After Years of Refocusing, Merisel Sees Profit Ahead

By KAREN KAPLAN

May 22, 1999 12 AM PT

TIMES STAFF WRITER

Three years after finding itself on the brink of bankruptcy, Merisel may finally be on the road to sustained profitability.

The El Segundo company is one of the country’s largest distributors of computer hardware and software, with 25,000 products in its portfolio. It ranks 343rd on the Fortune 500 list with $4.6 billion in sales last year, although profit remains small. And in recent weeks, Merisel has shown several signs that the years it has spent refocusing on its core North American business are paying off.

In mid-May, Compaq Computer cut nearly 90% of its distributors and selected Merisel as one of only four remaining distributors--a decision that could double the amount of business Merisel does with the No. 1 PC maker. The company also settled long-standing litigation with some of its note holders. Last month, Merisel completed a two-year effort to install SAP’s enterprise software.

“We entered 1999 with a couple of clouds over our heads,” said Merisel Chairman and Chief Executive Dwight Steffenson. “Now we can really focus on growth.”

Actually, the company has been focused on growth since Steffenson joined the firm in February 1996. But instead of growing bigger, the company founded in 1980 in a Mar Vista garage purposely got smaller.

Years of aggressive overseas expansion to gain market share strained the company. Then, in 1994, Merisel bought the franchise and distribution operations of Computerland.

The next year Merisel opened a large automated warehouse in the Netherlands and tried to implement a custom computerized warehousing system. When margins in the computer business started shrinking, Merisel found itself in trouble.

“The company was trying to do too much at one time,” said Steffenson, who previously served as president and chief operating officer of Orange-based pharmaceutical distributor Bergen Brunswig.

Steffenson responded by paring down the company’s operations. He sold Merisel’s less profitable operations in Europe and Latin America in 1996 and sold the Computerland business a year later. Steffenson also dropped low-margin product lines. Now the company is focused on distributing PCs, peripherals and software in addition to providing services.

“Intuitively that would strike you as the wrong thing to do,” said Bob Anastasi, managing director of investment bank Robinson-Humphrey in Atlanta. “But sometimes you have to amputate the arm to save the patient.”

But those moves didn’t solve the company’s financial problems. So Merisel accepted $152 million from the New York investment firm Stonington Partners in 1997 in exchange for a 62.4% stake in the company.

Today, Merisel may finally be poised to reap the benefits of its restructuring.

“Is this the sign of a beginning of a turnaround?” said analyst Bryant Riley, president of B. Riley & Co. in Santa Monica. “I’ve been thinking it is.”

Trey Fitzgibbons, a partner with Stonington, is also optimistic that Merisel’s worst days are behind it. Still, he said, there is plenty of work left to do--starting with an increased emphasis on customer service.

“In order to complete the turnaround, you now have to go out and become a very customer-focused business,” Fitzgibbons said. “I think this industry has been very vendor-focused, and everyone has got to migrate to a customer focus.”

That is one of the ways Merisel hopes to differentiate itself from its biggest competitors, Santa Ana-based Ingram Micro and Tech Data of Clearwater, Fla.--both of which also remain distributors for Compaq.

Merisel has created several sales groups to focus on important customer segments, such as resellers who supply small and medium-size businesses. The Merisel Open Computing Alliance, a division dedicated to distributing Unix products from Sun Microsystems, is the fastest-growing segment of the company--accounting for 16% of Merisel’s business.

Like other distributors, Merisel has beefed up its array of value-added services. The company still supplies bread-and-butter services such as reseller financing and technical support. But it has augmented those traditional offerings with services such as software licensing, extended warranties, marketing and advertising support, and custom configuration of products.

Analysts applaud the moves. To improve margins, distributors will have to offer more services so their customers can get not only hardware and software but also training and implementation from a single source, Riley said.

Merisel customers have noticed the difference. Karen Fuller, vice president of DellWare, which supplies software and peripherals to Dell Computer customers, praised Merisel for its ability to tailor marketing programs for specific manufacturers and embrace electronic commerce.

For Woodfield Group, a Schaumburg, Ill., concern that supplies more than $100 million worth of hardware, software and services to Fortune 500 companies annually, Merisel is like “an unpaid member of our staff,” said President Tom Lesniak.

“They want to work with us,” said the longtime customer. “They treat us as if we’re somebody.”

Customers and vendors credit Merisel with helping them identify new markets--which boosts Merisel’s sales as well.

“It’s the growth of the business as opposed to the absolute dollar business, and I absolutely look to Merisel as a driver of business,” said Keith Robinson, vice president of the Americas for Cupertino-based Symantec.

The one piece still missing from Merisel’s turnaround is profit. Earlier this month Merisel announced first-quarter net income of $491,000--or 1 cent per share--excluding a one-time charge of $21 million related to settlement of the note-holder litigation. That followed two years of small profit.

Steffenson said profit should pick up because of Merisel’s closer relationship with key PC makers, including new facilities at Compaq and IBM sites that allow the company to ship products faster and reduce inventory. The new SAP system will also enable the company to operate more efficiently, he said.

Anastasi, the Robinson-Humphrey analyst, has forecast Merisel’s profit to pick up in the fourth quarter or early next year.

Profit would provide the stock with a much-needed boost. Merisel’s shares have languished between $1 and $4 since January 1998, and they hit a 52-week low of $1.16 on April 1. Merisel shares closed Friday at $2.25, up 6 cents in Nasdaq trading.

“I still haven’t demonstrated the appropriate level of profitability,” Steffenson said. “That’s my next goal.”

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Reprogrammed

Three years ago, Merisel had sprawling international operations that produced impressive sales but tiny profit. Now the computer hardware and software distributor is focus on the North American market.

Revenue

In billions of dollars

‘94: $5.0

‘95: $6,0

‘96: $5.5

‘97: $4.0

‘98: $4.6

Net Income

In millions of dollars

‘94: $11.6

‘95: -$83.9

‘96: -$140.4