CompuCom Systems, Inc.

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CompuCom Systems, Inc.

10100 North Central Expressway
Dallas, Texas 75231
U.S.A.
(214) 265-3600
Fax: (214) 265-5275

Public Company
Incorporated: 1981 as CytoSystems Corporation
Employees: 1,541
Sales: $1.01 billion
Stock Exchanges: NASDAQ
SICs: 5045 Computers, Peripherals & Software; 7373 Computer Integrated Systems Design

CompuCom Systems, Inc. is a leading personal computer (PC) dealer and computer network integration company. Serving as an authorized dealer of major PC lines, CompuCom markets and sells microcomputer hardware, software, and peripheral products to corporate customers through a direct sales force based in over 40 metropolitan locations. In addition to providing multivendor computing system solutions for corporate needs, CompuCom offers its customers a range of services including custom configuration of PC systems as well as network design, installation, training, and support services. Approximately two-thirds of CompuCom’s common stock is owned by Safeguard Scientifics, Inc., a technology management company.

CompuCom Systems, Inc. traces its roots to the 1981 formation of CytoSystems Corporation, a Michigan company founded by Stanley Sternberg to capitalize on what was then a growing interest in the automation of manufacturing operations in the automobile and electronics industries. In 1983, the company changed its name to Machine Vision International Corporation (MVI), which principally served Detroit automakers, focusing its operations on the production of automated inspection guidance systems for industrial robots, which helped machines “see” in order to interpret data and control a manufacturing activity.

By the time MVI went public in the fall of 1985, the company was one of the largest machine vision operations in the United States with over $9 million in sales and nearly 200 employees. During this time, Safeguard Scientifics began investing several million dollars in MVI stock. However, Safeguard soon lost millions on the machine vision company, when MVI was forced to cut back on its product line, due to technical problems in the development of its machines and reduced orders from automakers, including General Motors, which accounted for half of MVI’s revenues. MVI lost $13.6 million on its operations in 1986, and industry analysts lost faith in near-term profitability for machine vision companies, suggesting that initial expectations for automation were too high and that difficulties in integrating robotic systems into factories had been underestimated.

In 1986, Safeguard Scientifics’ chairperson Warren V. Musser was named chairperson of MVI. The following year, Safeguard Scientifics—which had helped finance the development of Novell Inc. earlier in the decade, transforming that firm from a struggling microcomputer manufacturer into a profitable local area network (LAN) software company—financed MVI’s entrance into the business of selling microcomputers to corporate customers. Utilizing $15 million provided by Safeguard Scientifics, in July 1987, MVI acquired TriStar Data Systems, Inc., a regional computer reseller based in New Jersey, and purchased the computer retailer Office Automation, Inc. With the pair of acquisitions, MVI began marketing and selling branded microcomputer systems, including models manufactured by IBM, Compaq Computer Corporation, and Hewlett-Packard Company.

MVI’s entrance into computer retailing marked the beginning of its exit from the machine-vision market. By August 1987, Stanley Sternberg had started a new, four-person operation in Ann Arbor, Michigan, called Machine Vision International Inc., which began work on a NASA contract to develop guidance systems for space robots. In October 1987, the original MVI formed the holding company CompuCom Systems, Inc. and relocated its offices to Cherry Hill, New Jersey, while retaining a Michigan machine vision division with a much-reduced payroll for fewer than 30 workers.

By December 1987, a shakeout in the machine vision industry was underway. While less than half the nation’s machine vision companies were profitable, CompuCom, due to its diversified interests, earned $209,000 in 1987, the first time in the company’s history that it showed a profit. In early 1988, CompuCom officially bowed out of the machine vision field, having been transformed into a substantially larger computer retailer.

In June of that year, CompuCom launched a national expansion strategy, purchasing the Dallas-based CompuShop Inc., a computer retailer and former CompuCom competitor, from Bell Atlantic Corporation. The $20.3 million acquisition helped create one of the computer retailing industry’s largest outbound sales forces engaged in direct sales to corporate customers and gave CompuCom a national presence with 25 sales offices throughout the country.

After bringing CompuShop’s operation into its fold, CompuCom relocated its headquarters to Dallas, and James Dixon, former CompuShop president, was named president of CompuCom, succeeding Ira Lubert, who then became chairperson. By the end of 1988, Safeguard Scientifics and Warren Musser controlled 46 percent of the company, and CompuCom’s earnings had grown to $1.5 million on sales of $159 million. In 1989, Avery More succeeded Dixon as president of Compu-Com. That year, Safeguard Scientifics increased its interest in CompuCom to 66 percent while CompuCom’s revenues climbed from $159 million to $270 million, and earnings inched up to $1.6 million.

CompuCom entered the 1990s with three self-declared strengths: an established base of corporate clients, products offered on an “a la carte” basis,” and tight management controls over expenses. In April 1990, CompuCom acquired Data Access Systems Inc. (DASI), a Pennsylvania-based computer reseller and a former franchisee of Intelligent Electronics with $10 million in annual sales, which like CompuCom’s revenues, came largely from corporate clients. Having successfully absorbed the larger CompuShop without losing profitability, CompuCom announced an agreement to acquire Computer Factory Inc., a one-time leading microcomputer retail chain with 63 outlets that had fallen on tough financial times. By the end of 1990, CompuCom was one of the fastest growing microcomputer dealers in the country and had more than doubled its earnings to $3.6 million on sales of $343 million.

