CompuAdd Computer Corporation

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CompuAdd Computer Corporation

12337 Technology Blvd.
Austin, Texas 78727
U.S.A.
(512) 250-1489
Fax: (512) 250-3658

Private Company
Incorporated: 1982
Employees: 300
Sales: $233.4 million
SICs: 3571 Electronic Computers; 3575 Computer Terminals;
5961 Catalog and Mail Order Houses

One of the world’s leading direct marketers of computers and peripheral equipment, CompuAdd Computer Corporation manufactures its own line of personal computers and PC-based point-of-sale terminals. CompuAdd also sells software and provides a full range of support services for the products it markets. By selling to its customers directly, primarily through mail-order, the company has kept its products’ prices among the lowest in the industry. The vast majority of the CompuAdd’s customers are businesses or government agencies. About one quarter of its business comes from government contracts, while large businesses account for 29 percent. About 17 percent of the company’s customers are small or medium-sized businesses.

For the first twelve years of its existence, CompuAdd was essentially a one-man show run by founder Bill Hayden. Hayden, a mechanic’s son who grew up in San Antonio, Texas, moved up the road to Austin for college and stayed there after graduating. He began his career as an engineer at Texas Instruments. To fulfill his entrepreneurial dreams, Hayden quit Texas Instruments in 1981 and launched CompuAdd in April 1982. Using as seed money $100,000 he had earned selling real estate on the side, Hayden started selling disk drives and other peripheral equipment out of the trunk of his aging orange Chevy Chevette. The name CompuAdd came from Hayden’s idea to sell add-on equipment for computers. The company’s first sale was made after Hayden ran a small ad in a computer magazine. After that initial breakthrough, orders began pouring in, and by the fall of 1982 Hayden’s monthly receipts had reached $30,000. Before long, he was able to move CompuAdd’s base of operations out of his shabby car and into a shabby office known as “the cave.”

Hayden’s initial plan for CompuAdd was relatively modest. He hoped to establish a successful mail-order operation that would sell computer equipment made by others at a significant discount and offer superior customer service. His original intention was to keep the product line small and the operation simple. By 1983, however, the business had grown so much that he and his wife, Connie, could no longer handle all of CompuAdd’s affairs by themselves. With sales approaching $2 million, Hayden hired his first batch of managers. The three young men he brought on board were all in their twenties and were either recent college graduates or still in school. Under Hayden supervision, John Hutchison handled purchasing and advertising; Frank Taylor worked on shipping, quality control, and technical support; and Tom Irby managed CompuAdd’s earliest forays into retail sales.

By 1984 CompuAdd was selling a full range of products for personal computers, including the PCs themselves. The company’s growth during the next few years continued to accelerate, and by 1985 CompuAdd had about 80 employees and annual sales of about $25 million. In spite of CompuAdd’s meteoric growth, Hayden was adamant that the company retain certain small business characteristics. As additional layers of management became necessary, communication between them remained old-fashioned. Inter-office memos were few and far between, and nobody, including Hayden himself, had a secretary. Business was conducted face-to-face, and everybody answered their own phones.

Sales at CompuAdd soared to the $100 million range by 1987. By this time, CompuAdd was marketing its own line of PCs, low-cost IBM clones that were sold mostly through mail-order catalogs and ads featuring the company’s toll-free 800 number. Price and customer service remained CompuAdd’s main hook for customers, and its direct marketing methods allowed the company to consistently undercut the competition. In 1989 Hayden decided to increase the role of retail outlets in the company’s scheme. That year, the number of CompuAdd stores was increased from 15 to 71. The stores were warehouse-like, with little in the way of decoration or styling. Toshiba laptops and a few select brands of printers and other peripherals were stocked in addition to CompuAdd products. Hayden saw the stores as a way to tap further into the small business and individual computer-users market. At the same time, the company gained a retail presence without having to deal with the difficult task of breaking into the big computer retail chains. Despite the company’s focus on in-store sales, telephone and mail-order sales accounted for 80 percent of the company’s revenue for 1988. For the year, CompuAdd more than doubled its sales to $241 million.

