Norstan, Inc.

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Norstan, Inc.

605 North Highway 169
Twelfth Floor
Plymouth, Minnesota 55441
U.S.A.
(612) 513-4540
Fax: (612) 513-4537

Public Company
Incorporated: 1961 as Norstan Research and Development Company
Employees: 3,100
Sales: $323 million (1996)
Stock Exchanges: NASDAQ
SICs: 5065 Electronic Parts and Equipment, Not Elsewhere Classified; 5046 Commercial Equipment, Not Elsewhere Classified

Norstan, Inc. has gained a strong position as a “one-stop” provider of communications solutions in the United States and Canada. Norstan offers consulting, sales, and support services for best-of-breed telephone systems, videoconferencing equipment, long-distance services, call transaction processing, intelligent cabling services, and network integration. Increasingly, Norstan’s focus has been on becoming a full-service communications systems integrator of voice, video, data, and image communications solutions. Norstan has formed strategic alliances and distributor relationships with many of the top makers of communications equipment and software, including Siemens ROLM, Aspect Telecommunications, Chipcom, Compression Labs Inc., Lotus, Microsoft, Novell, Sprint, Northern Telecom, Synoptics, and others. With revenues expected to reach $323 million in 1996, sales of telephone systems account for about one-third of Norstan’s business, and recurring revenues from services provide another 32 percent. By the year 2000, however, the company expected its integration and cabling services, accounting for about 9 percent of its revenues in the mid-1990s, to grow to about 33 percent of its business. In 1995, Norstan’s clients numbered more than 13,000, principally in the West, Southwest, and Midwest regions.

First Steps

Although Norstan was founded as Norstan Research and Development Company in Minnesota in 1961, it operated as a shell company until it was purchased by Sydney R. Cohen in 1970. At the same time, Cohen bought Summit Gear Company, a maker of gears, gear trains, and other precision parts for the aerospace and defense industries. For the next several years, the company achieved modest sales and earnings, posting $1.8 million in revenues by 1973 and a net income of $11,000. During this initial period, Norstan attempted to enter the pollution control business, acquiring the marketing and manufacturing rights to the Westcreek Afterburner system for burning animal wastes. But it was another early venture that would drive the company’s future direction and growth.

Telephone equipment was controlled entirely by the Bell System until the 1960s, when it lost its monopoly. In 1973, Norstan co-founder Paul Baszucki, together with several partners in the company, formed a wholly owned subsidiary, Norstan Communications Systems, Inc. (NCS), with the intention of entering the nascent telecommunications equipment and service industry. Norstan secured a distributor agreement with Siemens ROLM of Germany for ROLM’s private-branch exchange (PBX) equipment. The PBX computer managed private telephone networks and featured corporate switchboard functions and cost-monitoring systems.

NCS recorded early successes, and by 1975 it was handling 75 percent of the private telephone networks operating in Norstan’s Minneapolis-St. Paul base. The acquisition of Allcom of Minnesota, a distributor of PBX systems, in 1975 expanded the company’s reach through Minnesota and into other mid western states. Norstan went public, and revenues rose to $2.8 million in 1975. The following year, Norstan signed an exclusive distribution agreement with ROLM, becoming the sole reseller of ROLM equipment in its territory. By 1977, with customers including the operation of Harley Davidson’s toll-free Hog line, Norstan’s sales neared $5 million. In that year, Norstan discontinued its Westcreek operations. NCS and Allcom were merged together, and Norstan changed its name to Norstan, Inc. Two years later, Norstan reorganized as a holding company for its telecommunications and Summit Gear subsidiaries.

The PBX sales of the 1970s and early 1980s continued to drive the company’s growth. Norstan’s agreements with ROLM expanded to include most of the Midwest. Norstan typically entered smaller cities, avoiding the higher competition and costs of larger cities, such as Chicago. By 1979, Norstan’s sales topped $10 million; two years later, revenues reached $25 million, earning a $1.8 million net profit. By then, Norstan was preparing new additions to its portfolio.

Becoming a $100 Million Company

In 1981, Norstan formed its Norstan Financial Corp. subsidiary to assist in the lease financing of its PBX sales. At the same time, the company attempted to enter the young information processing market, forming a new subsidiary, Norstan Information Systems. Norstan posted a second public offering of 1.1 million shares at $14 per share to finance these ventures. In the meantime, sales and service contracts for its PBX products continued to increase revenues.

The deregulation of the telephone industry in the 1980s added fuel to Norstan’s growth. With traditional Bell leasing arrangements coming to an end, large numbers of corporations turned from leasing to purchasing the equipment for their private telephone networks. Meanwhile, technology had outstripped the Bell System’s analog technology, and digital systems, such as ROLM’s products, became the PBXs of choice. The resulting boom in PBX purchases lasted into the mid-1980s, with hundreds of start-ups, both manufacturers and distributors, competing for market share.

By the mid-1980s, however, the PBX boom had faded, and many of the start-up manufacturers and distributors disappeared. Several factors were responsible for these companies’ failures. Manufacturers tended to sign distribution agreements with several vendors in the same region. This competition forced vendors to cut prices, usually below cost. The distributors expected to make up these negative margins by selling support services at inflated prices. An array of third-party service providers sprang up, however, undercutting the distributors’ service charges. When the PBX market stalled later in the 1980s, most of the distributors and many manufacturers went out of business.