In April 1991, CompuCom completed its $38 million acquisition of Computer Factory, which had prepared itself for the deal by reducing its number of retail outlets to 24, confined largely to the northeastern United States where CompuCom was seeking an expanded, direct sales presence. By the end of May, the Computer Factory chain had been pared down to 14 outlets, and Computer Factory’s direct sales staff was integrated into CompuCom’s corporate sales force.

In July of that year, CompuCom acquired the PC sales business of Photo & Sound Company, a west coast consumer electronics chain serving audio-visual and multimedia markets. The $9.4 million acquisition gave CompuCom—which had become the fifth largest PC dealer in the country with 37 offices—an expanded presence for its corporate sales in the western United States as well as a West Coast distribution facility.

Initially, CompuCom planned to use Computer Factory stores to explore new markets, but within six months of the acquisition that strategy changed. While the Computer Factory’s corporate accounts were easily integrated into CompuCom’s operations, its home computer market did not fit CompuCom’s corporate-customer direct-sales strategy, particularly since the home computer sales market was increasingly dominated by mail order businesses and discount superstores. As a result, in November 1991, CompuCom backed away from the consumer retail market by first consolidating the former chain’s remaining outlets into six New York locations and then discontinuing consumer operations altogether.

CompuCom’s quick departure from the consumer market was welcomed by industry analysts, who had lauded the company for maintaining double-digit earnings in the face of a downswing in computer reselling. During 1991, CompuCom signed its first dealer agreement with Apple Computer Corporation, adding Apple computer systems to its multivendor product line of IBM, Compaq, and Hewlett-Packard systems. CompuCom’s 1991 acquisitions, which had significantly expanded the company’s direct sales force in northeastern and western states, boosted annual revenues more than 50 percent, while earnings climbed to $5 million on sales of $528 million.

In April 1992, CompuCom entered the computer systems integration and computer related services market with the $2.7 million acquisition of the assets of CompuServe Systems Integration Group Southwest (formerly known as MicroSolutions) and CompuServe’s LAN training facility in Dallas. CompuCom returned the “MicroSolutions” name to the Dallas-based computer systems integration business—which was a regional leader in providing technical network integration services for major corporations—and announced that MicroSolutions would serve as the company’s first link in building a national network integration business.

That year, CompuCom began benefitting from a computer price war initiated by Compaq, which provided the brand name computer dealer with an opportunity to steal market share from clone retailers. And while some of its competitors were chalking up disappointing results, CompuCom—which had become Safeguard Scientifics’ largest business unit, accounting for 80 percent of its revenues—earned $7.2 million on sales of $713 million as revenues rose 35 percent and net income grew by 45 percent.

Between 1992 and 1993, CompuCom enhanced its distribution operations to allow for low-cost, one-day delivery to most locations. The company expanded its West Coast distribution center in Stockton, California, and, the following year, relocated its eastern distribution center from Paulsboro, New Jersey, to a larger, modernized facility in nearby Woolwich, New Jersey.

In an effort to enhance customer support and further improve order processing, CompuCom also began a three-year program to centralize sales administration, support, and order processing activities—previously done by various offices throughout the country—at a new CompuCom Customer Center in Dallas. In 1993 CompuCom relocated its administrative offices to a new corporate headquarters, a six-story commercial office building in Dallas, which doubled as a showcase for the company’s networking-based systems.

By 1993, CompuCom’s business was booming as a result of its series of strategic acquisitions, while its bottom line was improving due to its four years of cost-control programs. In August of that year, Ed Anderson, a well-known computer industry veteran and former president of ComputerLand Corporation, was named chief operating officer of CompuCom. The management move, representing a step towards placing Anderson at the helm of the company the following year, was expected to help improve the company’s following on Wall Street, which had been slow to actively monitor the company’s progress because of Safeguard Scientifics large interest in CompuCom.

During 1993, CompuCom increased the number of its office locations to 41, and for the third consecutive year Fortune magazine listed the company among its “100 Fastest-Growing Companies.” As demand for branded PCs increased, CompuCom’s annual sales surged $300 million during the year, with revenues climbing 42 percent to more than $1 billion and earnings increasing to $11.4 million.

In January 1994, Anderson became president and chief executive, succeeding More, who remained a company director while moving on to form a new company, Eureka Ventures, a venture-capital and merchant banking firm. Eureka Ventures then agreed to acquire CompuCom’s network training division and a 50 percent interest in CompuCom’s PC Parts Express subsidiary, a computer parts distribution firm. Also during this time, the company sold off its government sales division, as it continued focusing on the expansion of its network support services for corporate customers.

In early 1994, CompuCom’s financial position was bolstered by its expansion of customer credit lines to $150 million and by selling Safeguard Scientifics an additional $20 million in convertible preferred stock. During the same period, CompuCom’s common stock—having risen from a first quarter 1993 high of $3.50 to $4.56 by the end of that year—continued to climb on the open market, and its listed price soared to a first quarter 1994 high of $7.25.

As CompuCom entered the mid-1990s, a period of increasing industry consolidation, the company planned to continue its policy of growth through acquisitions, while Safeguard Scientifics continued to maintain its role as the financial guardian. In response to a corporate trend of outsourcing computer and integration services, CompuCom planned further expansion of its network support services, through both acquisitions of regional service providers as well as internal growth. CompuCom appeared well positioned to gain ground in its market niche of selling brand-name computer products to corporations. The company was also poised to take advantage of price reductions by major computer manufacturers battling for business with clone makers and the increasing number of corporations abandoning mainframe and minicomputers systems in favor of networked personal computers.