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October 27, 1999

Global Reseller Network in Peril as CHS Crisis Unfolds

By CBR Staff Writer

By Brian White

Huge disruption to IT sales channels across Europe is likely to follow the collapse of the Austrian, German and UK subsidiaries of Miami, Florida-based CHS Electronics Inc. While CHS is trying to salvage something from the wreckage, by keeping a 49% stake in a management buy-out of its operations in Europe and the Middle East, the crisis has alarmed both customers and suppliers.

CHS is itself in a shaky financial situation with its shares languishing at $0.75. Though it had revenue of $8.5bn last year, giving it a ranking of 197 in the Fortune 500 list, its second quarter figures showed a sharp decline in margins and it reported a net loss of $89.2m on revenue up 32.4% at $2.34bn.

The board was aware that a new direction was needed and in September announced that it had retained Raymond James & Associates Inc to assist directors in evaluating strategic alternatives. But events in Europe moved more quickly than the company expected. Subsidiaries CHS Frank & Walter, CHS Germany and CHS Austria have voluntarily filed for protection from their creditors. An insolvency administrator, appointed by the courts, will now examine their recovery plans and then decide whether to sell or close the businesses or return them to their owner. They were massive distribution organizations and had combined sales of $735m in the first six months of this year though they lost $13.9m in the process.

In the UK, 200 staff lost their jobs when receivers acting for CHS Electronics Plc failed to find a buyer. The company was reported to owe 17m pounds ($28.2m) to its bank though shocked staff claimed that it had accounts receivable of 20m pounds ($33.2m).

With the falling price of hardware, and the growth of the direct sales model, most distributors have seen margins squeezed. While competitors will relish picking up the extra business, there is concern at the impact on credit insurance and the fact that it will increase bankers’ nervousness over the business.

CHS boasted of its focused distribution approach with 80% of sales from 20 equipment and software manufacturers including Hewlett Packard, Microsoft, IBM, Seagate, Compaq, Quantum, Western Digital, Intel, 3Com, Toshiba, Epson and Creative Labs. By sticking to a few well-known brands, CHS said it had less inventory risk than broadline distributors.

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The problems facing CHS are also hitting other distributors. In September, the largest distributor Santa Ana, California-based Ingram Micro Inc parted company with its CEO after warning that profits would come in far below analysts’ expectations (CI No 3,743).

The squeeze on margins was confirmed by Clearwater, Florida-based Tech Data Corp whose second quarter net income dropped 16.6% to $29.4m on revenue that jumped 81.9% to $4.02bn (CI No 3,738).

Both are potential buyers for CHS that used to boast of 150,000 resellers in 49 countries in Europe, Latin America, Asia, the Middle East and Africa.

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