Merisel, Inc.

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Merisel, Inc.

200 Continental Boulevard
El Segundo, California 90245-0984
U.S.A.
(310) 615-3080
Fax: (310) 615-6438

Public Company
Incorporated: 1980 as Softsel Computer Products
Employees: 2,500
Sales: $3.09 billion
Stock Exchanges: NASDAQ
SICs: 5045 Computers, Peripherals & Software

Merisel, Inc., is the world’s largest publicly held distributor of computer hardware and software products. The company sells about 30,000 hardware and software products from 900 manufacturers to 65,000 resellers worldwide. About 70 percent of the company’s revenues come from the United States and 30 percent from business overseas.

In 1980 the computer software industry was in its infancy. Programs were written primarily in one-person shops by computer junkies, who did it more for love than for money. Getting this software to the 1,200 or so owners of computer retail stores was, at best, a hit-or-miss affair. If the software writer went on vacation, for example, the factory was closed and shipments stopped. Deciding which software to buy was even trickier. Approximately 95 percent of personal computer software was being sold by retail dealers, but few were in a position to evaluate and select stock from the huge number of programs available.

While “distribution” can sound mundane, 33-year-old Robert Leff recognized exactly what the software business needed: a good middleman. A friend was selling computer software door-to-door, and Leff bought out his operation for $1,300. Leff retained his day job at Transaction Technology, a Citicorp subsidiary, and sold his software in the evenings and on weekends. The first month he grossed $5,000. A coworker, David Wagman, put up $10,000, and the two became equal partners in their new company, Softsel Computer Products.

By 1982, just a year and a half later, Softsel was generating $25 million annually, with its sales doubling every quarter. The company had a huge warehouse stocking more than a thousand software titles, ranging from VisiCalc, a pioneer spreadsheet application, to home video programs that have since been forgotten. Retail dealers phoned in their orders, which were then delivered by United Parcel Service. Leff and Wagman went far beyond simple distribution, however. They tested each of the 120 to 150 new programs that were arriving each month, making sure they performed as advertised and were easy to use. Then, with their heads of sales and product groups, the two executives would decide which programs had market potential. Softsel also sent out monthly bulletins to dealers, keeping them up to date on what was hot in the market and advising them of manufacturers’ specials.

By the end of 1983 annual sales stood at $90 million and the number of dealer customers had grown to 8,000. Softsel carried 4,000 products and each month added 20 from the 300 new software programs being published. Meanwhile, Softsel was continuing to refine its support services. Its account representatives kept dealers fully informed of the strengths and weaknesses of specific programs and of sales trends, broken down by product sector and geographic region. When dealers had technical questions that Softsel’s marketing staff couldn’t answer, they were turned over to its technical department. The company invested substantial time in training each account representative, who would be able to suggest complementary products and evaluate the dealer’s purchasing program.

The company had also begun publishing its Hot List, which each week cataloged the most popular computer programs. The list ranked Softsel’s best-selling business, educational, and game software, as well as popular accessories, like joysticks. By 1985, the list had begun to be posted in thousands of computer stores, and soon consumers were using it as a guide to what to buy. Some critics called the list deceptive and even unfair, because it only tracked sales through Softsel and not through other channels; as a result, popular software that wasn’t distributed by Merisel did not appear on the list. David Wagman, however, responded that the company had never represented the Hot List as anything but a record of Softsel’s own sales. In retrospect, the controversy was a reflection of the scarcity of data about industry sales at that time: since few other tracking services were available, the computer industry used the only source available.

During the late 1980s the company continued to grow at a rapid rate, although more slowly than the phenomenal pace of its infant years. Sales reached $319 million in 1987 and $465 million in 1988, when the company went public. In 1989 the company took a major new direction by agreeing to acquire Microamerica, a large hardware distributor annual sales, through an exchange of stock. The companies’ product lines complemented each other, as did their geographical market penetration, with Softsel established in Europe and to a certain extent in Australia, and Microamerica strong in Latin America.

Initially, however, the merger created substantial problems. While the companies made a good strategic fit, they were also two very different operations. Softsel’s corporate culture reflected its Southern California environment, with its employees dressed in the Hawaiian-shirt look of Robert Leff, while Microamerica’s people preferred the button-down look of the Northeast. Logistics also proved difficult. Following the merger in 1990, sales staff in scattered outposts resisted relocating to central locations in the Boston, New York, and Los Angeles areas. Softsel’s mainframe didn’t easily digest all of Microame-rica’s data, which meant costly mistakes and delays in customer deliveries. Scott Bye, the advertising district manager for Computer Reseller News, told California Business that “it was definitely a crazy time.... We were never quite certain where the offices were going to be or exactly what would happen day to day.”

