Two years ago office supplies distributor United Stationers discovered evidence of fraud and financial irregularities at its Azerty United Canada division, leading to the removal of senior executives.
The fallout from that discovery led to an agreement Thursday to sell most of the assets of the division to Synnex Canada for US$17 million.
“Although we made progress in reducing the US$5.9 million in operating loss reported by the Canadian division in 2005, we decided it was best to sell the division,” United president and CEO Richard Gochnauer told analysts Friday in a conference call to discuss the company’s first quarter results.
United has been close-lipped about the division’s troubles, refusing to identify which executives were replaced. It said in its 2004 annual report that it had to take a US$13.2-million charge following an investigation that took “countless hours reviewing customer and supplier transactions and divisional books and records.”
It concluded “certain items were incorrectly accounted for, and we found evidence of fraud by certain personnel.”
However, Pat Collins, senior vice-president of sales who also has responsibility for Canada, said in an interview Friday the problems didn’t cause irreparable damage to the division, which had annual sales of US$120 million in ink and toner consumables and office supplies.
However, in the quarter just ended the division recorded a US$900,000 operating loss.
“Our decision in Canada was really more one of just the basic economics of what the business was there,” he said. “And candidly we felt and still feel we had a good operation there that needed more volume in order to be successful, and we would need to acquire that or be acquired.”
Nor did he believe Synnex Corp.’s purchase in 2004 of EMJ Data Systems, one of Azerty’s biggest competitors, was not a factor in the Canadian division’s fall .
That’s not, however, how EMJ head (and now Synnex Canada chair) Jim Estill sees it. The Synnex purchase of EMJ was the “power engine” that turned his small company into a major threat to Azerty, he said. Azerty’s financial difficulties didn’t help, he said.
“When they changed their management team they really lost momentum,” said Estill. He estimates that Synnex Canada won a half a dozen major retail chain accounts from Azerty since 2004 because of its problems.
“I suspect (the financial problems) is partly why United isn’t thrilled with Canada,” he said.
Asked if the 2004 problems affected Azerty’s business, Estill replied, “I believe it did. It’s very tough to quantify, but distribution is a very lean business and there’s very little margin for error. They lost some of their customer relationships because they lost all of their senior staff, lost some vendor relationships.”
Synnex’s purchase of Azerty is expected to close by June 15. Estill said it will absorb some 60 of Azerty’s staff, about half of its employees in Toronto, Montreal and Vancouver. Synnex Canada will move into Azerty’s offices in Montreal.
United said it could take a charge of US$6 million due to staff payouts and termination of Canadian leases.
Collins said it began shopping the division in the last quarter of 2005. Estill said he heard about it and began discussions.
“Synnex is probably the largest distributor of toner supplies in Canada,” he said, “and Azerty, if they weren’t second they were close to second, so it very much solidifies us in that market,” he said.
While Azerty’s major suppliers — including Hewlett-Packard, Lexmark and Brother — are also carried by Synnex Canada, Estill said there will be “huge economies of scale.” It will, however, pick up some new accessory lines.
“They would have some resellers that we don’t have,” he added. “They were stronger in office supply space than we were. However, most of the larger customers we would both have been dealing with.”
The majority of Azerty’s business here was toner and ink consumables, but there was some office equipment products as well. That is not part of what United is selling to Synnex, but the company is getting out of that business up here.
United acquired Azerty in July 2000. Before that it had been part of Ohio-based Miami Computer Supply, which bought the company from Axidata.