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Brainstorm At Egghead?


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BRAINSTORM AT EGGHEAD?

Corporate titans are not the only ones experiencing boardroom dramas these days. Egghead Inc., the nation's No.1 software distributor, has had its own showdown between management and activist directors.

On Feb. 10, the suburban Seattle company said it appointed both a new chairman and a new chief executive. The appointments ended an executive search that began right after a contentious board meeting last Sept. 16, when Egghead's nine directors met to discuss the fate of the struggling $665 million company. The outcome: Chairman Stuart M. Sloan and two other directors stepped down immediately. Within months, CEO Matthew J. Griffin and three other senior executives left as well. "These were not resignations," says one director. "I would draw the analogy of General Motors."

Sloan and Griffin, two local businessmen, had joined a troubled Egghead in 1989 and restored profitability through strict cost controls. Egghead's share price soared from 10 in 1989 to 30 by early 1992. But by then, says the director, Sloan and Griffin were resisting steps urged on them by some directors to expand rapidly the nearly 200-store chain and reach into new businesses, such as international distribution and superstores. Since the two were nearing the end of a four-year contract that was not scheduled for renewal, Sloan and Griffin may not have felt an urgent need to act. Griffin says he resigned and confirms that he disagreed with some directors over ex-

pansion plans. Sloan did not return BUSINESS WEEK's phone calls.

The dispute came at a critical time. Price wars were breaking out between such top suppliers as Microsoft, Lotus Development, and Borland International. As profit margins on software collapsed, Egghead suffered. For the first nine months of the fiscal year that ends in March, net income dropped 59%, to $4.7 million. Sales grew only 4%, to $530 million. Software Spectrum Inc. and Corporate Software Inc., by contrast, each grew by more than 30% last year by giving big discounts to corporate buyers.

By September, Egghead's stock had dropped to 8. That prodded an activist director, Seattle philanthropist Samuel N. Stroum, to urge the search for a new management team. Says Stroum: "We have the potential to be significantly larger." Stroum, who was Sloan's father-in-law until a 1991 divorce, says that family matters had nothing to do with his decisions. A former director of Bank of America's Seafirst Bank, Stroum helped line up two Seafirst executives for the top jobs. Richard P. Cooley, retired CEO of the bank, is the new Egghead chairman, and Timothy E. Turnpaugh, who was Seafirst's vice-chairman, is the new CEO.

'STEEP CURVE.' Can a couple of bankers turn around Egghead? Turnpaugh, who has no experience in the retail or software businesses, is on the hot seat. Although Egghead has opened 33 stores in the current fiscal year, the chain is hard-pressed to keep up with the new computer superstore chains, which stock a wide range of software and hardware at rock-bottom prices. Despite the name--Egghead Discount Software--its stores now represent the high-cost formula: small shops in pricey downtown spots with well-trained staffs. "The question is whether that concept is compelling in today's world," says Nathan P. Morton, CEO of Dallas-based Comp USA, which now runs 39 superstores.

To respond to the superstore threat, Turnpaugh says "we have to show the world that we are deadly serious about taking decisive action." The 43-year-old still looks like a banker--dark suits, white shirts, conservative ties, and a gold Cross pen--but says he's always been a techie at heart. A business graduate of Indiana University, he spent the first 12 years of his career as a software developer at Continental Bank Corp. After switching to Seafirst in 1984, Turnpaugh managed its technology service division before moving up to head all operations.

Running Egghead may turn out to be a lot like running a bank, says Turnpaugh. Both, he says, operate retail outlets and provide services to corporations. To improve efficiency, he says he'll oversee Egghead's move into electronic ordering and delivery of software for such big customers as Boeing Co. Direct sales to such clients account for nearly 60% of Egghead's business.

To remain No.1, however, Egghead needs more radical change. Turnpaugh, who is just formulating his strategic plan, has announced the search for a "superstar" retail specialist to help him reexamine Egghead's operations. Opening suburban software superstores and going international are among the options he may consider.

But there isn't much room to plot strategy. Comp USA, for example, has staked out the choice suburban locations. And investors are bitter. Corey Horowitz, a money manager for White Pine Capital Management in New York, had predicted last March that Egghead stock would hit $42. Now he says he'll never buy it again. "I took my losses and licked my wounds," he says.

Turnpaugh, unlike his predecessors, who were clearly short-termers, says he wants to stay "for a long, long time." He may do that--if he figures out how to unscramble Egghead, restore investor confidence, and keep his board happy.Dori Jones Yang in Issaquah, Wash.


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