Spokane will lose a big chunk of Egghead Software, but gain the residency of another premier software sales company, in a deal announced Monday.
Egghead, which completed the relocation of its corporate headquarters to Spokane only a few months ago, announced it is selling its corporate, government and education (CGE) division, which has historically accounted for about 50 percent of Egghead’s sales.
But as a condition of the sale to rival Software Spectrum, of Garland, Texas, Spectrum will keep the Spokane call center that services the division for at least three years.
The deal also should help solve some of the financial problems that have hampered Egghead in recent months. The CGE division has been a drag on earnings since the company moved its corporate headquarters to Spokane.
Kurt Conklin, Egghead’s vice president of human resources, said Monday that the company had several inquiries about acquiring the division.
“When we were exploring possible suitors,” Conklin said, “one of the preconditions was maintaining the call center here in Spokane because of the commitment we had made to the community and, quite frankly, because of the commitment the community had made to us.”
Meeting that requirement, though, was not a problem for Software Spectrum, according to Keith R. Coogan, the company’s vice president of operations.
He said his company likes Spokane’s low-cost business climate, its telecommunications infrastructure and the labor pool here.
“In the Dallas area, there is a lot of competition for the technology worker,” Coogan said. “Our competition won’t be as intense here.”
The transaction will reduce Egghead’s Spokane employment from about 500 to about 300. Egghead’s corporate, government and education division employs about 350 people company-wide. About 200 of those work in Spokane. How many of those people will keep their jobs in the transition to Software Spectrum is uncertain.
“There will be some displacement,” Coogan said. “I don’t want to mislead anyone about that.”
But, he added, the possibility of increasing the number of employees in Spokane in the future is good.
The company will lease the portion of the Egghead complex at Liberty Lake that currently houses Egghead’s CGE call center.
Coogan said Software Spectrum will interview all current Egghead employees as it determines how big the call center here will initially be. That depends, he said, on Software Spectrum’s analysis of the customer base it is acquiring, and what service approach the company will pursue with those customers.
Software Spectrum’s largest call center operation is located in Garland and employs about 100. It has much smaller call centers in Toronto and Dublin, Ireland. The Spokane call center will likely service the Western United States.
The acquisition, Coogan said, will make Software Spectrum the largest reseller of software products to corporate, government and education institutions in the world.
Egghead’s business has historically been split evenly between its retail stores and its direct sales to corporations, government agencies and schools. But Egghead’s CGE division has been a headache for the company over the past 18 months. Terry Strom, Egghead’s president and chief executive officer, said earlier this year that the division was badly disrupted by the company’s move from the Puget Sound area to Spokane.
And while the company’s retail sales division has performed well, the inability of the CGE division to recapture customers it lost to the disruption of the move has dragged down Egghead’s bottom line.
The company lost $3.5 million during the second quarter of fiscal 1996, when CGE sales were off $11 million from the same quarter of 1995. During the third quarter, which ended Dec. 30, Egghead lost $941 million, with CGE sales down by 19 percent over the previous year’s third quarter.
Monday, Egghead warned that the fourth quarter will be another difficult one. Company officials expect consolidated revenue to be $182 million, a decrease of 17 percent from the fourth quarter of fiscal 1995.
Egghead expects a net loss of about $2.7 million, compared with net earnings of almost $1 million during the fourth quarter of 1995.
Ironically, Conklin said the CGE division performance was not that significant a factor in the company’s fourth-quarter performance.
But, he added, the company had to make a decision about how it wanted to go about trying to rebuild the CGE customer base.
“When we considered how much it was going to cost us to be able to compete against companies like Software Spectrum,” which sells exclusively to CGE clients, Conklin said, “a sale of the division made a lot of sense.”
Strom called the deal a “logical transaction.”
“For Egghead, this transaction means that we can focus our expertise and resources on the core retail business, for which we believe there is strong growth potential,” Strom said in a news release.
“Software Spectrum has always specialized in outbound sales to corporations,” he added.
The $45 million sale, which still requires federal approval, will provide Egghead with the assets it needs to beef up its retail operations in time to “try and capture full advantage of the biggest retail opportunity - the Christmas, 1996, season,” Conklin said.
He said some of the money will be applied to opening more of its new, large-format retail stores, including the likelihood of more retail outlets in Spokane. The cash will also be used to help fund Egghead’s new Elecom subsidiary. Elecom provides a direct computerized-purchasing process for businesses.
Investors in both companies responded favorably to Monday’s announcement. Egghead’s stock closed at $9.25, up $1.62. Software Spectrum’s stock was up $3 with a $22.75 close Monday. Both companies are traded on the Nasdaq exchange.
Software Spectrum has a 52-week high of $26.50 and a 52-week low of $14.87. Egghead has traded as high as $14.25 and as low as $5 in the past 52 weeks.
Founded in the early 1980s, Software Spectrum has 44 sales locations across North America and Europe. In calendar 1995, the company had net sales exceeding $384 million. That, combined with sales for the same period by Egghead’s CGE division, produces a figure of $767 million.
For the nine months ended Dec. 31, Software Spectrum had net income of $6.2 million, or $1.45 per share, on sales of almost $300 million.
Egghead has 169 retail stores throughout North America.