Westcon Group, Inc.

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Westcon Group, Inc.

520 White Plains Road, Suite 100
Tarrytown, New York 10591-5167
U.S.A.
Telephone: (914) 829-7000
Fax: (914) 829-7137
Web site: http://www.westcongroup.com

Private Company Incorporated: 1985
Employees: 1,000
Sales: $1.85 billion (2004)
NAIC: 541512 Computer Systems Design Services

Majority owned by South Africa-based Datatec Ltd., Westcon Group, Inc. is a global channel provider of networking technology. Through its divisions, Westcon, Comstor, and Voda One, the company offers products and services for convergence technology, remote access, Internet and e-business, virtual private networks, videoconferencing, wireless connectivity, and network security. With its headquarters located in Tarrytown, New York, the company does business through three divisions: Comstor, Westcon, and Voda One, specialty distributors for major manufacturers. The largest is Comstor, devoted primarily to selling Cisco products to some 45 countries around the world. Other vendors include Adtran, Inc., Proxim Corporation, RSA Security, Inc., and Symbol Technologies. The Westcon division focuses on the sale of Nortel Networks and security products, and its portfolio includes Check Point Software Technologies Ltd., Extreme Networks, Inc., Nokia Networks, Symantec Corporation, 3Com Corporation, and many others. The division serves some 65 countries. Westcon Group's Voda One division is primarily focused on distributing products manufactured by Avaya; the division also handles vendors such as MCK Communications, Inc., NICE systems, Plantronics, Inc., and Spectralink Corporation, among others, selling to customers in the United States.

Founding the Company in the Mid-1990s

Westcon was founded in June 1985 by Thomas Dolan, Philip Raffiani, and Roman Michalowski. Dolan, a former Marine with an engineering degree from Tulane University, was the manager of systems development at cosmetic giant Avon Products, Inc. He joined forces with Raffiani, an expert in IBM mainframe systems, and Michalowski to become involved in the fast-growing world of personal computing networking. It was a time of great flux, as companies began to realize the potential of linking personal computers into a local area network (LAN), a drastic change from the mainframe computer model that companies had been following for decades. Dolan recognized that because there was little standardization between systems, major businesses would need to find a way to communicate with one another electronically. Westcon was created to serve the LAN market, and started out as just a four-person operation located in Eastchester, New York. Michalowski served as chief executive officer, with Dolan in charge of worldwide sales and marketing and Raffiani as general manager.

Westcon was an early believer in the potential of Ethernet run over the twisted pair wiring of a telephone system rather than coaxial cable. Using cable, a LAN was limited in terms of distance, a problem not inherent with twisted pairs. Westcon's founders were so convinced that Ethernet over twisted pairs would take off that they mortgaged their homes to purchase $1 million of SynOptics products. With SynOptics products stored throughout its headquarters, the small Westcon staff quickly began moving the inventory by phone. Westcon became one of the first companies, if not the first, to sign a distribution agreement with SynOptics. Westcon was one of a number of small distributors that changed the way computer products were sold, a shift away from first-tier, authorized vendors to aggressive second-tier value-added distributors willing to take chances. More than just selling products, they were willing to offer technical support and training, as well as provide marketing and even financing, which helped many small businesses to upgrade their technology infrastructures, leading to increased growth.

The next major product to impact the evolution of Westcon was the router, which grew in importance with the deregulation of telephone service in the United States that led to lower long distance service prices. Dolan told CRN in 2002, "We recognized that meant people would be much more interested in highspeed connections from office to branch and from branch to home. We threw everything we had into getting into routers and the router marketplace. And that paid off very well for us."

Bolstering Customer Service in the Early 1990s

Westcon provided product training from the start, becoming one of the first authorized Novell Inc. training centers. Over the next several years the company added certified training programs for products manufactured by SynOptics, Eicon Technologies, and Lotus Development Corp., as well as training for Microsoft applications. Training was an important component in the company's continued success, even though it accounted for just 10 percent of Westcon's business. In the early 1990s, Westcon also began to differentiate itself from the competition by bolstering its service capabilities, helping customers to find better ways to solve problems—especially in high-end networking. In this way, potential customers knew that they would receive more than just a product when they bought from Westcon. The company also tried to narrow its focus by concentrating on a limited number of product lines—such as SynOptics (which became Bay Networks Inc. and was later bought by Nortel Networks)—which it could then support in depth.

By 1995 the company was doing more than $150 million in annual sales and ready to embark on a major growth spurt. Over the next five years, revenues would grow tenfold and the company would extend its reach around the world. In 1995 the company took steps to expand its business to the West Coast. Soon it was setting its sights overseas. After already setting up an operation in Canada, Westcon in 1996 established an Australian subsidiary to sell its full line of products in the Australian market. Also in 1996, Westcon Inc. became known as Westcon Group, Inc.

