Merisel Courts Government Customers

Merisel Courts Government Customers

By Richard McCaffery
Staff Writer

After three years of losses, consolidation and finally a buyout, Merisel Inc. is out from under a crushing debt load and making a play to grow its government business.

The El Segundo, Calif., distributor of computer products is forming a unit dedicated to federal, state and local governments, and hiring a manager to head its new Government Access Division.

"When we looked at markets we could do a better job of serving, the federal government was at the top of the list," Kristin Rogers, senior vice president and general manager of U.S. distribution, told Washington Technology. "We didn't have a stand-alone, dedicated unit of sales folks with the background and expertise to support government resellers."

The government manager has not been named but will be appointed quickly, said Rogers, who declined to disclose how many government sales people the company expects to hire.

She said the new employees will be added to Merisel's sales offices in North Carolina, Massachusetts and California by year's end. "This year marks a turnaround," Rogers said.

Once one of the world's largest distributors, Merisel has had losses of $240.1 million over the last three years. The company, which sells hardware and software to commercial and government resellers, has not had a profitable year since 1994 when it reported net income of $11.6 million.

Merisel's stock closed June 18 at $2.94 a share. It has been trading in the $1 to $6 range for more than two years. Merisel does not break out its government revenues, but the company had total sales of $4 billion in 1997.

Its problems surfaced in 1994. The company had expanded operations to 11 countries and accumulated nearly $400 million in debt as a result of rapid growth, company executives said. A decline in the value of technology stocks prevented the company from issuing additional stock to pay for its $75 million acquisition of a division of ComputerLand Inc., Pleasanton, Calif.

"The starting point [of their troubles] was making a significant-sized acquisition and financing it with debt," said Molly Toll-Reed, director at Standard & Poor's, New York.

But last December, Merisel negotiated a $152 million investment from Stonington Partners, a New York-based investment firm that now owns 62.4 percent of the company's stock. That investment, along with the sale of its foreign operations, cut Merisel's debt to $130 million, said Tim Jenson, Merisel's senior vice president of finance.

Analysts think the company has solved its debt problem but still must prove it can compete against giants like Tech Data Corp., Clearwater, Fla., and Ingram Micro Inc., Santa Ana, Calif.

"It boils down to management execution," said Dale Leshaw, co-director of investment at Imperial Capital LLC, a Beverly Hills, Calif., brokerage firm. "The market is there. It's growing. But these guys have not been able to convince everybody they have completed the turnaround."

The company still must get its cost structure in line with competitors like Tech Data,
Leshaw said.

Jenson acknowledged as much. "The biggest hurdle from our point of view is to gain customer and investor confidence and to improve profit margins," which declined from the first quarter of 1996 to the first quarter of 1997, Jenson said.

"I think that the rest of the business will fall in line now that the restructuring is behind us." Merisel's profit margins slipped from 6.2 percent in the first quarter of 1997 to 5.6 percent in the first quarter of 1998.

The company is focusing on markets in the United States and Canada, which accounted for 80 percent and 20 percent, respectively, of its 1997 sales. Merisel has added vendors like Lucent Technologies Inc., Murray Hill, N.J., and Raytheon Co., Lexington, Mass., as well as services such as leasing packages to its portfolio in an effort to attract resellers.

The company is also configuring computer systems in-house to reduce costs, monitor quality and increase the number of services it offers.

Merisel's fortunes showed signs of improvement last quarter. It reported earnings of 5 cents a share on net income of $3.6 million. The company has reduced its cost of operations by automating its warehouse and is counting on the installation of new business software this year to further improve efficiency.

Merisel Inc.
1997:
Sales: $4 billion
Net loss: $15.8 million
1996:
Sales: $5.5 billion
Net loss: $140.3 million
1995:
Sales: $5.9 billion
Net loss: $83.9 million
1994:
Sales: $5 billion
Net income: $11.6 million

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