Published Friday, May 14, 1999, in the Miami Herald
Computer Associates will invest $50 million
By CYNTHIA CORZO
Herald Business Writer
Miami computer distributor CHS Electronics, which has been in financial straits since last year, got a multimillion-dollar lifeline Thursday from Computer Associates International, a New York software maker.
Computer Associates, a maker of software for corporate personal computer networks, will invest $50 million in CHS as part of an expanded alliance. Computer Associates already had agreed to package its software with products distributed by CHS. The Miami company will, as part of the alliance, give Computer Associates marketing, distribution and reseller rights for its products.
''We are establishing a unique partnership,'' said Marc Sokol, senior vice president and general manager of worldwide marketing for Computer Associates. ''We will provide the software and services, and CHS will provide the hardware.''
Sokol stressed that the investment is a sound business deal and that Computer Associates is not worried about CHS' financial situation.
''We feel CHS is a strong company, we believe in the management team, the business deal makes sense and the investment makes sense,'' he said. ''We thought it was a good time to make this investment.''
CHS has been suffering financially for several months, and earnings for the first quarter, released this week, were lower than anticipated. CHS's troubles stem from the one-two punch of a PC market slowdown and an in-house accounting scandal.
In March, CHS disclosed that profits for the final nine months of 1998 were $44 million lower than originally reported. It blamed the problem on a Paris executive who resigned after auditors determined that he had overstated the value of manufacturer rebates.
In reaction, its shares have tumbled more than 80 percent from their high of $24.50 last May. On Thursday, CHS shares fell 87 1/2 cents to $4.62 1/2.
The infusion of cash from Computer Associates will be a welcome boost for CHS. The company will use the proceeds for working capital.
''It's always good when you have someone who's willing to put money in you,'' said Joel Pitt, a Credit Suisse First Boston analyst who rates CHS shares ''buy.''
Late Wednesday, CHS reported that net earnings for the first quarter of 1999 were $200,000, or break-even, compared with $20.6 million for same period last year. Sales slightly exceeded expectations, increasing 41 percent to $2.5 billion from $1.8 billion in 1998.
''Overall in the first quarter, from a sales perspective we experienced a solid quarter and we met our expectations. From a gross margin, though, we experienced significant price pressure and weakness in margins in both Germany and the United Kingdom,'' said Claudio Osorio, CHS's chairman and chief executive. ''All in all, the year has not met general expectations.''
A year ago, it appeared that at CHS everything was coming up roses. Fueled by acquisitions and high demand for PCs in Europe and Latin America, CHS' first-quarter sales in 1998 doubled and its profit tripled from the year before.
The growth pushed CHS into the No. 320 spot on the Fortune 500. CHS moved its stock from the Nasdaq to the New York Stock Exchange. Osorio spoke openly last September about taking CHS to $20 billion in sales by 2000.
A former sporting goods merchant and computer importer in Venezuela, Osorio began selling computers in Europe and buying distributors there. He moved the company to Miami in 1993. Today, CHS has $11 billion in annual revenue, about 6,000 employees and about 150,000 customers -- computer resellers -- in 46 countries, the notable exception being the United States.
The stock-market crash last summer swept CHS shares down to its previous low of $4.50. The stock roared back, only to be held in check by the currency crisis in Brazil and slumping PC sales in Latin America -- where CHS derives 13 percent of its revenue.
Expecting lower than expected earnings, on May 1 CHS embarked on a reorganization plan to reduce operating expenses -- which have grown to $134.3 million from $89.5 million in 1998. The plan includes a worldwide hiring freeze, a 10 percent reduction in employees, closing 25 warehouses across all regions, cost-cutting on travel and communications and a 15 percent voluntary salary cut by all officers of the company.
''We are confident in our ability to increase CHS's profitability and anticipate the company will begin to show significant operating involvement in the third quarter,'' Osorio said.
e-mail: ccorzo@herald.com
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