Computerland Corp. Business Information, Profile, and History

History of Computerland Corp.

ComputerLand Corp., a wholly owned subsidiary of Merisel, Inc. is a leading retailer of computer systems and related products. The company distributes computer products from major microcomputer manufacturers to a network of approximately 750 independently owned computer outlets in the United States. The principal computer manufacturers, including IBM, Apple, Compaq, Hewlett-Packard, and others, have historically required retailers to purchase their products from selected affiliated distributors such as ComputerLand rather than from wholesalers. Despite a troubled history, ComputerLand currently operates as a profitable subsidiary of Merisel.

Computerland was created in 1976 just as the market for personal computers was beginning to take off. The company's founder, William H. Millard, was a rags-to-riches entrepreneur. Millard was raised in Oakland, California, the oldest of six children from a blue-collar family. While growing up, Millard delivered newspapers until he was a high school senior. He also worked as a drugstore clerk and held several summer jobs to earn additional money for his family. At parochial school, he developed an interest in science, technology, and mathematics. Upon graduating from high school, Millard held several odd jobs, including a Southern Pacific switchman, an assembly line worker, a truck driver, and a welder's helper. He attended the University of San Francisco but a lack of funds caused him to drop out after three semesters. He then became a loan officer for a finance company in Oakland, eventually becoming branch manager.

In 1958, Millard moved into computer operations after the finance company established an electronic data-processing facility in Los Angeles to facilitate transactions from branch offices across the country. Millard's first experience with a computer was the Univac I, a huge piece of machinery the size of a room and with a tangled array of vacuum tubes and wires that would eventually be replaced by the silicon chip. Millard's subsequent experience as programmer, systems analyst, and supervisor of data processing earned him jobs throughout the 1960s overseeing computerization projects for county governments in Oakland and San Francisco. He also briefly worked as an IBM salesman.

Millard took advantage of this experience in 1969, forming a company called Systems Dynamics to sell custom software to businesses using IBM computers. Unfortunately, the company failed after three years leaving Millard bankrupt and $25,000 in debt. Another bank loan enabled him to form a software consulting business, Information Management Science Associates, Inc., or IMS. During this time, Millard began experimenting with the relatively new microprocessor technology, and in 1975 he invented one of the first personal computers, the IMSAI 8080. To market the computer, Millard, his wife, and their three children ran a rudimentary mail order business from their kitchen. This procedure included hand sorting the microprocessor parts from muffin tins to plastic bags and, with assembly and soldering instructions, selling them to hobbyists for $399. The price was later raised to $499.

In 1976, when personal computers began to appear in stores, IMS attempted to produce and sell the IMSAI 8080 as a finished product. For a brief period, the IMSAI 8080 stood at the forefront of the PC revolution, but problems with production and quality ultimately doomed the venture. Similar homemade products--including the Apple computer, made by Steve Jobs and Stephen Wozniak out of a garage--far surpassed IMS in innovation and quality. In 1979, after amassing debts totalling $1.9 million, the IMSAI manufacturing subsidiary of the parent firm IMS Associates went bankrupt. Millard's debt's included a $250,000 promissory note owed to the Marriner venture capital group, which had provided funds to keep the 8080 computer afloat.

Despite IMSAI's collapse, Millard still saw an opportunity to sell computers manufactured by others. In September 1976, he formed Computer Shack with $10,000. The company rapidly became a profitable franchise chain, selling personal computers to hobbyists and small businesses. A legal challenge from Tandy, owner of Radio Shack, compelled Millard to change the company's name to Computerland. Millard aggressively set up franchises in malls and downtown areas throughout the country. As a result, the company went from 24 stores and $1.5 million in sales in 1977 to 147 stores and $75 million in sales in 1980. Computerland's profits exploded after IBM introduced their PC in the early 1980s and the corporate giant decided to sell the product solely through IBM stores, Sears Business Systems Centers, and Computerland. Company sales skyrocketed from $151 million in 1981 to $1.4 billion in 1984, making ComputerLand the world's largest chain of retail stores for computers. By 1985, the company operated more than 820 outlets in 24 countries, including China.

Although Millard had achieved millionaire status with ComputerLand, his good fortune quickly dissolved. One cause was a long running legal dispute over a promissory note he signed in 1976 when his computer firm IMSAI was having financial troubles. The note involved a $250,000 debt to the Marriner venture capital group, a small firm based in Lynnfield, Massachusetts, which had rescued Millard's foundering company. Millard made the scheduled interest payments, planning to pay off the promissory note in full by the expiration date in May 1981. The note was originally convertible solely into shares of IMS stock. But after Millard began diverting capital from the failing IMSAI to establish ComputerLand, the Marriner Group contended that the note should also be convertible into shares of the new company, as well as those of Millard's other holdings. Millard eventually signed an agreement to this effect.

