To hear Jerome York tell it, the pending acquisition of $2.22 billion computer cataloger Micro Warehouse by an eclectic group of investors is little more than a few neighbors chipping in to make a joint purchase.
“We have all lived in the southern California area for the past several years and have gotten to know each other because of that,” says York, a former chief financial officer for computer behemoth IBM and one of the lead investors. “And some of us have made prior investments together.”
The acquisition, announced Dec. 21, is valued at nearly $725 million. In addition to York, the investors are led by Northwest Airlines chairman Gary Wilson and investment firm Freeman Spogli & Co. The deal is expected to be completed by the end of February, and shareholders will receive $19 in cash for each share. The day of the announcement, shares rose $2.81, to close at $18.06.
York will succeed Micro Warehouse cofounder Peter Godfrey as chairman/CEO. In addition, a new seven-member board of directors will be established with York, Wilson, fellow investors Alfred Checchi and Alfred Boyer, and three representatives from Freeman Spogli. But otherwise, few, if any, changes are planned. “This is not about one company buying another company and finding synergies,” says Bruce Lev, executive vice president of corporate legal affairs at Micro Warehouse. “It’s just about one set of shareholders being substituted with another. No layoffs are expected, and it’s business as usual.”
York agrees. “At this point, nothing precipitous is going to be done.” The company will continue to mail its flagship Micro Warehouse catalog, and the Mac Warehouse, Data Comm Warehouse, and Inmac books.
But some analysts speculate that one particular investor, entertainment giant Michael Ovitz, could have Micro Warehouse thinking about restructuring its online business. Ovitz, a big-name Hollywood talent agent, also has his own Web business, CheckOut.com, which sells computer programs as well as home videos and music. With this in mind, some wonder if ultimately Micro Warehouse’s Web business will merge with CheckOut.com, or if the mailer will even phase out its print books.
Micro Warehouse’s online sales were $101 million for the first nine months of 1999 – up nearly 108% from the comparable period of ’98. And that’s despite shutting its Savebynet.com subsidiary – which consisted of Webauction.com, an auction site selling refurbished computer products, and discount computer products site Computersbynet.com – in August ’99 to concentrate on its core Website, Warehouse.com.
“I’m not sure if the company will make a shift toward online-only retailing,” says Neal Johnson, an analyst at Atlanta-based investment firm Robinson-Humphrey. “It’ll be a few weeks before it even knows what its intentions are.”
As for why Micro Warehouse agreed to be bought, increased competition, both online and offline, and shrinking margins in the computer market have taken their toll on the company’s stock price. On Nov. 30, shares closed at $11.75; the 52-week high had been $39 in January 1999.
“Clearly Micro Warehouse has been growing slower than its competitors CDW or Insight,” Johnson says. Net sales for Tempe, AZ-based Insight Enterprises rose 59.7% in 1998, to more than $1.0 billion; at Vernon Hills, IL-based CDW, net sales rose 35.8%, to $1.73 billion. In contrast, Micro Warehouse’s sales grew just 3.4% in ’98.
“Over the past few years, Micro Warehouse has tried restructuring and investments to improve its position,” Johnson notes. “But it saw an opportunity to realize the value of the company with this transaction.”