Verdict Still Out on Micro D, Ingram Industries Merger

From the beginning, it seemed like an arranged marriage of two unlikely partners.

Now, 2 months after Ingram Industries Inc. and Micro D Inc. made it official, the question remains: Can a conservative Tennessee barge operator and an aggressive Southern California computer company find happiness together?

Company officials insist that so far, the combination is working out just fine. They say the complicated task of merging Ingram’s Buffalo, N.Y., distribution business with Micro D’s Santa Ana operations is going smoothly.

But industry observers and company insiders wonder whether Micro D can maintain its past momentum now that Ingram is calling the shots. They point to some troubling signs, including a mass exodus of top managers and the loss of a major customer.

Ingram and Micro D, it seems, have become the odd couple of the personal computer distribution business, a fast-paced, $4-billion-a-year industry in which customer service and consistency are critical to success.

“Our marriage is working out wonderfully,” said Linwood A. (Chip) Lacy, the former chairman of Micro D who was picked to be chairman of the combined company, renamed Ingram Micro D and headquartered in Santa Ana.

In later comments, though, Lacy was more candid. “I know we’ll have some screw-ups,” he acknowledged. “But I’m sure in the end it will go smoothly.”

Ingram Micro D is the biggest player in the PC distribution industry, which has grown from $1.6 billion in 1985 sales to an estimated $4.8 billion in 1989, outpacing the growth rate of the personal computer market itself.

Distributors like Ingram Micro D serve as computer industry middlemen, supplying retailers with a variety of machines, accessories and software products. Manufacturers, particularly smaller ones, rely on distributors because they can move products onto store shelves faster and more efficiently, using their own shipping networks, financing programs, and sales and marketing forces.

Since it was founded a decade ago, Micro D has become one of the distribution industry’s top performers. The company stumbled in late 1984 and 1985, posting losses of several million dollars. A new management team including Lacy and the recently departed Harold Clark was brought in. Clark was Micro D’s president and chief operating officer. Micro D’s financial results and market share have grown steadily ever since, with sales soaring from $119 million in 1985 to $553 million in 1988.

Based in Nashville, Ingram Industries is a private, family-owned holding company involved in the distribution of books, magazines and videotapes as well as computer products. The firm also has interests in marine transportation, oil and gas exploration and insurance.

Ingram, which had been Micro D’s majority owner for 3 years before the merger, once criticized Micro D’s managers for concentrating on growth at the expense of profits. Industry observers are watching to see how the combined companies will fare now that Ingram is in the driver’s seat.

So far, the road has been a little rocky.

Since the acquisition, Ingram Micro D has lost the services of, in addition to Clark, David Blumstein, vice chairman; Godfred Otuteye, senior vice president and chief financial officer; Carol Miltner, senior vice president of sales, and Judy Roseth, director of major accounts.

Blumstein, formerly president of Ingram Computer, was lured away by an offer to become president of Peter Norton Computing, a Santa Monica software company. Miltner and Roseth defected to rival Softsel, an Inglewood firm. Clark and Otuteye’s departures were described as voluntary resignations that had been planned before the merger.

Ingram Micro D suffered another blow when a major customer, Toshiba America, abruptedly dropped its 3-year-old distribution contract with the company shortly after the merger was completed.

Then, Lotus Development, a large software company, decided to take some of its business away from Micro D and give it to another distributor, MicroAmerica, which had long been trying to land Lotus as a customer.

A Toshiba official said the cancellation of the Micro D contract, which was worth between $25 million and $35 million annually, was unrelated to the merger. “We just perceived that Micro D was going in a different direction than was our strategic planning,” said Philip J. Vertin, a vice president at Toshiba’s computer division.

Robert Anastasi, a technology analyst, said it has traditionally been difficult to merge two companies whose success relies heavily on customer service.

“It’s always difficult to put two service companies together,” said Anastasi, who follows the industry for the investment firm Robinson-Humphrey Co. in Atlanta. “They’ve lost some key people and a couple of vendors. But the initial damage report is not too bad.”

Industry analysts said Ingram and Micro D face a big challenge in trying to combine their operations. Such tasks as merging sales forces and computerized order-entry and inventory systems haven’t been easy.

But if those obstacles can be overcome, analysts said, the merger could help Ingram Micro D solidify its role as the nation’s largest wholesaler of PC products.

The merger gives Ingram Micro D an estimated 20% of the personal computer distribution market, about twice the share of its nearest competitors, Softsel in Inglewood, and MicroAmerica, a Massachusetts company.

Ingram Micro D expects to post close to $1 billion in sales in 1989, putting it in competition with Irvine’s Western Digital Corp. for the honor of being Orange County’s largest computer-related company.

“If we can keep our market share and do things more efficiently, we’ll make a great deal of money,” Lacy predicted.

According to analysts, a company’s size and financial clout are becoming more important in the PC distribution industry as major manufacturers reduce the number of distributors carrying their products. More consolidations are likely as distributors are forced to spend more for computer systems, advertising and telemarketing to stay ahead of competitors.

The merger “gives our customers and vendors a deeper sales organization, and an ability to give more specialized attention to the vendors and their products,” Ingram Industries President E. Bronson Ingram said.

The unusual relationship between Ingram and Micro D dates back to early 1986, when Ingram purchased a controlling interest in the Santa Ana firm from Lorraine Mecca, who co-founded the company with her husband, Gene Csige.

Mecca founded Micro D in a small Fountain Valley warehouse in 1979. The company had grown to more than $100 million in sales when she sold her 50% stake to Ingram for $6.7 million. Mecca and Csige left Micro D in July, 1985, to pursue business ventures in Hawaii. Later that year, Ingram purchased an additional 10% of the company from private investor Frederick R. Adler.

Despite Ingram’s obvious clout as Micro D’s majority owner, the two firms’ top executives didn’t see things eye-to-eye.

One source of tension between Bronson Ingram and Lacy had been the Tennessee firm’s ownership of Ingram Computer in Buffalo, a competing distributor about half Micro D’s size.

Micro D’s management had maintained that Ingram had a conflict of interest because of its ownership of two rival companies. And, a few years ago, Micro D accused Ingram of trying to steal business from Micro D by spreading rumors about the stability of the Santa Ana company. Ingram management denied the allegations and agreed to the establishment of a special committee to investigate the conflict of interest issues.

Following that tiff, Ingram agreed to changes in Micro D’s board of directors that significantly reduced its influence over the firm. Instead of Ingram representatives holding six of 11 director slots, the board was reduced to five members, of which only two were selected by Ingram.

During the next few years, Ingram and Micro D continued to have disputes on various issues, including the use of stock options as compensation for senior management and the amount of access the Ingram directors would have to confidential Micro D information.

In addition, Ingram’s management was said to be frustrated by the fact that it owned nearly 60% of Micro D but had little say in how the company was run.

Ingram decided that the easiest way to resolve the bickering would be to simply buy the rest of Micro D. So, last December, it launched an unsolicited bid to purchase the Micro D stock it didn’t already own for $12.50 per share, or about $37 million.

When Micro D rejected Ingram’s initial offer, Ingram upped its bid to nearly $44 million. Micro D found that proposal more to its liking. A deal was struck.

Bronson Ingram said he sees no signs that the sometimes tense relations that developed between the two firms would continue after the merger.

“I don’t think there was ever that much friction,” Ingram said. “Chip (Lacy) was insistent that Micro D was still a public company and that he was responsible to shareholders.

“From time to time, we did look at things differently,” he said. “But now that we own all the shares, Chip has only one entity to please.”