Tax Worries Scuttle Merger of Micro D, First Software

The planned merger between Micro D Inc. of Santa Ana and First Software Inc., which would have created the nation’s largest wholesaler of personal computer products, has been called off because of potential tax problems, Micro D said Monday.

Lorraine Mecca, founder and chief executive of Micro D, said the merger was scuttled after warnings from accountants for both companies that it probably would not qualify as a tax-free transaction and therefore would ultimately be too costly for the companies’ shareholders. Mecca said the agreement signed in June by the two companies specified that the merger would be canceled if it did not qualify as a tax-free exchange of stock.

Analysts said that, although the marriage would have created a powerful entity almost assured of surviving the slump in computer sales, neither company will suffer because of the deal’s collapse.

“The merger would have been a plus,” said Kathy Lane of Dataquest, a market research firm in San Jose. “But both companies are strong on their own.”

However, for Mecca, who guided 6-year-old Micro D to a $114-million sales year in 1984, the merger offered something more than immediate financial clout: freedom to pursue another venture.

Mecca said she wanted a merger partner whose management team would be strong enough to take over daily operations of the combined company and allow her to leave.

“I’m an entrepreneur. I’m very good at controlling things--making a decision and seeing it accomplished just by sheer willpower alone, if necessary,” Mecca said. “But Micro D has grown beyond that style. I’m not uncomfortable with the company, but I’m not as effective.”

Mecca said Kenneth Carpenter and Rick Faulk, the founders and executives who turned First Software into a $60-million-a-year company, would be far better equipped to run the combined company. Under the terms of the canceled agreement, the new company would have been located in First Software’s hometown of Lawrence, Mass.

First Software executives could not be reached for comment on the termination of the agreement.