An acrimonious court battle erupted after the Marriner Group sold the note to a third party, John Martin-Musumeci of Micro/Vest, an investment partnership. A former employee of Millard's, Martin-Musumeci had sold ComputerLand franchises before being fired in May 1977. In December 1980, he privately sold his 1.05 percent stake in ComputerLand to Bruno Andrighetto, a Bay Area produce magnate and stock investor who had an interest in the computer industry. Martin-Musumeci also conferred with Andrighetto on the Marriner note and the potential rewards of its conversion rights. The two formed Micro/Vest and brought in another former IMS associate, Philip L. Reed III, who had once been a close friend of the Millard family and who had left IMSAI before it folded. The partners purchased Millard's $250,000 note from Mariner for $300,000 plus the prospect of another $100,000 contingent on its conversion into 20 percent of ComputerLand's equity. Micro/Vest's claim for 20 percent of the shares ignited a contentious legal fight amid charges and countercharges of betrayal, fraud, and violations of the security laws. Millard's accusations of security violations stemmed from Micro/Vest selling speculative shares in the note to dozens of outsiders based on the outcome of the suit. For its part, Micro/Vest stated that such a move was necessary to help raise the $1.3 million to pay for the years of litigation.

Finally, on March 11, 1985, a California Superior Court jury handed Millard a serious defeat, ruling that the promissory note was convertible into 20 percent of ComputerLand stock and requiring Millard to transfer 20 percent of his other holdings to Micro/Vest as well. The court also hit Millard and IMS, his holding company, with $115 million in punitive damages and ordered ComputerLand to pay another $10 million as punishment for Millard's delaying court tactics. Millard could appeal by posting a $238 million bond, 10 percent of that in cash. However, the banks severed ComputerLand's credit line after Millard failed to raise the necessary funds and announced that he might file for Chapter 11 bankruptcy protection.

In addition to the litigation matter with Micro/Vest, many of ComputerLand's franchises openly rebelled against Millard's autocratic management style. What originally began as Millard's refusal to take the company public, soon involved charges that the owner extracted severely high royalty fees. In 1984, most of the franchises' competitors were publicly owned chains. Although growing at a robust 30 percent a year, the franchises feared losing out to competitors. The dealers demanded access to expansion capital to fuel growth, but Millard's franchise agreement strictly prohibited them from going public and therefore kept them comparatively small, fragmented, and easy to control. Millard feared that to take ComputerLand public would cause consolidation among his franchises as some bought out or acquired others, resulting in the domination of a few large dealers. This possibility would not only weaken his control over the company, but it would also destroy what Millard considered to be ComputerLand's key to success--individual entrepreneurs serving a local community. The agreement also provided Millard with the option of raising public capital to open his own ComputerLand stores which could compete with his franchises. This prospect, coupled with fierce competition from other computer retailers including Entre and BusinessLand, aroused considerable concern among the ComputerLand dealers.

To assuage dealer concerns and still maintain control, Millard tried to engineer a complicated compromise. He planned to create a subsidiary, ComputerLand Stores Inc. (CSI), which would trade shares with the franchises before turning public. Under this arrangement, CSI would issue common stock to the franchises for a percentage of their stores. The franchises would also give CSI participating preferred stock, paying a dividend based on gross sales. Following the transaction, Millard planned to take CSI public leaving him firmly in control. However, the dealers vetoed his proposal and continued their demands for expansion capital.

By 1985, intense competition and sagging sales were causing hard times for computer retailers, a development which exacerbated the open revolt against Millard. A number of dealers, especially those on the verge of bankruptcy, demanded relief from Millard's royalty and advertising fees, which ranged from 5 percent to 8 percent of their monthly income. Franchises also claimed that Millard was failing to honor pledges to sell them computers at cost. When Millard ignored their pleas, a group of 350 franchises threatened to file suit. Already besieged by the Micro/Vest litigation, Millard settled with the franchises and stepped down as head of ComputerLand. He and his family still remained the company's major stockholders, however, owning some 96 percent of the shares.

After his ouster, Millard invited his former partner, Edward E. Faber, to take over as chairman of the company. A former marketing manager for IBM, Faber had helped Millard found and develop the ComputerLand chain in 1976, serving as company president until 1983. Importantly, Faber's work over the years with the hundreds of ComputerLand franchises had earned him their respect and trust. Among his most important changes, Faber shifted the company's legal troubles from ComputerLand to the Millard family. He also negotiated a deal with Micro/Vest to have ComputerLand dropped from the suit, which Millard was appealing, in return for removing the Millard family from the management of the company. As a result, the stock and voting rights became subject to an extraordinary arrangement. While the Millard family held 96 percent of the company's shares, they now had no voting rights. Faber himself controlled 99 percent of the voting rights with just 3 percent of ComputerLand's stock. In the Micro/Vest settlement, Faber also agreed to expand the board to include two ComputerLand franchises and to take the company public.

