Post-Buyout Cuts Leave Micom Leaner and Profitable : Computers: The Simi-based maker of communications equipment says layoffs and cost-cutting led to profit.
Last year, Micom Communications was a company in trouble. The Simi Valley-based concern was losing money and employed too many managers for its needs, yet was still uncertain about its strategy for the future.
But in the past year, Micom, which makes devices that allow computers to “talk” to each other and share information, has been overhauled.
New management took over, 36% of Micom’s work force was laid off and overhead costs were slashed. Micom, with sales expected to total $85 million this year, says it’s profitable again and expects growth with some new products, even though its parent company showed a loss in the quarter that ended June 30.
The changes were triggered when Micom Communications was taken private as part of a $334-million leveraged buyout of the former Micom Systems in September, 1988, by the New York investment firm Odyssey Partners.
Micom also has a new corporate parent, Black Box Inc., which Odyssey Partners named for Black Box Corp., a Lawrence, Penn., mail-order business for data communications products that was Micom Systems’ most profitable company.
Under the Black Box umbrella, the Black Box catalogue business and Micom Communications are the only remaining operations. Three other former Micom Systems units were sold by Odyssey Partners for a total of $82.4 million.
Micom Communications had no choice but to scale down. In a leveraged buyout, an acquisition is paid for with borrowed money and the debt is paid off with cash from the acquired company’s operations or by selling off pieces of the firm. Black Box still has about $200 million in debt left from the buyout, Micom said, requiring interest payments of $21 million this year. But Micom asserted that cash generated from its business and that of the catalogue company should be enough to cover that bill.
Even though Micom was losing $2 million to $4 million a year when it was acquired, Odyssey decided to hold onto it because “they felt if we could get this business under control and manage it efficiently, this could be a real turnaround,” said Gilbert Cabral, Micom’s president and chief executive. Cabral, who formerly headed Micom’s manufacturing operations, is the only remaining member of the previous management team.
After the buyout, Cabral cut the work force by more than 400 people--the company presently employs 711--and disbanded the firm’s direct sales force. He closed manufacturing plants in Mexico and the Far East, consolidated manufacturing in California and Puerto Rico and is in the process of selling and leasing back the company’s Simi Valley headquarters. In all, he reduced costs by about $17 million a year.
“It was ugly,” Cabral said of the cutbacks. “But a cost structure had been built up that was too excessive for the company.” He said he expects Micom to earn 7 or 8 cents per dollar of sales before taxes in the current fiscal year.
Yet despite trimming down, the company faces a more daunting challenge: It must continue to bring out new products that will allow it to compete in a marketplace where technological innovations happen so fast that products introduced just a few years ago might already be obsolete.
“There’s this evolution, so if you don’t have a product, somebody else is going to get the business,” said Steven D. Levy, an analyst with the investment firm Hambrecht & Quist in New York. “If everyone’s going to diet soda, you’d better have a diet soda.”
Micom’s main product lines include devices that allow companies to save phone line costs by squeezing more data onto one line and equipment that lets computers “talk” to each other electronically. Micom aims for the less expensive end of those markets with about 300 products ranging in price from $80 to $250,000.
But overall demand for Micom’s bread-and-butter products has leveled off as new technologies have been developed. While Micom is still holding onto its traditional product lines, which Cabral says still produce steady sales, he hopes the company’s growth will come from new products that it plans to begin shipping next month.
These include equipment that transmits voices and data on the same phone line and products that save money by allowing data to flow through one of several alternative routes.
The voice-data technology, which can cut a company’s phone bills by half or more, has already taken hold among Fortune 500 companies. But Micom is gearing its versions of the products, priced at about $4,000 to $6,500, to smaller companies that use phones extensively. It is a new market in which Republic Telcom in Boulder, Colo., is the biggest player.
Jennifer Sleek, a marketing and communications specialist for Republic, said Republic doesn’t fear Micom. “They’re still back at square one,” she said.
Still, Larry Cynar, an analyst at Dataquest, a market research firm in San Jose, said Micom might have latched on to a growing market in the early stages. “It’s got more risk associated with it than going into a business that’s known,” he said. “But then again, the potential for them is to grab a big market share if it turns out to be a bigger market than I can foresee right now.”
Mark Vonarx, Micom’s vice president of sales and marketing who left the company in 1985 but returned last year after the buyout, projected sales of Micom’s new voice-data products will total $5 million this year and $10 million next year.
How did Micom foul up in the first place? In the late 1970s and early 1980s, Micom captured a large share of the low-capacity, low-priced end of the market for computer communications equipment. But in 1985, “a wall was hit and the business started declining,” Cabral said. Part of the decline was due to an overall market slowdown, but it also was because the company had diversified into higher-end products and was not paying enough attention to its main business, he said.
The previous management “was basically milking the core business” to pay for the new product lines, said Barry Phelps, a Micom employee since 1987 who was elevated to chief financial officer after the buyout.
Micom Systems’ earnings declined from $22.1 million on $194 million in revenue in the fiscal year ended March 31, 1985, to $9.8 million on revenue of $218 million in the fiscal year ended April 3, 1988, the last full year the company was public. Its stock fell from an all-time high of $49.75 in 1983 to $6.50 in late-1987. When a dispute erupted among directors over the company’s direction, the decision was made to find a buyer.
After the buyout, Odyssey immediately sold Micom Digital, a Herndon, Va.-based data communications products firm that was Micom’s biggest money-loser, to Telematix for $9.65 million. Interlan, a Boxborough, Mass., manufacturer of high-speed communications equipment that links computers in one building, was sold to Racal Interlan in May for $58 million. Micom Borer, the firm’s United Kingdom subsidiary, was purchased by Tricom Group in May for $15 million.
Odyssey split the remaining subsidiaries into two independently run businesses. Black Box, the catalogue company, is considered the industry standard for mail-order computer parts and was consistently profitable even through Micom’s bad times. Gene Yost, Black Box’s president, said he expects the company to post more than $100 million in sales this year, a 20% gain from last year.
According to documents filed last summer with the Securities and Exchange Commission in connection with an offering of debt and equity, the parent company, Black Box Inc., lost $2.6 million on revenue of $169 million in the fiscal year ended March 31, and lost another $732,000 on $46 million in revenue in its fiscal first quarter ended June 30.
Though Phelps said Odyssey is satisfied with Micom’s performance so far, a former Micom executive, who asked not to be identified, said it’s likely that Micom Communications will be sold within a few years. “The guys that bought it are basically financial buyers,” he said. “In general, those buyers aren’t long term.”
Brian D. Young, Black Box’s president and an Odyssey general parter, did not return phone calls seeking comment.
Cabral is concentrating on trying to bring the company back to a sense of normalcy after the upheaval of the past few years. He’s instituted such programs as quality education classes, paid out companywide bonuses and calls all employees “team members.”
These efforts have helped to improve morale, Cabral said. “People are back to work in this company, whereas before they were more concerned about what was going to happen to Micom,” he said.
