Comstor.net Buy Hands Westcon Cisco Business

By Richard McCaffery, Staff WriterThe Westcon Group will pick up Cisco Systems Inc. as a major manufacturing partner, push sales beyond $1 billion and add serious bulk to its government presence with the purchase of distributor Comstor.net.Westcon Group, a Tarrytown, N.Y. -based distributor of networking products to government and commercial resellers, announced the purchase July 27 of Comstor.net for about $100 million.Comstor.net, which sells networking products and services from about 15 vendors, had 1998 sales of $400 million and expects to hit $500 million this year. But the jewel in the company's crown is market leader Cisco Systems. Comstor.net is one of just three distributors licensed to sell Cisco products to government resellers, and because more than 95 percent of Cisco's government sales go through the channel, that relationship is like gold to Westcon. "This deal is key for us," said Alan Marc Smith, chief operating officer of Westcon Group, whose revenue exceeded $500 million last year. Comstor.net had what Westcon wanted: A strong relationship with Cisco in the U.S. market and a growing federal presence. About 40 percent of Comstor.net's business is with government resellers such as Federal Data Corp. of Bethesda, Md., and Intellisys Technology Corp. of Fairfax, Va. Acquiring Comstor.net bumps Westcon's government business from 20 percent to 30 percent, said Smith, who noted that both companies are profitable. The deal is expected to close this month.Comstor.net, which is based in Chantilly, Va., and has an office in Boulder, Colo., was formed in 1986 and purchased by General Electric Co., Fairfield, Conn., 10 years later. But Comstor.net is not No. 1 or 2 in its industry and that is essentially a requirement for membership in the GE family, according to a Comstor.net official. Comstor.net competes with broad line distributors such as Ingram Micro Inc. and Tech Data Corp., which had $22 billion and $11.5 billion, respectively, in sales last year.It was just four months ago that Comstor changed its name from Comstor to Comstor.net, stopped trying to sell a full line of computer products and focused on networking gear and services. Company executives took this step in April to compete with the industry giants. Comstor.net tries to offer resellers more than a full line distributor could. For example, it has a Cisco-certified lab where resellers receive training.It was that focus that attracted Westcon to Comstor. The distribution industry is under siege from companies like Dell Computer Corp., which skip the sales channel and sell directly to end users.This has distributors scrambling to add value to the services they provide. One way of doing this is to specialize as Westcon and Comstor.net have done. Thomas Meagher, a director at Boles, Knop & Co., a Middleburg, Va., investment bank, said the days are over for distributors that simply sell boxes and fail to adjust to the threat from Dell. "That's just a business that's exceptionally tough to do good margins in," he said. But joining Westcon will allow Comstor.net to spread its costs out under the umbrella of a larger company, Meagher said.Smith said he was looking to buy a distributor with the same networking focus, one with a product line that would not require heavy weeding. "What Comstor.net finalizes for us is a well rounded picture," Smith said. "Now in the United States we have all four legs of the horse." By this he means Westcon will carry networking products from North America's top four vendors of routers, hubs, switches and convergence gear: Cisco, Nortel Networks Corp., 3Com Corp. and Lucent Technologies Inc."We built a company that's dedicated to the internetworking field," said Barry Culman, president of Comstor.net, who has had five bosses and four owners in the last six years. Because of competition among networking vendors, the purchase of Comstor.net is being structured carefully, Smith said. Westcon Group has two divisions: Westcon, based in Tarrytown, which will distribute Nortel, Lucent and 3Com; and RBR Networks, Chantilly, Va., which will distribute the Cisco line in the United States and Europe. The two divisions will have separate headquarters, management and staff, Smith said. Comstor.net will be folded into the RBR division, but will keep its name and headquarters. Comstor.net has 224 employees; Westcon has 650. No layoffs are planned, Smith said.Westcon was founded in 1985 by three business partners as a consulting company, and in 1988, became a computer products distributor. In the early 1990s, it focused on selling a select group of networking gear. In June 1998, Datatec Ltd., a Johannesburg, South Africa distribution, software and Internet company, paid $160 million to buy Westcon. The deal gave Westcon the cash it needed to expand through acquisitions and build its brand name.