Merisel Inc. is exiting the broad-line hardware distribution market in the United States to focus solely on software licensing. The company plans to wind down the balance of its domestic hardware distribution operations by the end of March.
The El Segundo, Calif., company said it will reduce its U.S.-based staff from 400 to 200 as a result of the restructuring. Merisel's Canadian operations, which employ 435, will remain a broad-line distributor, according to David Sadler, the company's president and chief executive.
Once the No. 2 broad-line distribution reseller in North America, competing with industry giants such as Ingram Micro Inc. and Tech Data Corp., Merisel has seen the nature of the U.S. hardware distribution industry change dramatically in the past 18 months.
"There has been pressure in terms of margins and terms and conditions of suppliers in the industry," Sadler said. "The margins have shot down from 9% or 10% to 4.5%, and we've seen an increasing number of hardware customers going direct to OEMs."
The last two years have been difficult for reseller distribution due to cutthroat pricing and the number of competitors chasing the market, according to Robert C. Damron, an analyst at Tucker Anthony Capital Markets in Milwaukee.
"Compaq reduced its number of distributors from 39 down to three in 2000, which made it more difficult for reseller distributors to compete," Damron said. "Merisel looked like they were still hanging in there until recently."
Sadler said it was in shareholders' best interest to pursue other avenues in the United States, but he remains bullish about the company's distribution prospects in Canada, which he says have "largely been unaffected by Merisel's performance in the U.S."
"Our Canadian distribution business has a strong market share-and with some vendor lines market dominance-in both hardware and software distribution sales. Merisel will continue to offer a full line of products to its national customer base in Canada," Sadler said. "With the sale of MOCA, Merisel has invested more than 40 million Canadian dollars in its Canadian distribution business in the past month to substantially improve its balance sheet and cash position."
Late last year, Arrow Electronics Inc., Melville, N.Y., agreed to acquire the Merisel Open Computing Alliance (MOCA) division, once Merisel's most profitable hardware-centric business unit. Arrow completed the deal in November for $110 million in cash plus the assumption or repayment of about $70 million in debt.
With 1999 revenue of approximately $950 million, MOCA is focused on Sun Enterprise Solutions, software, storage-area networks, Solaris operating systems, and professional services that run on Sun hardware.
In 1999, Merisel's North American distribution business comprised 82% of total revenue, generating $4.2 billion in net sales. Excluding MOCA, U.S. net sales reached $3.3 billion in 1999, compared with approximately $1 billion in the first three quarters of 2000.
Responding to mounting margin pressure, Merisel's U.S. divisions reorganized in January 2000, but the company found itself unable to adapt to the changing market fast enough.
Ingram and Tech Data, meanwhile, have experienced accelerated revenue growth with higher gross margins in the last three quarters, according to Tucker Anthony's Damron, as smaller competitors have left the marketplace and created a stronger pricing environment for those that remain.
"Merisel should've benefited this year to some extent from the better pricing environment," he said. "But the distributor lacked the economies of scale to compete against Ingram Micro, [which does] about $30 billion in net revenue, and Tech Data, with $20 billion in net revenue."