Merisel Battles On Despite Bleak Outlook

Merisel Battles On Despite Bleak Outlook

Dennis Obial

By Lisa Terry, Contributing Writer

The financial struggles that continue at one-time distribution powerhouse Merisel Inc., El Segundo, Calif., have government resellers looking on with sympathy, but the outlook for the company is not good.

Even those who sing the praises of Merisel for its ability to quickly and accurately fill orders acknowledge that the volume they buy through the $5.2 billion distribution house has dwindled as its line of offerings has shortened.

The sale of the most successful portion of its business, its Merisel Open Computing Alliance (MOCA) subsidiary, offering Sun hardware, software and support, to Arrow Electronics Inc., Melville, N.Y., will further affect that volume.

The distributor's government division, launched in January 1999, appears to have been disbanded with the exit earlier this year of Curt Cornell, government and education division director, followed later by his successor. Also, value-added resellers are reporting the disappearance of government-specific events. The Web link to the Merisel Public Sector Solutions site is also inoperable.

Many VARs laud Merisel for its core competency in delivering products. "They're excellent. They ship products 99.98 percent of the time correctly and on time," said Daniel Mahon, director of marketing and vendor relations for McBride and Associates Inc., a $200 million Reston, Va., federal government value-added reseller that buys primarily from MOCA.

Similarly, some discussion group participants on CRN Talkback and Yahoo! Finance praise Merisel's ability to ship ? when they have products.

Not everyone, however, was pleased with service levels. Government Acquisitions Inc., a Cincinnati integrator, dropped Merisel 18 months ago.

"We had problems with deliveries, and customers don't stand for that," said Dennis Obial, chief executive officer. The then-new government programs sounded good, but "actions speak louder than words, especially in the government arena."

Similarly, Tier One Computer Services Inc., a Canton, Ohio, government VAR, encountered problems with customer service and, despite an excellent rating, could not get the company to extend credit.

"When we heard Merisel was in trouble, it was not hard to figure out that they did not have the credit themselves," said Kevin Busto, Tier One president.

Over the past three months, Merisel has been holding a fire sale of sorts in an effort to raise cash: $110 million, which may increase by up to $37.5 million, for the MOCA unit and $10.6 million netted for the sale of its corporate headquarters.

Merisel also announced Aug. 31 closure of four warehouses and elimination of 700 jobs, which together with the real estate transaction should amount to $40 million in annual savings. In 1999, the firm reported 2,400 employees.

Three warehouses remain in the United States. Last February, the company also raised prices and implemented internal cost reductions in an effort to generate cash.

With the most recent raft of cost-cutting and cash-raising now being implemented, Merisel is focusing on assessing its strengths and bolstering its core business.

Chief Executive Officer David Sadler said in August that the firm is restructuring and working to strengthen its relationships with suppliers, customers, employees and shareholders.

As for offering a government-specific program, "We're still serving government resellers, but I don't know how things will play out internally," said Terra Hoskins, public relations coordinator for Merisel. The company declined further comment for this story.

Third quarter earnings were unavailable, but the company did announce it expects to take a $10 million to $12 million charge against earnings in the quarter to account for the restructuring.

For the six months ended June 30, Merisel reported a net loss of $30.35 million, or 38 cents a share. After a 52-week high of $3.68 reached last March, Merisel stock was trading for 53 cents Oct. 13. About 62 percent of the company has been held by investment firm Stonington Partners since a 1997 debt restructuring. Stonington funneled another $15 million into the firm in May.

Dwight Steffensen left the CEO position in early August after four-and-a-half years at the helm. He was replaced by Sadler, former Rowe International CEO. Several other key executives preceded Steffensen out the door. A spokesperson declined to comment on whether Steffensen retains a board position.

"Unfortunately, the CEO didn't do much to help them," said Benny Lorenzo, portfolio manager with Aspira Capital Management, Fort Lee, N.J. "It was about time they had a change in leadership, but they're operating in a very difficult environment," with consolidation in distribution and manufacturers doing more direct sales.

"These are moves out of desperation," said Brett Miller, distribution and reseller analyst at AG Edwards, St. Louis. "The company is in a complete entrenchment mode. They're not building anything to engage the market."

The MOCA sale enabled Merisel to satisfy financial commitments to vendors, but it's unclear how long the influx of cash will hold out, Miller said.

"They have not been able to engage the VAR community," he said. "They lost a lot of customer advocacy in the VAR area, and they've never been able to get it back."

McBride's Mahon, a former regional sales manager at Merisel, said: "The one mistake Merisel made was they forgot people buy from people, and not from Merisel." A cultural shift occurred in 1997 with the departure of two senior executives, when "they brought people in to save money rather than do sales."

Manufacturers such as Zoom Telephonics Inc., Boston, plan to continue selling to government and commercial markets via Merisel. Larry Hancock, marketing director for the modem manufacturer, observed that the distributor has tightened up its ordering.

"They're on a cash only, pay-as-you-go status, which is normal when there are financial problems," Hancock said. "That alleviates any concerns we may have."

Merisel Canada evidently is faring better than its U.S. counterpart, but problems have affected that organization as well. Of the recent job cuts, 200 were in Merisel's Canadian operation, which was spun off as a separate company in September.

Dwayne Mott, president of Orbex Computer Systems Inc., Guelph, Ontario, which sells to government, has seen its volume through Merisel Canada drop to about 30 percent of former levels because of line card cutbacks, such as Intel. Mott said he was skeptical when Merisel launched a government division, wondering about the value of a vertical focus for distributors.

However, "they had a couple of good seminars with people making IT decisions within government, which provided a good opportunity to ask questions," said Mott.

Special government pricing programs allowed Orbex to offer price-based proposals.

"My personal preference has always been to work tightly with Merisel, because they've always been there to help us out," Mott said. But when 80 percent of an order can't be filled, the VAR is forced to go elsewhere.

Some recent positive signs have given Mott hope that Merisel is getting on track, such as improvements in price and availability over the last six weeks and resumption of the company's business builder program after a summer hiatus, he said.

AG Edwards' Miller expects Merisel to either become a vertical niche player, or to divide up and sell its assets.

McBride's Mahon sees a good fit with the government vertical, packaging hardware with software.

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