By 1991, though, the problems of the merger were largely behind Merisel (the company had changed its name in 1990 to better reflect its product mix). Sales for the year were up 33 percent to $1.59 billion—far above the computer industry’s average increase of 13 percent. Net profits of $11 million weren’t spectacular, but were substantially higher than the $635,000 recorded in 1990. The company had eliminated 200 jobs following the merger and now had about 1,300 employees. Costs were back un’der control, and top management was reorganized for greater efficiency. Focusing on overseas opportunities, the company created Merisel Europe, which allowed manufacturers to sell their products in the United Kingdom and continental Europe through just one distributor. Merisel Europe also installed software in its offices that allowed it to invoice in any language. By 1992, the company was supplying the products of 700 manufacturers to 50,000 customers worldwide. Approximately one-third of its business was generated overseas.

The company was also benefiting from industry trends. Many top computer makers were under pressure to increase profits, and they were searching for alternatives to traditional marketing methods, which had included costly direct sales forces and authorized dealerships. These manufacturers strengthened ties with Merisel to access different channels like value-added resellers (VARs), which were small, often one-person operations that provided value-added elements like configuration, technical service, or customized software. The VAR would determine the client’s computer needs and then install a system, buying the components from a distributor like Merisel.

Since it was expanding its relationships with the top names in the industry, the company could increasingly supply a better, broader mix of products. In 1992 and 1993, Merisel concluded distribution agreements with companies including Apple, Compaq, Hewlett-Packard, and IBM, allowing the company to market parts or all of their product lines in designated locations throughout the world. Merisel was also one of the largest international distributors of software made by Microsoft, Lotus, Novell, and WordPerfect.

In addition, the company was benefiting from the increasing reliance of computer dealers on wholesale distributors like Merisel for credit and inventory management. In addition to filling orders efficiently, deliver merchandise quickly, and offer a wide range of technical and sales support, Merisel was able to maintain and build relationships in a competitive marketplace. The company was also concluding agreements with mass-market discount chains like Circuit City, Office Depot, and Montgomery Ward to supply them with computer products. It also entered the membership warehouse market, creating alliances with Sam’s Wholesale Club and Boston-based B.J.’s Wholesale. The impact of these combined efforts was apparent in 1992 results: sales rose 41 percent to $2.2 billion, while net income increased 82 percent to $19.7 million. In 1993 the company recorded another impressive performance, as sales gained 38 percent to $3.1 billion, while net income increased 55 percent to $30.4 million.

In February 1994, Merisel further expanded its operations by buying ComputerLand’s retail franchise and distribution division for $80 million. There were more than 200 ComputerLand franchise locations across the United States, and the division had installed the largest number of local area networks (LANs) in the country. With the purchase, Merisel acquired the right to refranchise the ComputerLand name in the United States. The company operated as a separate entity from offices in Pleasanton, California. For the fiscal year ending September 30, 1993, ComputerLand business generated approximately $1.1 billion in revenue.

By 1994, the breadth and depth of Merisel’s offerings was truly remarkable. The company provided telemarketing services for companies like Compaq, IBM, and Microsoft, which included fielding inquiries from consumers, sending out literature, fulfilling orders, and conducting market research. In the merchandising field, Merisel was providing manufacturers with in-store services like returns processing, product replenishment, sales analysis, point-of-purchase display design and production, and demo loading. In the education and training area, it was teaching resellers and their customers about the most current technologies in UNIX, networks, systems, and connectivity. Its Sof-teach seminars, in which manufacturers conducted seminars on how to market their products, were attended by approximately 17,000 resellers in 1991.

Education was just a small part of Merisel’s services to resellers, of course. Through its Dial-Up Sales Net, customers could use a computer with a modem to examine pricing, credit information, and product description and availability, and then place orders directly into Merisel’s order processing system. Some of its largest customers could even directly access the company’s mainframe for order processing and account information. The company also provided resellers with financial services, tools for inventory management, and direct fulfillment services (whereby Merisel shipped directly to the resellers’ customers).

The company continued to record huge revenue and earnings increases in the first quarter of 1994, but profitability suffered in the spring and summer. For the first nine months of the year, sales were up 68 percent to $3.6 billion, but earnings shrank 24 percent to $14.1 million. Part of the contraction reflected the addition of the ComputerLand operations. Some analysts also believed that revenue growth in the core, non-ComputerLand businesses was slowing, and that the company faced operating losses in Europe. They also noted that Merisel had high levels of debt and that increased interest expense was hurting net margins. Wall Street’s fears of a slowing computer industry under pricing pressure contributed to a drop in the company’s stock price from a high of 22½ during the year to seven in December.

Nevertheless, it was important to keep the scale of the company’s accomplishments and problems in perspective. In 15 years, what had started as one man, Robert Leff, going door-to-door with software under his arm had become a $5 billion company. (Leff was still co-chairman in 1995.) While some analysts questioned whether the company could maintain its sales growth and raise profitability, it nevertheless seemed certain that Merisel would continue to be one of the major players in the computer industry.