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Still wielding the hammer

Computer seller CDW remains focused on taking market share away from Dell, driven to grow well beyond the market norm.

By ASSOCIATED PRESS
Published June 26, 2006


VERNON HILLS, Ill. - CDW Corp. has long fashioned itself as David to Dell Inc.'s Goliath - a role CEO John Edwardson embraced when he took a sledgehammer to a Dell laptop at a gathering of senior managers on his very first day.

Five years later, the flattened Inspiron sits encased on a wall of his office like a trophy, and Dell remains Enemy No. 1. But the company once known as Computer Discount Warehouse is now a giant in its own right - and one facing its own Dell-sized issue of how to cope with slowing industry growth.

Unlike its bigger rival, CDW is not a manufacturer. It buys computers and related equipment from such manufacturers as Hewlett-Packard Co., IBM Corp. and Apple Computer Inc. and markets them to small and medium-sized businesses, governments and school systems, customizing the products and offering other services.

Not only must it endure a price war with the world's largest personal computer maker, it faces stiffening competition from 80,000 small U.S. value-added resellers that vie to outdo it in service. All this at a time when a three-year stretch of double-digit PC growth has ended.

Edwardson himself posed the challenge in an interview: "The question is, can we continue to grow at rates faster than the market rate of growth?"

His answer, of course, is yes. Industry analysts aren't so sure, skepticism that's reflected in a 25 percent drop in CDW's stock since 2004. Shares have been hovering around $55 after topping $70 two years ago.

"The environment couldn't be any worse for selling computer products," said Fred Hickey, editor of the High-Tech Strategist, a Nashua, N.H., newsletter. "We have an economy that's stretched, there isn't any pent-up demand, and to make matters worse ... CDW is engaging in an expansion program" in its government and education markets.

CDW has proved doubters wrong before. In 1995 - 11 years after used-car salesman Michael Krasny founded the company reselling personal computers through newspaper ads out of his home in nearby Skokie, Ill. - Forbes magazine wrote of the prospering firm: "As the Internet blooms, CDW risks losing its price advantage."

So much for that threat; revenues have since increased tenfold. CDW cracked the Fortune 500 list of largest U.S. companies in 2001 just after Krasny, who remains the largest shareholder with 22 percent, handed the reins to Edwardson. It's now up to No. 343 and climbing, with sales of $6.3-billion last year.

There's no question CDW's business model is still flying high. Its latest earnings report, for the first quarter, showed better-than-expected profits on an 8 percent increase in sales.

But that's well off the strong double-digit sales pace the company long enjoyed, so eyebrows shot up around the industry when Edwardson recently announced a goal of $10-billion in revenue by 2008. That would require annual sales growth of 17 percent in an information technology market that IDC Research Inc. projects to increase at a pace of just 4 percent to 4.5 percent over the next five years.

Dell's recent skid, losing ground to HP and other competitors during seven straight quarters of declining revenue growth, has helped keep the mood light in Vernon Hills.

While crediting Dell for being "very, very good at what they do," Edwardson noted almost gleefully that the PC company's letter to shareholders, which he read twice, made no mention of its problems. Soon after, two technology research firms reported that Dell's PC sales were growing more slowly than rivals' and the company acknowledged that the competitive environment was more intense than it had planned for or understood.

"They never really owned up to their service issues, which I thought was great," Edwardson said. "I was really happy that they didn't seem to be wanting to recognize that."