Agilysys Inc.

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Agilysys Inc.

6065 Parkland Boulevard
Mayfield Heights, Ohio 44124
U.S.A.
Telephone: (216) 587-3600
Web site: http://www.agilysys.com

Public Company
Incorporated: 1963
Employees: 1,386
Sales: $1.6 billion (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: AGYS
NAIC: 421690 Other Electronic Parts and Equipment Wholesalers

Agilysys Inc., formerly known as Pioneer-Standard Electronics, Inc., operates as a leading distributor and reseller of enterprise technology solutions. The company markets its products and solutions through its Enterprise Solutions Group and its KeyLink Systems Group. The latter serves Agilysys's reseller partners and distributes computer systems that include server and storage hardware and software. Agilysys's Enterprise Solutions Group caters to large corporations that need help streamlining information technology systems. The company also provides software applications to the retail and hospitality industries. Agilysys sold off its Industrial Electronics Division in 2003 and adopted its current moniker shortly thereafter.

"Vacuum Tubes by the Pound": 1921–63

The U.S. electronic components distribution business was born in the 1920s in Courtland Street in lower Manhattan, a location that came to be known as Radio Row because of its profusion of radio parts stores. Before the commercial battery-operated radio was developed, ham radios ruled the industry, and in 1921 Charles Avnet, the founder of the firm that would lead the industry 70 years later, opened one of the first electronics distributorships for ham radio replacement parts, passive components, and connectors on Radio Row—only to see it fall victim to the Depression in 1931. In the 1930s Avnet tested the waters again with a car radio kit and antenna manufacturing business, which succumbed to competition and went bankrupt as well. Small radio and electrical goods stores were springing up across the country, however, in major U.S. port cities like Boston, Philadelphia, and Chicago. In 1922, for example, industry pioneer Charles Kierulff (later part of the Arrow Electronics empire) opened his own radio parts store in Los Angeles, and in 1928 Allied Radio, a mail-order radio parts store, opened in Chicago.

By 1932 the radio parts distribution industry had reached Ohio, where a small distributorship named Standard Radio Supply—Pioneer-Standard's first incarnation—opened for business in Dayton. Around the same time an entrepreneur named Murray Goldberg founded Arrow Radio on New York's Radio Row to sell used radio equipment, marking the birth of the firm, Arrow Electronics, which together with Avnet would dominate the industry in the 1990s. For all of this entrepreneurial fervor, however, it was only with the explosion in manufacturing brought on by World War II that the U.S. electronics industry really came into its own. Simple ham radio parts suddenly became high-priority defense products, and for security reasons the federal government banned the manufacturing of radio sets for home or hobbyist use. With their traditional customers now off limits, radio part resellers and distributors like Standard Radio turned to the U.S. military and the war industry for sustenance. Charles Avnet, for example, made his third and finally successful attempt at business success at the height of the war by buying surplus electrical and electronic parts and selling them to the government. After the war, the private radio and electronic parts market was flooded by government war surplus parts, and the electronics distribution industry flourished. Among the many distributors who began in the postwar electronics boom were two new Cleveland firms, Premier Industrial Corporation and Pioneer-Standard's other forerunner, Pioneer Electronics Supply, both of which opened in 1946.

In 1947 the invention of the solid-state transistor rendered the vacuum tube obsolete, and during the 1950s the emergence of the television provided a new outlet for industry sales. In 1953, Wyle Electronics was formed in California, and a year later Marshall Industries began business in the same state. Charles Avnet's distributorship incorporated as Avnet Electronics Supply Co. in 1955 and saw its sales climb above the $1 million mark for the first time. By the mid-1950s, some electronic parts distributors were selling parts for televisions, car radios, and sound systems, primarily to the consumer market, and in the late 1950s the growing U.S. space industry provided another lucrative new market. A growing number of Original Equipment Manufacturers (OEMs) began to join the consumer market as buyers of industry products, and industry firms began selling power electronics products and high-current devices for heavy equipment in addition to TV and radio components. To lessen its dependence on the military market, the electronic components industry increasingly began to sell its products directly to distributors like Avnet, Pioneer, and Standard, who for their part began to develop new methods to protect their prices and inventories from the competition and demand swings of the electronics market.

