‘Bulking Up’ to Top Spot in PCs : Computers: Softsel-Microamerica is now the world’s largest PC and software distributor. Others are finding that they, too, must combine to survive.
Donald J. Trump may have built a far larger empire during the past decade than did Robert Leff and David Wagman. But the flamboyant New York developer didn’t start out peddling personal computer software from the trunk of a Datsun in the Los Angeles suburbs.
Leff and Wagman did, and their El Segundo-based company, Softsel-Microamerica, hasn’t suffered for it. Now a $1.1-billion business, the firm has risen above its humble origins to become the world’s largest distributor of personal computers and software, as well as an example for how other PC wholesalers can survive in the 1990s.
The spurt into the top spot came earlier this week when Softsel Computer Products, then the nation’s No. 2 PC distributor with 1989 sales of $629 million, completed its merger with No. 3 Microamerica of Marlborough, Mass.
The deal illustrates the pell-mell rush throughout the entire PC industry to “bulk up” to withstand increasing competition, price slashing and an overall slowing of the industry’s once-torrid sales pace.
With only about 20% of the $25 billion in PC and related sales passing through their warehouses, wholesalers in particular are scrambling these days to attract customers at both ends of their business. But the obstacles are formidable. Manufacturers are paring down the number of dealers handling their merchandise, and retailers are increasingly trying to buy directly from manufacturers, bypassing middlemen--and their markups--entirely.
It’s a tough squeeze, and only those wholesalers capable of handling large-volume deals and heavy discounting and withstanding pretax profit margins well under 10% will survive. Translated: Size is what counts.
“I wouldn’t want to be a smaller player as we enter the 1990s,” says Softsel’s co-chairman Leff, the 43-year-old former computer programmer whose Datsun doubled as the company’s original delivery van. “My comfort level needed this merger.”
Leff isn’t alone. Last year, Micro D of Santa Ana officially combined forces with Ingram Industries of Nashville, Tenn., to create the first $1-billion PC middleman, Ingram-Micro D, which reigns as a close No. 2 to Softsel-Microamerica. Between them, the two giants control about 45% of the $4.8-billion PC wholesaling business.
The dozens of remaining smaller distributors face uncertain prospects, analysts say. “The likelihood is that many of them will need to find merger partners themselves,” said Liz Buyer, an analyst with Needham & Co. in New York. “It’s not a foregone conclusion that they can remain as small players.”
The importance of size is underscored by Toshiba’s decision last month to pare its distributor list from about half a dozen to just a single wholesaler, Microamerica. Although the move startled the industry for its boldness, analysts say it illustrates the lengths to which manufacturers are willing to go to streamline their number of direct customers while still providing the widest possible distribution for their goods.
If the gambit--no small gamble on Toshiba’s part--works, it will be widely copied, says Seymour Merrin, whose Merrin Information Services tracks the PC distribution industry. “An enormous number of manufacturers are watching this example, and it could set a pattern for the nation,” he says.
The result could be even more consolidation as distributors combine forces to attract contracts with large manufacturers.
“You have to have some sort of leverage to get the manufacturers’ attention,” says Van Holland, vice president and controller of Wyle Laboratories, an El Segundo-based distributor of semiconductors and other computer components. “Sheer size is certainly one way to do it.”
Even without the uncertain prospects ahead, the life of a distributor is hardly a glamorous one.
PC manufacturers and software publishers skim off the easiest customers: the huge retailers such as Egghead Discount Software and Businessland and the giant corporations capable of dealing directly with the manufacturer. Distributors are left to fight over the remaining crumbs: the odd-lot orders from Mom and Pop computer retailers, the slower-selling items huge retailers don’t like to stock and the overnight deliveries that manufacturers can’t provide even their best customers.
And that’s when business is good. When business turns down, distributors are among the very first to see their inventories swell and to face the credit problems of failing retailers.
“No one really likes distributors; no one really respects them,” says Richard Shaffer, editor of a PC newsletter in New York, only half joking. “But the plain fact is that the industry would die without them.”
Leff and Wagman saw that early on.
In 1980, while both were working at a Santa Monica computer systems subsidiary of Citicorp, Leff spotted an opportunity to serve the growing number of small retailers hungry for software for the only PC then available, the Apple II. Two months later, he persuaded Wagman, an engineer with a business background, to join him.
At first the two stockpiled merchandise in their apartments and distributed it themselves at nights and on weekends. But within five months business was so brisk that they quit their jobs to devote full time to the venture.
Although the company grew steadily over the ensuing decade, Wagman says he and Leff realized that they could no longer depend on simple industry growth to sustain them after last year’s merger of Micro D with its long-time affiliate, Ingram. “We felt that at simply $500 million (in sales) we had a strategic disadvantage,” recalls the 38-year-old Wagman. “And so did Microamerica.”
While the two companies had talked casually in the past about teaming up and had repeatedly stumbled over which company would be the lead partner, the Micro D-Ingram merger brought the issue to a head. Within six months, Wagman and Leff were in serious merger discussions with Microamerica’s 37-year-old founder, Gordon Hoffstein. And two months later, a deal, with Softsel as the surviving entity, was struck.
Analysts have reacted favorably to the merger, noting that it joins two profitable and generally compatible businesses with strong presences abroad where sales are far stronger than in the United States. Softsel has outlets in Europe, Canada and Australia, while Microamerica is a force in Canada and Latin America.
The merger will mean laying off about 200 of the combined company’s staff of about 1,450 to eliminate redundancies. Officials of Softsel-Microamerica (the name is temporary until a new one for the combined company is adopted) declined to say what percentage of those would be in El Segundo.
Although product lines overlap about 30%, the two companies had concentrated on different business areas. Softsel had traditionally focused on retail dealers with a product offering equally split between machines and software, while Microamerica had been especially strong with computer systems integrators and sells more machinery than software.
Among the remaining details from the merger is choosing a name for the new company, a task that has proven particularly vexing. Wagman, who along with Leff will remain as a co-chairman of the company, says the new name must convey the company’s business in the United States as well as abroad.
“We tried everything from employee contests to executive brainstorming. Nothing happened,” Wagman says. Consultants have the project now, and until it’s settled, the new company is Softsel-Microamerica.
