list. “For our first time out of the gate, we like the size of this. It gives us a chance to do it right and to learn the integration process.”

MindWare owner Smith came to the United States as a graduate student at New York University through the London Business School in his native Great Britain. He met his wife in New York and worked for Spiegel Brands and Newport News, a women's clothing catalog.

Years later, he decided to invest in a small company with good products and found MindWare, started by Jeanne Voigt in her home in 1990. Voigt wanted someone to advance the business, and Smith liked MindWare's focus on educational toys.

“It had a very clear, identifiable niche that was enduring,” he said. “It was not a fashion business. Everybody cares about their kids, and a great many parents and teachers care about exercising their brains so that they can be educated while they're having fun.” Smith bought 75 percent of the company in 2003 and the rest in 2009.

Smith will turn 65 this year. He sought a buyer so he could retire, accepting Oriental Trading's offer not only because of the price but also because of its plan to improve the business long-term.

Private equity buyers likely would own a business for a while and then “flip it,” selling to another buyer to make a profit on the sale, Smith said. “That's not always good for the company involved.”

He said he considered Oriental Trading's ties to Berkshire Hathaway and Buffett. “The pedigree of the buyer overall is important, and that's certainly a reassuring element. We probably would have had to have done more research if (Oriental Trading) had been a stand-alone operation.”

He said it's important that MindWare's headquarters will remain at Roseville. “We've got a great team here, and the last thing we would want to do is disrupt their ability to produce great products.” MindWare also works with “a talented roster of outside inventors” who come up with new products, he said.

Smith will help with the ownership transition through the end of the year. Jonathan Staruck, now vice president of MindWare Direct, will be promoted to vice president and general manager of MindWare.

CEO Taylor said MindWare's customers, on average, have higher incomes and more education than Oriental Trading's. More than half of its sales are from proprietary products that aren't available elsewhere. Grandparents, parents, schoolteachers and home-schooling parents are among its top customers.

Besides catalogs and online sales, MindWare has a wholesale business through thousands of specialty stores such as educational toy shops and teacher supply stores, as well as mass retailers and international distributors.

For Oriental Trading, Taylor said, “MindWare adds to the assortment a more educational aspect. They have educational products that are fun. We have fun products for the classroom, but they're not nearly as educational.”

Oriental Trading will continue operating the website and its printed catalogs and also sell some MindWare products through Oriental Trading's catalogs, online and via email, including this holiday. Oriental Trading also can put more MindWare catalogs in consumers' hands, such as enclosing catalogs in boxed products shipped to customers.

Oriental Trading gets 25 times as much traffic on its websites and sends out 18 times as many catalogs as MindWare, Taylor said, which means there's growth potential.

“Oriental Trading can use its marketing muscle to get the brand out there to a much wider audience.”

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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