Pioneer-Standard Electronics: 1963–71

As the semiconductor industry began to grow in importance in the 1960s, electronics distributor Hamilton Electro (later acquired by Avnet) popularized the "broad-line" approach to distributing by carrying a range of electronics products from a variety of manufacturers rather than a limited line of select goods. It thus created the industry niche that Pioneer-Standard would later exploit on its path to industry leadership. By 1963 the electronic parts distribution business had grown into a roughly $500 million industry, and Cleveland's Pioneer Electronics Supply merged with Dayton's Standard Radio Supply to form Pioneer-Standard Electronics, incorporated in Ohio. Three years later in 1966, Pioneer-Standard purchased 50 percent of Frontier Electronics (itself founded in 1964) of Gaithersburg, Maryland, and rechristened it Pioneer-Washington and then later Pioneer/Technologies Group. By the mid-1960s, Pioneer's sales of electronic components and audio equipment stood at $5 to $9 million. In 1966 Preston (Pete) Heller, Jr., the CEO who would preside over Pioneer-Standard's growth into an industry giant, joined the firm as an executive vice-president of the Pioneer Division after a career with Crane Packing Company, Inland Steel, and Arthur Young & Company. Throughout the 1960s the leading firms in the electronics distribution industry grew by acquisition. In addition to Pioneer-Standard's purchase of Frontier, Avnet acquired Time Electronics, for example, and an investment group bought up Arrow Electronics. In its 1969 annual report Arrow's management sketched the future of the electronics distribution industry: It would soon be dominated by "those few substantial distribution companies with the financial resources, the professional management, and the modern control systems necessary to participate in the industry's current consolidation phase."

Pioneer Going Public: 1971–82

In 1969 Pete Heller was named Pioneer's president and director, and James L. Bayman (later Heller's successor as CEO) joined the firm as the general manager of its Dayton branch after several years in management positions in the electronics industry. Despite the national recession of 1970–71, several electronics distribution firms broke the $100 million sales level in the early 1970s, and by 1971 total industry sales were closing in on $1 billion. The industry solidified its place in the electronics industry food chain by developing product return privileges and further price protection guarantees. With sales at roughly $13 million, in June 1970 Pioneer-Standard registered an initial public offering (IPO) of company stock with the Securities and Exchange Commission. The $2.47 million in common stock sold quickly in January 1971, and Pioneer-Standard joined 14 other electronics distributors in the publicly owned arena (by the mid-1990s, only nine—Pioneer-Standard, Arrow, Avnet, Bell Industries, Jaco Electronics, Marshall Industries, Milgray Electronics, Sterling Electronics, and Wyle Electronics—remained).

Although Wall Street ignored the electronics distribution industry in the early 1970s, under Heller's command Pioneer-Standard raised its net income from $949,000 in 1973 to $2.33 million in 1975 and investors were soon watching its stock price with anticipation. Between 1975 and 1980 the electronics distribution industry as a whole grew at an annual pace of 17 percent as distributors grabbed a larger share of the electronics parts market and the largest firms grew even larger. As the growth of the computer industry began to spark investors' interest in electronics distributors in the late 1970s, industry earnings began to climb, carrying stock prices with them. Pioneer-Standard topped the $36 million mark in sales in 1976, and in 1977 sales broke past the $46 million mark. By 1980, the stocks of many distributors were selling at four to five times their 1971 prices, and Pioneer-Standard's net income had reached $3.95 million.

The onset of the recession of the early 1980s interrupted Pioneer's ascent, however, and in mid-1980 Heller was forced to admit to securities analysts that "if business remains flat and expenses remain frozen, profits will be under great pressure…. We're no different from any other concern in the industry." Unless the industry could cut costs or raise prices, he warned, its sales would have to grow at a 20 percent clip to match 1979 profit levels. As Wall Street saw stocks fall 24 percent between 1981 and 1982, distributors' stocks performed even worse. Many industry firms reported losses, and stock price declines of 50 percent were not unusual.

Company Perspectives:

Agilysys strives to be the preferred strategic link between its suppliers and customers by providing differentiated value that is rewarded. The company's role is to provide customers with solutions to integrate their systems, improve the efficiency of their business, and solve information technology challenges.