In 1987, following Faber's sweeping changes, Millard exiled himself to the tax haven of Saipan, the capital of the Northern Mariana islands, and sold his remaining 52 percent stake in the company for $80 million. The principle buyers were E. M. Warburg Pincus & Co. and William Y. Tauscher, a takeover specialist. Tauscher's diverse portfolio included major holdings in CoastAmerica Corp., a hardware store chain run by close friend Richard H. Bard, and in Vons Cos., a Southern California supermarket chain. He also headed FoxMeyer Corp., the wholesale drug distributor he developed and sold to National Intergroup, Inc. At the age of 38, Tauscher saw a great opportunity in ComputerLand and joined with Bard and the investment bank E. M. Warburg Pincus & Co. to buy a controlling stake in the company. The partners planned to take the company public as quickly as possible to double the value of their shares.

This scheme took a peculiar turn in 1988 when Wall Street showed little interest in ComputerLand's first public offering. Then the company's veteran president and chief executive officer, Kenneth R. Waters, unexpectedly quit over ComputerLand's continued turmoil. Tauscher, who had not planned on directly managing the firm, took over as chief executive officer. At the time, the PC business had reached new heights in fierce competition. Mail-order sellers and discounters were taking an enormous share of the market, hitting the retailers especially hard. ComputerLand lost money in both 1987 and 1989. Further, its chain of 609 stores in 1985 had shrunk to 481 three years later. By this time, the company's retail sales were only a small percentage of the total business, the bulk instead coming from sales to corporations. But even in this lucrative market sales began to spiral downward and profit margins decreased.

In an effort to prevent further losses for ComputerLand, Tauscher implemented an aggressive campaign to cut costs and consolidate stores. As part of this initiative, he laid off 40 of 600 staff, combined two offices into a new building in Pleasanton, California, and forced financially weak stores to merge or be sold to stronger operations. Tauscher also hired Edward R. Anderson away from rival computer retailer Computer Factory, Inc. to serve as his new chief operating officer. At the same time, Tauscher continued to shift the core business away from the crowded middle retail market to focus on small business customers. He also bought many of ComputerLand's big-city franchises catering to large corporate customers. To win more corporate clients, he improved the company's service and support network and set up a direct electronic link which allowed customers to shop by computer. In addition to his emphasis on large markets, Tauscher also retained franchises in smaller cities to handle the low end of the retail market.

By 1991, Tauscher's survival strategy began to pay off. While rival BusinessLand sank to near bankruptcy before being acquired by JWP Inc., and Compucom Systems Inc., the nation's seventh largest computer seller, left the retail business altogether, ComputerLand embarked on greater expansion. In June 1991, the company acquired Nynex's chain of 79 computer stores, including its sales force and sophisticated service and support center. In the fall, Tauscher opened a trial superstore in Atlanta called ComputerLand Express, with the aim of opening superstores nationwide. ComputerLand's major competitors arose primarily from mergers and acquisitions, including JWP's purchase of BusinessLand; Intelligent Electronics's buyout of the Bizmark superstores; Valcom's merger with Inacomp Computer Centers, resulting in Inacom; and Compucom's acquisition of the Computer Factory, primarily to move into corporate sales. To confront increasing cost competition, Tauscher began relying primarily on producers of low price IBM-compatible clones, such as AST Research and NEC.

Despite Tauscher's increasingly successful business strategy, ComputerLand faced renewed anger from franchises over having to compete with company-owned stores stemming from the Nynex acquisition. The most bitter case involved dealer D&W Computer stores of Florida, which sued ComputerLand contending that it was being forced out of business. In November 1991, Tauscher told the New York Times that most of the territorial disputes with the franchises were already resolved.

By 1994, Tauscher had largely succeeded in repositioning ComputerLand, shedding its retail operations to focus on supplying system integration and services to Fortune 1000 companies. The ComputerLand name and all franchise holdings were sold to Merisel, Inc., the largest publicly held wholesaler distributor of microcomputer hardware and software products. Tauscher renamed his company Vanstar following the sale of ComputerLand for approximately $80 million in cash. With the ComputerLand acquisition, completed on January 31, 1994, Merisel became the industry's leading retailer of computer systems and related products. Through ComputerLand, Merisel now distributes computer systems to about 750 independently owned product resellers comprising both ComputerLand franchisees and resellers purchasing under the ComputerLand Business' Datago Program. The latter customers consist of independent dealers and value-added resellers who purchase products from ComputerLand on a cost-plus basis but without licensing the ComputerLand name. In addition to the ComputerLand purchase, Merisel bought all of ComputerLand's franchise and third-party reseller agreements, as well as all U.S. rights to the ComputerLand trademarks, trade names, service marks, copyrights, patents, and logos.