From this week's Chicago Crains:
chicagobusiness.com
Comdisco: It's make or break up
If CEO search fails, spinoffs become likely
by Sandra Jones
• January 15, 2001
When Nicholas Pontikes stepped into the CEO job at
Comdisco Inc. two years ago, the founder's son had a
grand vision of transforming the computer leasing
company into a high-profile Internet player.
Last month, the 36-year-old CEO's ambitions came to a
crashing halt. After steering Comdisco into risky,
money-losing ventures, Mr. Pontikes conceded that he
didn't have enough experience to run the $3.9-billion
company and resigned.
He left in his wake an unprofitable firm that has strayed
from its roots and whose blurred identity confuses
investors.
Now, Rosemont-based Comdisco is looking for a new
CEO to turn it around, a search that could take as long as a
year. If a successor isn't found or proves ineffective, Comdisco could wind up in
pieces.
"If they don't find somebody they are comfortable with in a CEO, they might
consider selling the business to somebody bigger with a higher credit rating who
could reduce the cost of debt and increase operating margins," says James
Awad, chairman and CEO of New York-based Awad Asset Management, which
owns more than 500,000 Comdisco shares.
It could be difficult to attract a dynamic replacement with Mr. Pontikes, whose
family owns 25% of the company's stock, still a member of the board and the
executive search committee, outside experts say. A new CEO may be concerned
about having enough freedom to run the company.
If a break-up is pursued, a likely scenario would be to separate Comdisco's
profitable disaster recovery and storage services business and either run it as a
stand-alone company or sell it to a competitor such as IBM Corp. or SunGard
Data Systems Inc., according to people familiar with Comdisco.
The core equipment leasing business, which is made up mostly of machines for
the computer and medical industries, could be sold to a leasing expert such as
GE Capital Corp. The highly profitable Comdisco Ventures, which makes loans to
and investments in high-tech startups, could be spun off to shareholders.
Comdisco declined to comment.
In the meantime, interim CEO Philip Hewes says Comdisco must clarify its
mission.
"The centerpiece of Comdisco has been equipment financing services," says Mr.
Hewes, 48, a corporate lawyer and Comdisco veteran who says he is not a
candidate for the top job. "We're not out of leasing. But a lot of people are
confused as to who we are." In 1969, Kenneth Pontikes, then a 29-year-old IBM
salesman, founded Comdisco with $5,000 from his father, convinced that
companies would rather lease than buy computers. The company flourished in
the 1970s and 1980s, initially by leasing computer mainframes and then by
expanding into the disaster recovery business. In the 1980s, Comdisco began
leasing equipment for the medical, telecommunication and semiconductor
industries.
Ill-fated Prism deal
Shortly before Mr. Pontikes died in 1994, his son Nick, who had been working on
Wall Street as an investment banker, joined the family business. He ran the
disaster recovery business while Jack Slevin, the company's chief operating
officer, replaced the elder Mr. Pontikes as CEO. When Mr. Slevin retired in
January 1999, the board of directors named the younger Mr. Pontikes to the top
job.
Eager to make his mark, Mr. Pontikes sold Comdisco's original mainframe
leasing business that March to IBM for $485 million and shifted corporate
strategy to the higher-margin technology services business.
He also bought high-speed Internet service provider Prism Communication
Services Inc. of New York for $53 million and borrowed heavily to fund the
expansion of Prism's digital subscriber line (DSL) network.
The problem was that DSL is geared to homeowners and small businesses, a
completely different base from Comdisco's traditional large corporate customers.
The shift sparked defections from the salesforce, which was used to handling
lucrative corporate accounts.
"They devoted resources to build its DSL network, and it was a financial strain
that a company the size of Comdisco couldn't bear," said Thomas Kmiotek, an
analyst at Fitch Inc. in Chicago. "The competitive environment changed rapidly
over those two years."
The Prism deal proved to be Mr. Pontikes' undoing. Last October, after investing
$478 million in the business, Comdisco shut down the money-losing venture.
Comdisco expects to get about $80 million for the switches and other
telecommunication equipment it spent roughly $300 million to buy, says Mr.
Hewes.
"It was a very costly infrastructure," says Mr. Hewes. "Unfortunately, we didn't have
the revenue to support it."
After he became CEO, Mr. Pontikes also began steering money into venture
capital investments through Comdisco Ventures. The division started in 1987 by
exchanging equipment leases for equity stakes in companies strapped for cash.
Under Mr. Pontikes, the unit expanded into venture capital investments. Direct
equity investments soared to $39 million in fiscal 1999 and $139 million in fiscal
2000 from $7.4 million in 1998.
As the market rose, so did Comdisco Venture's value. For the year ended Sept.
30, its portfolio was worth $845 million and contributed almost two-thirds of
Comdisco's profits before taxes.
The portfolio's value has fallen in recent months to roughly $300 million as the
company sold stakes and dramatically cut back new funding.
Internet venture
Now, the company is focusing on building its new Web hosting business — an
Internet venture started under Mr. Pontikes that has yet to make money but has
potential, analysts say. The Web hosting centers use computer power that
otherwise would sit idle in Comdisco's existing disaster recovery centers and is
aimed at supporting large corporations' e-commerce functions.
To be sure, Mr. Pontikes isn't the only person to blame for Comdisco's troubles.
Analysts suggest that if the board thought it was important to put a Pontikes heir
at the helm, it should have taken better care in guiding him. |