The Computer Revolution: 1982–89

In 1982 IBM introduced personal computers with greater computing power than any that had previously been marketed to American business. Almost immediately, sales of computer electronics were accounting for nearly 20 percent of the distribution industry's sales. With businesses and consumers buying PCs to power spreadsheet, word processing, and video game applications, the computer segment of the electronic distribu-tion market was enjoying an annual growth rate of almost 100 percent, and price/performance ratios for industrial electronics began to improve by leaps and bounds every year. To capitalize on the trend, in late 1982 Heller engineered a $50 million credit agreement with four Ohio banks that enabled Pioneer-Standard to purchase the electronics distribution division of the Harvey Group of New York, pay down its existing debts, and cover its existing capital requirements. By early 1983, the electronics distribution industry had recovered from its recession and enjoyed an 18-month expansion in which sales grew at a 30 percent annual clip. Heller was named Pioneer-Standard's chairman and CEO in 1983, and by March 1984 the company's net income had recovered from its prerecession level, and then some, to $4.1 million.

The early 1980s was a period of heavy capital spending in the U.S. semiconductor industry, and Pioneer-Standard stock began to be touted as a way for investors to "play" the semiconductor industry without investing directly in the major semiconductor makers like AMD, Intel, and National Semiconductor. By 1984 Pioneer had established a distributor relationship with computer product maker Symbios Logic Inc. of Colorado; Peter Heller's future successor, James Bayman, had been promoted to president and chief operating officer; and the company's net income was climbing toward $3.67 million. The company established its System Integration Value-Added Center (SIVAC), a customer support/cost-control consulting service, in 1985 and in 1986 founded its End-User sales group to provide greater focus to its sales efforts. In 1989 Pioneer-Standard acquired California-based distributor Compumech Technologies and its net income broke past the $6.7 million mark on sales of more than $250 million.

The Keys to the Kingdom: 1990–97

For all Pioneer-Standard's steady expansion, however, by the late 1980s it had become apparent to many companies in the distribution industry that growth alone was no longer enough. Despite increasing industry sales, electronic components were becoming cheaper and cheaper to make, and distribution industry profit margins were declining. Firms like Pioneer-Standard were forced to scratch for improved cost savings and offer value-added services to maintain their profits and market share. In a crowded industry of 1,000 or more players, companies had to find new ways to distinguish themselves from their competitors.

For Pioneer-Standard's James Bayman, offering value-added services in addition to distribution became "the keys to the kingdom" of bigger profits and stronger market share. In fact, when it had begun offering systems integration services to customers in the mid-1970s, Pioneer-Standard had already started transforming itself from a plain-vanilla parts distributor to a value-added firm. By the late 1980s, however, there was no turning back. Electronics industry suppliers were reducing the number of distributors with which they worked and expecting more from the ones they kept. (Intel, for example—one of Pioneer's two largest suppliers—was among the first electronics manufacturers to insist that its distributors understand and technically support the products they sold.)

By 1990, Pioneer-Standard was not only supplying bowling automation system components for supplier AMF, for example, it was participating in their manufacture as well. "They [AMF] get the order," Bayman told Barron's magazine. "We configure it. We load the software, and ship it directly to the bowling alley, where it's installed by AMF service people." Similarly, in 1990 Pioneer-Standard opened "demonstration centers" in five U.S. cities, where its sales staff showed small- and medium-sized software companies how to adapt their products for use with DEC's computers. By 1997, Pioneer-Standard would be offering everything from product evaluation, demand generation services, warehousing, and package labeling to technology "migration" consulting and upgrading services and Internet and firewall design and connection services. Moreover, in addition to its army of increasingly technically trained sales people Pioneer-Standard added 150 "field application engineers" (FAEs) to support its sales force. The image of the electronics distributor as a mere "parts" supplier with only a big warehouse and a team of salesmen was giving way to automated warehouses, bar-coding of product shipments, overnight product delivery, and stock-tracking software and electronic data interchange systems for accurate, real-time sales and inventory information. By 1996, Pioneer-Standard could claim the highest FAE-to-salesperson ratios in the industry.

