Is Merisel’s Move to Shed Units Too Late?
As Apple Computer proved, the PC boom of recent years hasn’t been kind to everyone. But for a real tale of woe, take a look at Merisel Inc.
The El Segundo-based computer distribution giant, which employs 3,000, has for months been tottering on the brink of financial ruin, and its situation is not likely to improve any time soon.
The company, which acts as wholesale middleman between computer manufacturers and retailers, moved to secure some much-needed cash on Friday when it announced it would sell its European, Latin American and Mexican businesses to CHS Electronics Inc. for about $160 million in cash and debt.
News of the sale boosted Merisel shares 50 cents, or about 21%, to close Friday at $2.94 on Nasdaq.
But the sale came after Merisel had backed away from a previously announced plan to seek buyers for the entire operation.
And the slight gain in the stock comes as small comfort to investors. Merisel may have racked up about $6 billion in sales in 1995 sales, but it has piled up five straight money-losing quarters. And Wall Street has beaten the stock to a pulp: The shares traded as high as $22.50 in 1994.
How could a major player in a hot, high-growth industry stumble toward oblivion?
Some of Merisel’s problems can be blamed on tough business conditions that afflict everyone in the computer business, from manufacturers such as IBM to discounters such as Best Buy and Circuit City. Now that computer makers have shifted emphasis from business users to consumers, the industry has been seized by mundane but enormously expensive problems such as high returns and a huge demand for technical support.
For their part, Merisel executives blame high “expansion costs"--the company issued $125 million in debt to cover the 1994 purchase of the franchise and distribution operations of Computerland dealers and to provide working capital for the company--and increased competition and price pressure in the PC business.
“We’ve had pretty strong growth” in terms of sales, said Susan T. Stillings, Merisel’s director of investor relations. But computer makers have lowered prices to meet consumer demand for cheap systems, crimping margins industrywide in the process, she noted.
Merisel hopes to make money by the fourth quarter of this year, but Stillings cautioned that “certain things need to happen” first. New management--led by Chairman and Chief Executive Dwight A. Steffensen, late of pharmaceutical distributor Bergen Brunswig Corp., and President Ronald Rittenmeyer, a former railroad executive--is trying to restructure company debt and focus on more profitable accounts.
But these moves may be too little too late. In an August filing with the Securities and Exchange Commission, Merisel acknowledged, somewhat ominously, that its current business plan depends to some extent on the goodwill of its lenders and suppliers. They could easily decide to tighten contract terms or halt product shipments, given the company’s perennial cash crunch.
“I haven’t seen anything that’s impressed me so far” in the company’s efforts to regain profitability, said Van Baker, an analyst at the San Jose-based research firm Dataquest.
He attributed much of Merisel’s difficulty to bad strategic decisions, singling out the Computerland purchase for special mention.
To be sure, Merisel isn’t the only company to get caught in the pincers of the rapidly changing high-tech market. One of its rivals, Santa Ana-based computer products developer and distributor Ameriquest, announced last month that it would move its headquarters to Florida and lay off more than 60 workers in a bid for profitability. The company last month reported a third-quarter loss of $8.5 million, or 14 cents a share, on sales of $111 million.
But other high-tech distributors have found ways to survive, even thrive. Ingram Micro, which is preparing its first public stock offering, remains a dominant force in the computer distribution business, with 1995 sales of $8.6 billion. Experts credit the Santa Ana-based firm with consistently strong management, and they’re optimistic that record will be sustained even following the recent departure of longtime Chief Executive Linwood A. “Chip” Lacy Jr. (He has since been replaced by former AT&T; executive Jerre L. Stead.)
At one time, Merisel’s future seemed similarly bright. The company was formed in 1990 when Softsel, a 10-year-old firm that sold computer systems to retailers, merged with distributor Microamerica. The company rode the wave toward PC systems by inking major distribution deals with Compaq and other suppliers.
Then-Chairman and Chief Executive Michael D. Pickett “brought the company from obscurity to a pretty darn good position in this industry,” Rittenmeyer told a trade journal in February. Pickett also proved popular with employees, who praised his competitive instincts and “people-oriented” management style. He frequently quoted basketball coach Pat Riley and encouraged workers to take time off for graduations and other family events.
Yet Pickett made a grievous error with his 1994 Computerland deal, analysts say. The purchase alienated some Merisel customers, who felt the distributor was nosing in on their retail turf, Baker noted. Moreover, it drained the company of badly needed cash just when industry margins began plummeting.
Stillings said some customers may have been afraid that Merisel would give “preferential treatment” to business partners of Computerland but that subsequent events have proven “that isn’t the case.”
Merisel began toting up losses almost immediately after the Computerland deal, and throughout 1995, the news went from bad to worse. Growing more anxious, the board finally nudged out Pickett, who officially resigned in February. (Pickett could not be reached for comment.)
If the company manages a turnaround, the feat would probably be counted as one of the greatest comeback stories of the decade. But don’t count on it, Baker said.
Computer distribution is an almost impossibly tricky business, the analyst noted. “If you make just one misstep,” he said, “it can take a very long time to recover.”