Norstan, however, prospered during this period, with sales rising to $54 million in 1985 and to $106 million by 1989. Important for Norstan’s growth was the company’s relationship with ROLM, which provided for not only steady increases in territory, but also exclusive distribution agreements in each new area, a relationship that continued despite ROLM’s several changes in ownership. During the 1980s, Norstan continued to specialize in ROLM products, selling these more expensive PBXs at a profit and acting as the sole independent distributor of ROLM PBXs in Iowa, Michigan, Minnesota, Nebraska, and the Dakotas. Norstan added new territories with a number of acquisitions, including Electronic Engineering Co. in 1985, which brought Norstan into Kentucky and Ohio, and Communications Consultants, Inc. in 1988, which brought the company to Arizona and New Mexico. In that year, Norstan also signed an exclusive contract with ROLM as the reseller of refurbished ROLM equipment, which was becoming an increasingly important market.

Equally important for Norstan’s growth was its growing reputation as a strong, and ethical, service provider. With customer satisfaction and retention levels running above 90 percent, Norstan was able to fight off attempts of third-party providers to take away the company’s service contracts. As Norstan’s installed base grew, these service contracts provided a steady source of revenue, even as the end of the PBX boom put many of Norstan’s competitors out of business. By the late 1980s, Norstan’s focus was changing. Whereas sales of ROLM PBXs had accounted for 50 percent or more of the company’s revenues in the first half of the decade, by 1990, more than two-thirds of Norstan’s revenues came from service, support, and upgrades. The company’s acquisition of Solsound Industries for $5.5 million in 1986 further strengthened its communication capabilities.

Norstan was less fortunate in its attempts to diversify beyond communications. In 1985 the company formed a new subsidiary, Norstan Software Systems, in an attempt to develop proprietary software systems for the IBM PC-type computer market. Yet combined sales with Norstan Information Systems were only $12 million for 1985, and, after posting a loss of $1.5 million in 1986, Norstan Information Systems was discontinued. Meanwhile, the company’s Summit Gear subsidiary was also in trouble, with sales stagnating around $8 million per year during the mid-1980s and losses mounting to $2.6 million in 1986, causing the first net loss in Norstan’s history. In 1987, Norstan sold Summit Gear for $11.4 million and dedicated its focus to telecommunications.

Positioning for the 1990s

Within the first five years of the new decade, Norstan, under leadership of CEO Paul Baszucki, would reinvent itself from essentially a reseller of a single product to a vendor of diversified telecommunications solutions. At the start of the decade, Norstan worked with about 8,000 clients, including major corporations such as Land O’Lakes and First Interstate Bank of Arizona, and many others with long-term relationships with the company. Norstan moved to offer a broader range of products and services, adding the products of Aspect, a San Jose-based company created by former employees of ROLM, long-distance services through Sprint, and other products, such as cabling and voice messaging, that would allow it to become a provider of vertical integration solutions, from telephone equipment to personal computer networks.

Company Perspectives

The single source partner for voice, video, imaging and data communication solutions.

The expansion of its product portfolio came at the right time, as consolidation of the PBX industry was rapidly limiting Norstan’s potential growth in that area. In 1991, agreements with ROLM brought Norstan into eight more states, bringing the number of states in which Norstan operated to a total of 18. The acquisition of ROLM offices from Centel and of Tel Plus Communications, both in 1992, expanded Norstan’s territories in the Midwest, South, and Southwest. Consolidation of the industry, however, made expansion into other territories in the United States unlikely. In an important move, Norstan purchased IBM’s struggling ROLM subsidiary in Canada in 1992. In that year, as well, the company won distribution rights for the videoconferencing products made by Compression Labs Inc., while becoming a direct reseller of Sprint network products and signing distribution agreements for Octel Communications voice information processing equipment and Siemens HCM 200 PBX equipment.

Revenues soared, from $142 million in 1992 to nearly $196 million in 1993. Earnings could not keep pace, however, because of the company’s aggressive expansion and losses from its Canadian operations. Nevertheless, net income grew to $5.1 million for 1993, and the Canadian subsidiary turned a profit by 1995.

Further agreements added Novell, Microsoft, Intel, Hewlett Packard, and Lotus products to Norstan’s growing capacity. In 1995, Norstan strengthened its consulting arm with the acquisition of Toronto-based Renaissance Connects, which specialized in consulting, design, and engineering of wide-area and local-area networks (WANs and LANs). Outsourcing, by which Norstan contracted to design, install, and staff a corporation’s communications systems, was also a rising source of revenue, boosted by a five-year, $12 million contract with British Petroleum, which included the purchase of their physical plant, to provide telecommunications over British Petroleum’s 10,000-line PBX system. Meanwhile, sales of PBX systems began to pick up again, after a ten-year lull, driven by corporations moving to replace their outdated equipment.

Yet Norstan’s strongest growth was expected to come from several newly developing areas, including videoconferencing and networking and, especially, communication systems integration. Both markets were expected to take off in the latter half of the 1990s, and Norstan was positioned well to play a major role in the coming boom. Norstan made a strategic move in 1995 with the appointment of Max Mayer, former vice-president and CEO with Digital Equipment Corp.’s computer systems division, as Norstan’s president, bringing in Mayer’s experience with electronic communications. With 1995 revenues reaching $285 million, 1996 revenues forecasted to rise to $332 million, and forecasts calling for the company to top $500 million by 1998, Norstan was poised not only to remain one of the largest independent telecommunications providers in the United States, but also to become a major player in the communications integration industry.

Principal Subsidiaries

Norstan Communications, Inc.; Norstan Canada Inc.; Norstan Network Services, Inc.; Norstan Financial Services, Inc.; ROLM Resale Services; Norstan Resale Services; Norstan Integration Services.