Key Dates:

1932:: Standard Radio Supply opens for business in Dayton, Ohio.
1946:: Premier Industrial Corporation and Pioneer Electronics Supply are established.
1963:: Pioneer Electronics Supply merges with Standard Radio Supply to form Pioneer-Standard Electronics.
1966:: The company buys 50 percent of Frontier Electronics (later known as Pioneer/Technologies).
1970:: Pioneer-Standard goes public.
1982:: The electronics distribution division of the Harvey Group of New York is acquired.
1994:: Canada-based Zentronics is purchased.
1995:: Pioneer-Standard acquires the remaining 50 percent of Pioneer/Technologies, which is renamed Pioneer-Standard of Maryland.
2003:: The company sells off its Industrial Electronics Division and changes its name to Agilysys Inc.; Kyrus Corporation is acquired.
2004:: Inter-American Data Inc. is purchased.

Pioneer-Standard opened its Central Distribution Center in Cleveland in 1990 and acquired the LCS computer systems division of the U.K. firm Lex Service plc the same year. By 1991 Pioneer's vow to become "a solutions company" seemed to be coming true, and its share of the North American electronics distribution market rose from 5.5 percent in 1990 to 5.8 percent. Following further expansion to the West Coast, Pioneer's sales surged to $552 million in 1992, representing 6.6 percent of the total North American electronics distribution market. In 1993 Pioneer acquired Siemens Components Inc.'s Hamilton/Hall-Mark distribution franchise and won a crucial vote of confidence for its campaign (called "FutureStart") to become a quality-driven distributor when the International Standards Organization certified Pioneer as compliant with its ISO-9002 international quality standards program.

In 1994 Pioneer entered the international distribution market for the first time by acquiring Zentronics, one of Canada's largest industrial electronics and computer products distributors, from United Westburne Inc. for $10 to $12 million. While its share of Pioneer/Technologies was enabling it to make further inroads into the California distribution market, Pioneer signed a distribution agreement with California-based integrated circuit maker Atmel and won service awards from 15 of its suppliers and customers. Fueled by strong demand for microprocessors, Pioneer's sales broke the billion-dollar mark in 1994, and its share of the North American distribution market rose again, to 7.3 percent. By 1995, Pioneer could boast that its stock had risen 17.4 percent a year since its IPO in 1971 and that it did more business in a single day than it had in all of 1969.

In April 1995, James Bayman succeeded Pete Heller as Pioneer's CEO and announced his intention to continue Heller's expansion and value-added services strategies: "Our strategy is to grow internally and pursue acquisitions domestically and overseas in Europe and the Pacific Rim…. We [electronic distributors] are no longer just logistics managers. We are information managers…. We can't just sell a product, we have to show our client how to use it to become more competitive." In November Pioneer-Standard's long anticipated acquisition of the remaining 50 percent of Pioneer/Technologies was finalized, and in a deal estimated at about $50 million Pioneer/Technologies officially became Pioneer-Standard of Maryland. "With our buying technologies," Bayman quipped, "we finally put to bed the longest-running rumor in the industry, a rumor 20 years running." In one fell swoop Pioneer-Standard had become the third largest electronics distributor in North America, absorbing Pioneer/Technologies' 11 branch operations in the northwestern and southeastern United States and expanding its line card of products to one of the industry's most extensive. Rumors immediately began circulating that Pioneer-Standard would soon merge with another major distributor to gain ground on Arrow Electronics and Avnet—or even attempt to merge with one of those two industry leaders itself. "As usual, there is no basis for any of the rumors," Bayman asserted, while admitting coyly, "We are very interested in expanding."

The unprecedented growth of the distribution industry in 1991–95 tailed off in 1996, and Pioneer lost its rank as the third largest North American distributor. Nevertheless, in 1996 it announced distribution agreements with RadiSys Corporation, Cisco Systems, Micron Technology, AccelGraphics Inc., Tadpole Technology, Network General, Murata Electronics, Symbios Logic, Lucent Technologies, Actel Corporation, and Cipher Systems. It also entered into an increasingly typical "remarketing" agreement with IBM, in which Pioneer-Standard would not only distribute Big Blue's computer systems but would support them by providing value-added resellers (VARs) with an umbrella of services such as sales and technical services, direct marketing services, product evaluation, financial services, and business planning. With semiconductors representing an ever larger segment of the distribution market, in 1996 Pioneer-Standard also relocated its semiconductor marketing operations to California's Silicon Valley, the heart of the U.S. high-tech industry.