CompuAdd’s manufacturing capabilities began to grow more sophisticated in the late 1980s. When IBM abandoned some of its Austin-area operations, Hayden leased a 250,000-square-foot plant it had vacated, and hired a handful of former IBM and TI executives to help run it. These moves enabled CompuAdd to start designing its own computer systems from scratch, rather than merely assembling PCs from ready-made components. The company was able to design a new PC from the ground up in five months. CompuAdd’s small size made it more agile than its larger competitors; the same task took 18 months at IBM. Leading the team was CompuAdd president Edward D.

Thomas, a 26-year IBM veteran who had worked with great success on the low-end versions of that company’s popular PS/2 computer line.

The company entered the international marketplace by opening facilities for both sales and assembly in the United Kingdom in 1988. Hayden continued to expand CompuAdd’s retail division with breathtaking speed in 1989. As many as three stores were opened in a single week during this period. By the end of the year, a total of 88 CompuAdd stores were in operation. The pace of the company’s retail expansion slackened somewhat in 1990, as the Austin assembly plant struggled to coordinate its production with the needs of the outlets. This was balanced in part by the further growth of its international operations. Outposts were established during 1990 in Germany, France, and Mexico.

CompuAdd experimented with a telephone support line called the Direct Help service. While most computer hotlines were designed to provide support for a particular manufacturer’s line of products, CompuAdd’s 900-number differed by offering problem-solving assistance for virtually any PC-related snag, regardless of whose equipment was involved. By the end of 1990, CompuAdd’s sales had reached $516 million, a 500 percent increase over 1987’s figure.

In December of 1990, CompuAdd received a rush order from the Defense Department for $30 million worth of personal computers and laptops to be used in Operation Desert Shield and Desert Storm. Facing a close deadline, Hayden was able to convince many workers to put in huge amounts of overtime, and because of CompuAdd’s nimble structure, resources and personnel were easily diverted from other projects. Although only a third of the necessary parts were on hand when the order came in, the computers were delivered on time. A letter sent to CompuAdd headquarters by an Army commander attests to the battle performance of the equipment. The letter, displayed prominently at the Austin home office, tells of a CompuAdd 486 computer blown completely through a wall by the explosion of an Iraqi missile. The only damage the computer sustained was to a circuit board. The case remained intact, and after a board transplant the computer was returned to service.

CompuAdd expanded its retail business in 1991, opening 32 new stores. The company’s 120 stores were now located in 37 states, stretching to both coasts of the country. Customers at the stores paid the same prices as did those who ordered directly from the factory. By this time, retail and non-retail operations each accounted for about half of the company’s sales.

In June of 1991, Hayden surprised everybody by announcing a major reorganization of CompuAdd’s structure. The reorganization included the spin-off of the company’s price-sensitive mail-order business, its original backbone, from corporate mail-order and retail operations. The spin-off was completed in September. The new company, called CompuAdd Express, was moved into a building across the street from CompuAdd’s headquarters. Hayden was so adamant about the two companies having separate identities that no CompuAdd employees were allowed to set foot in the Express building, though Express was allowed to recruit personnel from among CompuAdd’s work force. The separation was apparently successful, since CompuAdd Express quickly began stealing customers from its mother company by establishing lower prices. To Hayden, it was obviously preferable to lose customers to another company he owned than to another upstart mail-order firm. Spinning off this key piece of its mail-order business enabled CompuAdd to operate without the burden of supporting the high-cost of retail operations. CompuAdd continued to grow without its mail-order business; its sales totaled $514 million in 1991.

In 1991, CompuAdd was awarded one of the largest government computer contracts ever, a deal worth about $400 million in the first year alone, to deliver 300,000 computers to the Air Force. The Desktop IV contract, which was shared with Sysorex Information Systems of Falls Church, Virginia, was immediately challenged by eight companies whose bids were passed over. The group of protesters included many industry heavyweights, including Apple Computer, General Motors’ Electronic Data Systems Corporation unit, IBM, and Zenith. The contract was declared invalid due to the way new government contract procedures were implemented, and CompuAdd came out of rebidding among the losers.

