Shift From Hardware Gives Tech Firm New Focus, Cash

0

Shift From Hardware Gives Tech Firm New Focus, Cash

Corporate Focus

by Anthony Palazzo

Wall Street may have given up on Merisel Inc., but its prospects haven’t looked better in years.

Once one of the nation’s largest distributors of computers and high-tech components, the El Segundo-based company nearly succumbed a few years ago to rapid changes in the way people bought and sold electronic gear.

As profit margins collapsed within the technology distribution industry, size became a key strategic advantage. Many tech distributors went out of business or were acquired in a wave of consolidation that left two dominant players, Santa Ana-based Ingram Micro Inc. and Tech Data Corp. of Clearwater, Fla.

“We found ourselves unable to be competitive in terms of our cost structure,” said Merisel Chief Executive Tim Jenson. “All the analysts ran from the company.”

Merisel narrowly avoided bankruptcy, and after a couple of strategic shifts, ended up re-focusing on a small portion of its previous business.

Merisel now specializes in distributing software licenses to resellers like computer consultants, who put together customized computer set-ups for small- to medium-sized business customers.

The company no longer distributes computer hardware, so the risk of inventory devaluation one of the biggest problems it faced has been eliminated. A sale of, say, 50 additional software licenses to a customer often doesn’t involve any shipments at all, only paperwork.

Merisel has grown its remaining business to a point where profitability is in sight. Though it’s still losing money, revenues rose to $14.5 million in the fourth quarter of 2001 from $3.2 million in software license sales during the like year-earlier period. (Including discontinued businesses, revenue was $159.6 million in the fourth quarter of 2000.)

First quarter revenue, which hasn’t been announced, will be higher than in the fourth quarter, Jenson said. In December, Merisel signed up Network Associates Inc., Borland Software Corp. and Panda Software as new customers.

Merisel is profitable, but mainly because it incurred lower costs than originally expected in winding down its other businesses. Altogether, Merisel reported net income of $8.8 million, or $1.11 per share, in the fourth quarter, compared with a loss of $22 million, or $2.74 a share, in the like year-earlier period.

On a standalone basis, the remaining business will require several quarters of additional growth, to about $40 million in quarterly revenues, to reach profitability, Jenson said.

The best news at Merisel is its cash pile. The company retained $55 million as it sold off unwanted operations. After deducting $17 million in preferred stock, Merisel still has more than $4 a share in cash well above its recent trading price of $2.85 a share.

The plan is to use that money to buy a solid, cash-flow positive company, for up to $250 million with leverage thrown in. The new business may or may not be related to software distribution.

“If there were synergies with our existing manufacturing partners, or if it had a significant overlap with our reseller base, or our back room (operations), those are only added benefits to what we’re looking for from an acquisition standpoint,” Jenson said. “We’d certainly like to do it sooner rather than later.”

Sellers are reluctant to let go in a buyer’s market, but Merisel can afford to wait. If the acquisition couldn’t be joined with its current business, the company would spin one or the other off.

Key to Jenson’s plan is $250 million in net operating loss carryforwards that Merisel accumulated during its worst times. The carryforwards represent losses the company racked up during the past decade. They can be applied to offset future earnings and eliminate Merisel’s tax bill if it turns profitable.

“We believe if we find the right acquisition (the carryforward) will have a value in and of itself of $75 million,” Jenson said. “That is entirely a function of how much pretax income the company makes and how quickly it makes it.”

Stuck in the middle

That’s a far cry from where the company was a couple of years ago.

The direct-sales, low inventory model popularized by Dell Computer Corp. in the early 1990s turned tech distribution into a game of hot potato.

Middlemen such as Merisel found themselves stuck with warehouses full of components such as memory chips, whose value was eroding daily due to the introduction of newer, cheaper products. Now, Merisel has found a specialty where it believes it can excel. Tracking the licenses is more complicated than it appears, Jenson said. Large software companies would rather deal with a few large buyers like Merisel than hundreds or thousands of smaller customers. Meanwhile, the resellers find it convenient to buy software from several manufacturers all in one place.

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at

[email protected].

No posts to display