THE TIMES 100 : The Best Performing Companies in California : The Giants : Merisel Counts on Acquisition : Buying Microamerica put a dent in profit, but the El Segundo firm sees a payoff in its future.
Leaping to the big leagues of American business can mean big-time headaches. Just ask executives at Merisel Inc., the nation’s No. 2 distributor of personal computer equipment and software.
The key to Merisel’s business is moving personal computer products from the people who make them to the people who sell them as cheaply as possible. So, to gain economies of scale, El Segundo-based Merisel bought a major competitor, Microamerica of Marlborough, Mass., for $90.7 million in April, 1990.
As a result, Merisel--formerly known as Softsel Computer Products--saw its revenue soar 89% to $1.19 billion last year. That made Merisel the 65th-biggest public company in California in sales, up from 94th in 1989.
But the bad news was that Merisel’s profit sank to a meager $635,000, down from $10.2 million the year before.
Besides a sales slump related to the recession, the main problem was that merging the two businesses was a lot harder than expected. For one thing, sales workers in scattered outposts didn’t want to relocate to centralized offices in the Boston, New York and Los Angeles areas.
Overlapping warehouses were closed to cut costs, but amid the nation’s economic downturn, it has taken longer than anticipated to sublease the buildings. Worst of all, the company’s mainframe computer became overburdened when Microamerica’s data was poured in, leading to costly mistakes and delays in deliveries to customers.
“Everyone is surprised at the trauma the merger caused,” said Robert P. Anastasi, an analyst with the brokerage Robinson Humphrey Co. in Atlanta.
Still, Merisel executives say the company will soon reap a payoff from the acquisition. “We got what we wanted, and now it’s a matter of tending the engine to increase profits,” said Michael D. Pickett, Merisel’s 43-year-old president and chief executive.
If anything has been lost along the way to becoming a billion-dollar company, perhaps it’s the charm of a business started on a shoestring. The company’s co-founders and current co-chairmen, Robert S. Leff and David S. Wagman, launched the business nearly 11 years ago, selling software from the trunk of a car to retailers.
Now it’s a sizable company with 1,300 employees--even after cutting 200 jobs after the merger. Merisel has operations across North America as well as in Latin America, Western Europe and the Soviet Union.
Despite its merger-related problems, Merisel is considered a well-run company that should be able to bring its costs under control. “They’re struggling a little bit making the merger work . . . but they’re clearly a power in the industry,” said W. Christopher Mortenson, an analyst with Alex. Brown & Sons.
The pressure on Merisel to strengthen itself by expanding came from several directions. First, there is tough competition from Santa Ana-based Ingram Micro, currently the No. 1 PC products distributor, with sales of $1.5 billion last year.
Although no other U.S. distributor is even half as big as Ingram Micro or Merisel, some smaller firms remain important players in local markets.
At the same time, some emerging computer “superstores” in major cities are cutting out middlemen by negotiating deals with key manufacturers. Some superstores use distributors to supply only the less-popular or less-expensive PC products, particularly software.
Still, most current trends in the computer industry bode well for the distribution business. As powerful workstations come down in price and are sold more widely, they could provide a lucrative new product line for distributors.
Also, the ongoing price-cutting in the computer business helps Merisel and other distributors that provide relatively inexpensive service. When retail prices go down, the cost of distribution becomes a more important factor.
So, company executives and analysts reason, some big manufacturers and retailers might decide that running their own distribution systems is a luxury they can no longer afford and instead turn to outside distributors such as Merisel.
For instance, giant computer makers IBM, Apple, Compaq and Hewlett-Packard generally don’t use outside distributors, choosing instead to deal directly with retailers. But industry analysts expect cost pressures to eventually force at least some to start using middlemen.
The still-growing personal computer equipment and software business brings in worldwide retail sales estimated at $60 billion annually. But distributors currently handle only a fraction of the business, with sales estimated at less than $7 billion.
