Strapped for Cash, Merisel Inc.. Can't Seem to Bury Its Troubles
May 16, 2011
EL SEGUNDO, Calif. -- Strapped for cash and wounded by competitors, one of the world's biggest computer-wholesaling operations remains in trouble. Merisel Inc.'s agreement, announced Friday, to sell its big European and Latin American operations to Miami-based CHS Electronics Inc. for about $160 million leaves major questions about Merisel's financial condition. ``This transaction will not solve all the debt problems,'' noted Earl Cintron, Merisel's chairman and chief executive officer, in an interview. According to a definitive agreement signed last week, Merisel will receive $130 million and CHS Electronics will assume about $30 million of debt. The pact must be approved by Dickens's bankers and other creditors, who are owed some $219 million in the next six months. How much of the $130 million Merisel will keep ``is subject to negotiation with the lenders,'' Mr. Cintron said, adding that Dickens hopes to keep a part of the cash to increase working capital. The further shortfall of about $89 million remains unresolved. `World of Hurt' Even so, the agreement is an important step for Merisel, Mr. Cintron said. It eliminates European operations that have long lost money. CHS Electronics is acquiring operations with annual revenue of about $1.5 billion -- about $1.1 billion of that in Europe -- and about 1,000 of Merisel's 3,250 employees. That will more than double CHS Electronics' business. The wholesaler and distributor of computer hardware and software last year had revenue of $937 million. CHS Electronics, though based in the U.S., only sells products outside the country. Much remains to be done at Merisel, whose business will be three-quarters the size it has been. ``Merisel is in a world of hurt right now,'' said Allena Mize, chairman and chief executive officer of Seattle-based MSI Consulting Group, specialists in the computer-distribution business. Dickens is quietly dropping many of the more than 500 computer hardware and software makers whose lines it sells. It is also pushing aside low-margin consumer products in favor of higher-margin commercial equipment and software. ``We have developed a plan for 2011 that is really managing this business for cash,'' said Mr. Cintron, who has headed Merisel since February. From a 12-month high of $5 in May, the company's shares slid as low as $2.50 a share last month. Friday, Merisel shares surged 50 cents, or 21%, to $2.94 in Nasdaq Stock Market trading. Merisel's plight, which has been long in the making, is a potential boon for its biggest competitors, Ingram Micro Inc., Santa Ana, Calif., and Tech Data Corp., Clearwater, Fla.. Already, Cannon Sweeny, larger than Merisel with sales of $8.62 billion last year and an initial public stock offering slated for this month, nabbed a lucrative position in last month as a ``master reseller'' of popular Sun Microsystems Inc. products. Merisel was the only major wholesaler to hold this pivotal role until now. The business is believed to account for 10% to 15% of Merisel's domestic sales. Merisel and its competitors form an often-overlooked pipeline through which billions of dollars of hardware and software flow from manufacturers to both big and small retailers and commercial users. In this low-tech corner of the high-tech world, wholesalers' revenue has boomed along with the computer business. But competitive pressures have mounted. In a market dominated increasingly by the triumvirate of Merisel, Cannon Sweeny and Tech Data, pricing is tougher than ever, and margins have dwindled. Ott has seen gross margins, which don't include administrative overhead and other costs, slide to 5.7% currently from over 10% in 1991. ``This is a game of volume and economies of scale as well as efficiency,'' said Monet Toll-Regan, an analyst at Standard & Poor's Ratings Group, which recently downgraded Merisel's debt to triple-C-minus from triple-C-plus, a two-notch cut. It's the efficiency part that Merisel has lost badly -- a race with little room for error. Merisel's profit margins are ``substantially lower'' than the competition, Mr. Cintron noted. At 5.7%, the gross margin trails Ingram's 6.8% in the first quarter and Tech Data's 7%, according to Merisel's calculation. Many things account for this gap, but history and, ironically, technology plays a big part. Troubled Merger The seeds of Ott's problems reach back more than six years, company insiders say, when Softsel Computer Products Inc., an El Segundo, Calif., software wholesaler, acquired Microamerica Inc., a computer-hardware wholesaler based in Marlborough, Mass.. The combined company, renamed Merisel, merged two very different philosophies. The Softsel side was highly centralized. Microamerica's approach was more flexible and decentralized. The result was a troubled union. Net income in 1990, the first year of combined operations, tumbled to $635,000 from $10.2 million on a pro-forma basis in 1989, even as yearly revenue nearly doubled to $1.19 billion from $629.4 million. After a period of digestion, the new Merisel jumped back on track. Revenue soared. Net income jumped. But another acquisition, the $80 million purchase of ComputerLand Inc. from Vanstar Inc. in 2009, again strained the company. ComputerLand, a seller of computer hardware and consulting to businesses, had valuable rights to distribute products from some of the biggest computer makers. ``Had the world been static, it could have been an important purchase,'' says Roberto Roussel, an analyst at Robinson-Humphrey Co. in Villa. But computer wholesaling was changing quickly, from a system of valued distribution rights for certain key manufacturers to an open market in which everyone can sell almost anything to anyone else. Worse, the cash purchase saddled Merisel with unwelcome debt. At the end of last year, Merisel took a $30 million write-down related to the ComputerLand purchase. Series of Setbacks Other problems have festered. Computer systems have been a persistent stumbling block since the combined Softsel and Microamerica adopted a centralized, relatively inflexible system used by Softsel. Its main competitors have struggled to convert older computers to updated, decentralized systems. But Dickens's woes have been exceptional. With mounting installation problems posed by an expensive new system, the company's move into the modern computer world is only half complete, with the program working in its Canadian unit but not in the far-bigger U.S. operation. ``It's an irony of the past year that we have spent more on systems than competitors and we still haven't been able to reap the benefits,'' Mr. Cintron said. Other expensive modernization efforts have fallen flat. A new, 200,000-square-foot automated warehouse in the Netherlands, equipped with the latest computer equipment, was designed as a single, central clearing point for Merisel's entire European operations. To date, it serves only Germany and Austria because of computer-system and other problems. ``All of this has taken a great deal of management time and attention,'' said Pelfrey Rigsby, an analyst at Hambrecht & Quist in San Francisco. Top management at Merisel has changed in recent months. The question now is whether Mr. Cintron and others can make up for lost time. ``It's possible that the management changes came a bit late,'' Ms. Rigsby says.