Westcon Group reached a watershed moment in 1997. By this stage, the company had enjoyed success by primarily distributing and supporting SynOptics networking products, generating around $190 million in sales. The management team now considered whether it should continue to concentrate on networking or broaden its purview. The decision was to remain committed to networking products, albeit on a global basis. It would turn out to be a wise choice. In order to expand its presence worldwide, Westcon Group put itself on the block and began looking for a partner, considering a dozen possible suitors, most of them U.S.-based, before settling on Datatec, a South African international networking and distribution company founded in 1986. In June 1998 Datatec acquired a 92.5 percent interest in Westcon Group in a deal valued at $160 million. For Datatec, the Westcon Group acquisition gave it entry to the largest IT market in the world, which was imperative if it was to become a truly global concern. Westcon Group, on the other hand, gained access to the kind of capital needed to nurture its own global ambitions. Rather than pursuing the risky strategy of building operations from scratch, Westcon Group could now buy into new markets and pick up established vendor relationships.

With Datatec's backing, Westcon was able to upgrade MIS systems in the United States and Canada, move into new offices in Tarrytown, New York, and enter new product lines through acquisitions. Given the speed at which the industry was changing, Westcon Group targeted companies that offered a similar infrastructure in order to effect a necessarily prompt transition. Through a pair of acquisitions, Westcon Group became a specialty distributor of products made by Cisco Systems Inc. In September 1998 RBR Group Limited—distributor of Cisco products in the United Kingdom—was added, followed by the August 1999, $95 million acquisition of Comstor.net, which distributed Cisco products in the United States. Comstor, founded in Chantilly, Virginia, in 1986 and acquired by GE Capital IT Solutions ten years later, did $500 million in annual sales. As a result of these transactions, Westcon was a global company doing $1.5 billion in business, divided between two divisions. More important, it represented the four networking giants, Cisco, Nortel, Lucent Technologies, and 3Com Corp. The company's growth also was enhanced when these major vendors elected to cut down on their global distribution channels.

Westcon Group's Voda One division grew out of a pair of acquisitions in 2000: Omaha, Nebraska-based Inacom Communications, Inc., a subsidiary of bankrupt Inacom Corp., and Pittsburgh, Pennsylvania-based CCA Technologies, Inc., both of which distributed Lucent Technologies voice products. These additions made Westcon the largest Lucent voice distributor in the industry with some $225 million in annual sales. A few months later, Lucent spun off the voice business, which took on the name Avaya, Inc. All told, Westcon Group acquisitions made since its sale to Datatec provided diversity as the company moved into areas complementing the networking business, such as security and voice-over-IP (internet protocol). As a result of representing both data and voice products, Westcon Group also would be well positioned to become involved in convergence, the concept of carrying both data and voice over a network, as well as such emerging technologies as optical networking and storage. The key, as had been the case from the beginning, would be to add value to the equation.

Challenging Conditions in the New Century

Westcon Group underwent some management changes at the start of the new century. In November 2000, Michalowski stepped down as CEO, turning over the reins to Dolan, who in 2001 would be succeeded by Alan Marc Smith. A former SynOptics executive, Smith joined Westcon Group in February 1997 as director of business development and planning. A year later, he became the company's chief executive officer. Before resigning as CEO, Dolan prepared to take Westcon public in 2001 but the initial public offering (IPO) of stock was pulled as the economy began to falter. Management believed that the market was not assigning a proper value to the company, which had sufficient cash in hand and was a profitable concern. The decision was to wait until conditions improved.

Company Perspectives:

WestconGroup is a pioneer in the networking industry, with a heritage of providing networking solutions since 1985.

At first, Westcon Group was much less affected by the poor economy than other technology companies. Revenues topped the $2 billion mark in 2001, and although there was a reduction in headcount, it was achieved mostly through attrition. With the tech sector continuing to struggle, the next two years would see a drop in sales, to $1.69 billion in 2002 and $1.65 billion in 2003, before the company began to enjoy a noticeable rebound.

Despite a downturn in business, Westcon Group remained strong enough to take advantage of conditions to grow by way of acquisition. Early in 2002 it reached a tentative agreement to buy Netherlands-based Landis Group N.V., a deal that would strengthen Westcon's position in Europe, adding locations in Austria, Belgium, Denmark, France, Germany, The Netherlands, Norway, Spain, Sweden, and the United Kingdom. By March, however, after two months of due diligence, Westcon Group announced that it was pulling out of the deal. A month later the acquisition was again in play, but this time Landis's U.K. assets were not included, since Westcon Group already possessed a strong operation in the U.K. market.

In 2004 Westcon Group took steps to become something of a one-stop shop for networking and convergence, which management believed was the next revolution in networking. Westcon Group introduced the Convergence Edge program to help solution providers sell convergence by providing training, services, marketing, and sales support of IP telephony solutions. A number of symposiums were then held around the country to promote the company's convergence services.

In 2004, as sales picked up, Westcon Group also revived its plan to go public, but it would do so without Smith at its head. He resigned in May 2004, replaced by Dolan. Both Smith and the company portrayed his departure as the completion of a task Smith had undertaken to grow the company to a global business. But according to Computer Reseller News, a "source close to Westcon Group said Smith may have left because he wanted to have more control in the company." Whatever the truth of the matter, his leaving was not expected to have any impact on the company's planned $115 million IPO. Some of the proceeds were to be used to pay off debts to Datatec, with the rest earmarked for working capital and general corporate purposes, such as additional acquisitions and the expansion of existing operations. By the autumn of 2004 the company had not yet pulled the trigger on the offering, which had been expected to take place in the first half of the year; there was every reason to believe, however, that the IPO would occur when conditions proved favorable.