Merisel's Pickett Speaks Frankly About the Future

The West Coast computer distributor's CEO speaks out on its purchase of Datago, the consolidation occurring in the industry and electronic commerce

Mike Pickett is chairman of the board and CEO of Merisel Inc., El Segundo, Calif., the second largest computer distributor in the world. Pickett also assumed the role of president of the company's U.S. operations in January, following the departure of John Connors, until the company names a replacement.

On Feb. 1, 1994, Merisel finalized its acquisition of Datago and Computer-Land's franchising business for $80 million.

WT: The purchase of Datago was controversial at the time. Some resellers thought it brought Merisel into direct competition with them because Datago franchisees compete directly with Merisel customers that are resellers.

Do you think there is a conflict of interest and are you pleased with the purchase?

Pickett: Absolutely.... Frankly we lost a little bit of business from some of the people that were affiliated with MicroAge or... Intelligent Electronics (competing firms in the aggregation business). But the amount of business we picked up from the Datagos and ComputerLands was far in excess of that. So the net gain was pretty dramatic.

We endured nine months of rock-throwing by our competition until [they] followed suit. [Companies who said] we were doing what wasn't in their best interest, particularly Ingram [Micro of Santa Ana, Calif.,] and Tech Data [of Clearwater, Fla.,]... had done the same thing. Ingram formed a program they're calling "Alliance" a year ago in June, and Tech Data just announced that they will do it as well.

WT: About a year ago, Mike Gumbert, [then vice president of Sales,] said the Datago deal would give Merisel a year's advance in gaining access to some of the key manufacturers. But Ingram and Tech Data were able to gain access within a year. Do you think that was a major advantage of the Datago franchise purchase?

Pickett: The advantage was that it got us into the traditional reseller/small dealer market.

We acquired those products.... We all [Ingram, Merisel, Tech Data] had rights to sell IBM, Apple, Compaq, HP, but we could only sell them to small value-added resellers. We could not sell them to dealers.

WT: Operating margins are in the single digits for most companies in the computer distribution industry. Merisel's stock has gone down to $5 or so.

Do you think Wall Street understands what you're trying to do with the purchase of Datago, and do you think Merisel should reduce its size and reorganize to get its stock price back up?

Pickett: [At the time of the Datago purchase], which was the beginning of 1994, all distributor and aggregator stocks were quite high. In fact, ours got to a high of $22 a share... sometime in February after the deal.

We were [trying to] raise capital when the market began to slow down. I think our stock dropped to $16 [per share], so we decided not to raise the capital.... A lot of this is the result of our [Datago] deal....

It caused a lot of confusion in the industry, a lot of change and reaction, and margins dropped dramatically. Merisel suffered like everyone else. (At press time, Merisel's stock had improved to $7.63.)

WT: Where do you see Merisel in five or 10 years, with the new technology and with the consolidation occurring in the industry?

Pickett: Merisel's position is very strong. We're in a great market position, we have great size.

We're dealing with older systems and replacing them. We've replaced warehouse management systems in eight of our 10 North American warehouses.

We have warehouses that are operating with zero errors and they're shipping 3,000 [orders] a week, 12- to 15,000 orders a month, with no errors. That is state of the art, and there's nobody close to that.

We're putting in new technology early next year to replace all of our old mainframe technology. That will provide us with new features in our system and enable us to do some heavy business process reengineering.

What you'll see in Merisel five years from now is a company with incredible operational excellence. Because of the investments we've made and the company's transition, it will be a very strong, highly efficient, very low-cost distribution organization using technology to gain market share.

The distribution industry itself will mature so that about 60- to 80 percent of all [computer] products in the channel will go through the few distributors that exist at that time. That'll mean the distribution channel... will be an important, significant part of the industry, and Merisel will be one of the largest, if not the largest distributor of its kind.

WT: How is Merisel using online purchasing and the Internet in terms of communicating with resellers and manufacturers?

Pickett: Our focus was on creating an interface, much like America Online or CompuServe.... It could be the front end for everything they'd want to do in terms of electronic commerce.

Our focus was on providing them with the ability to look up information in our system by dialing into a number, much like you'd dial into an AOL or CompuServe number, but it's a SELline product.

You log on and you can get product descriptions, product availability, pricing, credit information, order status. You can E-mail any person in our company and get feedback from them.

You can access the Internet if you want, participate in Merisel group forums, you can participate in customer forums.

It was shipped in the spring, it's the first version of this product, and it's something that's going to be real successful for us in the long term.

As for electronic commerce on the Internet, we're obviously concerned about security. Once that's taken care of we'll feel a lot better about it. We'll be doing a lot more in that area.

WT: Is something like Microsoft Network and other online services that will allow people to source directly from manufacturers a threat, particularly to software sales? Will that make you lose some business?

Pickett: I don't think so, because they can do that today. What will protect us is that [a manufacturer such as] Microsoft can't do the break bulk, the high-quality distribution that we do. And that won't change.

WT: Tell us about your programs for federal resellers.

Pickett: We don't have a great deal of business in the federal market, although we do have a marketing group that's focused exclusively on it.

We don't sell directly to the government. We do a lot of business with people who resell to the government. I don't see us adding much value to that segment, above the value that we add to all our resellers.

(Merisel's role in the government market should increase: Compaq recently selected Merisel as its exclusive distributor in the minority partner program to government resellers.)

WT: What products are hot now with distributors? What do you think will be the impact of products such as Windows 95 and Power PC?

Pickett: The expectation of Windows 95 is slowing down the purchase of software.

Some people are waiting to buy an application until the Windows 95 version [comes out]. It will obviously drive faster, bigger machines, and it will drive more services and productivity solutions and productivity offerings.

We'll feel it next year. Corporate standards will start implementing the new technology.

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