Between 1991 and 1996, the industrial electronics distribution industry had grown from $9 billion to more than $20 billion, a 300 percent increase over its volume in 1986. Despite the cost of its acquisition of Pioneer/Technologies and a slowdown in industry sales, Pioneer-Standard's sales topped $1.5 billion in 1996, and in 1997 it announced new distribution agreements with U.S. Robotics, Celestica Inc., and Fairchild Semiconductor. Its implementation of Total Quality Management (TQM) principles had lifted its quality control score to the "world-class" level, and the American Society for Quality Control was citing the company's quality program as a "textbook example of comprehensive planning activity, followed by rigorous implementation, producing results." The year 1996 was the tenth consecutive year of record sales for Pioneer-Standard; since its 1971 IPO its sales had increased every year but one.

In 1997, the company strengthened its international foothold with the purchase of World Peace International, a distributor located in Taiwan. It also branched out into Europe when it acquired a stake in the United Kingdom's Eurodis Electron. Technology had continued to change at breakneck speed during the late 1990s, and major changes were on the horizon for Pioneer-Standard.

A New Name for the New Millennium

During the early years of the new millennium, Pioneer-Standard operated with two main divisions: Computer Systems Division (CSD), which was responsible for the distribution and resale of enterprise computer systems products and solutions; and Industrial Electronics Division (IED), which handled the company's electronic components distribution. Pioneer-Standard also operated Aprisa Inc., a majority owned unit that created software for the electrical components market.

A major slowdown in tech spending during this time period forced Pioneer-Standard to rethink its business strategy. As such, the company made a bold move in early 2003 and decided to sell off its IED operations to competitor Arrow Electronics Inc. in a $240 million deal. The company restructured itself to focus solely on its enterprise computer solutions business. Pioneer-Standard's shift away from its electronic roots was made obvious in September when the company adopted a new corporate moniker: Agilysys Inc. The new name was a combination of the words "agile" and "systems" and was chosen to help the company transform its image.

Agilysys's first move came later that month with the $30 million acquisition of Kyrus Corporation, an IBM retail systems and solutions provider. The deal secured Agilysys's position as the leading provider of IBM retail solutions and services to the supermarket, chain drug, general retail, and hospitality markets. The company also gained a foothold in the casino and destination resort market segments in February 2004 when it added Inter-American Data Inc. to its arsenal. According to Agilysys, its Lodging Management Systems was considered to be the hospitality industry's leading property management solution.

In May 2005, the company bought The CTS Corporation, an independent services firm providing information technology storage solutions for large corporations. It also formed a reseller agreement with EMC Corporation. Sales in the 2005 fiscal year reached $1.62 billion, an increase of 16 percent over the previous year. Net income was also on the rise, reaching $19.5 million in fiscal 2005.

With solid financial results as evidence, it appeared as though Agilysys's new acquisitions were paying off. In fact, Arthur Rhein, who was named CEO in 2002 and chairman in 2003, claimed in a July 2004 Plain Dealer article that 80 percent of the rooms in Las Vegas and all of the rooms in Atlantic City operated on Agilysys software. Indeed, the company had an impressive client list across several industries including the Venetian Resort Hotel Casino in Las Vegas, Duane Reade drug stores, Family Dollar stores, and the International Securities Exchange.

Although Pioneer-Standard's metamorphosis into Agilysys was a sharp departure from its roots as an electronic components supplier, the company stood on solid footing as a leading enterprise computer technology solutions provider. Management was confident that its strategy would continue to pay off in the years to come.

Principal Subsidiaries

Agilysys, Inc.; Agilysys Canada Inc.; Agilysys S.C. Inc.; Agilysys NV LLC; The Dickens Services Group, A Pioneer-Standard Company LLC; Aprisa, Inc.; Aprisa Holdings LLC; Pioneer-Standard Financial Trust.