In December of 1991, however, CompuAdd won a $53 million contract from Sears, Roebuck and Co. to supply 28,000 computerized cash registers, beating out such industry giants as IBM and NCR Corporation. The terminals were assembled by CompuAdd using the 386SX microprocessor made by Intel Corporation. The company’s speed and agility impressed Sears’ officials when CompuAdd was able to demonstrate a working prototype within days of submitting a proposal.

By the beginning of 1992, CompuAdd had 1,500 employees—and not one of them was a secretary. Hayden, by now listed as one of the wealthiest men in Texas, still marked his own calendar. In March of that year, Hayden spun off another chunk of the company in order to keep it streamlined. CompuAdd Information Systems was created as a separate entity specializing in custom programming for large companies. The new firm’s first customer was Sears, which needed ongoing software support for its new point-of-sale terminals. Hayden also adjusted the mother company’s corporate structure again, dividing it into two autonomous divisions. The Retail/International Division, headed by former Texas Instruments executive James Moore, took control of CompuAdd’s stores and its overseas sales operations. John Conn, hired from Harris Corporation, became general manager of the Systems and Technology Division, in charge of government and large corporate accounts. The positions of president and chief operating officer, formerly held by Edward Thomas, were eliminated altogether.

Although CompuAdd’s growth in its first ten years of operation could be described as spectacular, it did not match that of cross-town rival Dell Computer Corporation during the same period. As Hayden admitted to Stephanie Anderson Forest of Business Week, this was partly due to his reluctance to give up control of the company. After going public in 1988, Dell saw its sales balloon to nearly $2 billion a year by 1992. CompuAdd, on the other hand, relied completely on cash flow and bank loans to pay for the cost of its expansion. As Hayden told Forest in early 1993: “I don’t even have a savings account. All the money I have is sitting in this company.” Dell’s lead over CompuAdd was especially evident in the area of international sales. While 36 percent of Dell’s business was generated overseas by 1992, sales abroad were bringing in only about ten percent of CompuAdd’s revenue.

CompuAdd launched its first national television advertising campaign in the summer of 1992 in an effort to achieve better public name recognition. Price wars and fierce competition among computer stores, especially superstores like CompUSA, led Hayden to rethink his planned retail expansion. Instead of surging ahead, CompuAdd began scaling back its retail operations, getting out of some markets entirely. There were also plans to convert several stores into CompUSA-like superstores. For 1992, the company’s sales grew only about three percent to $524 million, far short of the billion dollar mark that the Air Force contract had led Hayden to believe would be cracked. In March of 1993, CompuAdd announced it was fleeing the retail arena altogether, and would concentrate solely on direct sales in the future. The closures meant the elimination of about 600 jobs. The task of closing all of the retail stores created a host of complications, especially squabbles with landlords. Pressure from them and from other creditors forced CompuAdd to seek Chapter 11 bankruptcy protection in June of 1993 to smooth its withdrawal from retail sales and protect its viable mail-order business.

Bankruptcy did not slow the company’s product development efforts, however. In June 1993, CompuAdd also launched a new line of Centura personal computers that completely supplanted its existing PC line.

CompuAdd emerged from bankruptcy in November of 1993. As part of the process, 75 percent ownership of the company was transferred to unsecured creditors, with Hayden retaining 20 percent and the remainder held for employees. Within a few weeks of CompuAdd’s emergence from bankruptcy, Hayden announced his resignation from the company and went on to form three start-up ventures. The chief executive officer position was taken over by Richard Krause, the company’s president and chief operating officer. Immediately, CompuAdd began looking for a buyer to assume controlling interest in the company. In July of 1994, CompuAdd announced that it would be bought by Dimeling, Schrieber & Park, a private Philadelphia investment company that specialized in purchasing companies emerging from bankruptcy. The acquisition, which included a significant infusion of capital and a new lending group, was completed in September of 1994.

Throughout the bankruptcy and shift in ownership, the company continued rolling out new products. Eleven new multimedia computer models were unveiled; a new line of Pentium-based PCs was introduced; and the line of notebook computers was expanded. Whether CompuAdd’s new ownership can restore the company’s momentum remained unclear in the mid-1990s, but CompuAdd’s reputation for customer service and selling quality products at reasonable prices remained intact.