It's a common theme throughout much of history. A ruler dies, the prince takes the throne and the kingdom subsequently falls into chaos. So goes the not-so-noble tale of Comdisco, formerly the operator of a global multi-billion technology services and equipment leasing business, now slowly being partitioned away by strategic buyers looking to scavenge the remains of a once mighty company. The bursting of the dotcom bubble as well as the lending practices of the company's venture debt unit played a role in its downfall. But Comdisco's failure ultimately lies on the shoulders of its management led by a former high yield bond trader named Nick Pontikes, who inherited the company in 1994 from his father Ken, Comdisco's founder.
By the time Comdisco sought federal bankruptcy protection in July 2001, the company was a shadow of its former self. Nick Pontikes had resigned, a core technical services division was being sold off to Hewlett Packard, and one of the company's flagship investments in broadband service provider Prism Communications was under water. Worse yet, as the markets declined, Comdisco Ventures, the venture leasing and debt unit of Comdisco, had suffered mounting losses. A month before the company sought bankruptcy protection, James Labe, the head of Comdisco Ventures who had been around since the subsidiary's inception in 1987, left.
Comdisco Ventures' line of business – financing cash-flow negative startups with venture loans and leases – had always been risky. Unfortunately, its activities in 1999 and 2000 focused mainly on high-tech and Internet-based industries, i.e. the sectors hit hardest when the markets collapsed. According to SEC filings, Comdisco Ventures went from pre-tax earnings of $246 million in 2000 to pre-tax losses at $150 million the following year – and booked a $179 million pre-tax loss in 2002.
A source close to Comdisco Ventures says management heeded the Sirens' song of the dotcom craze instead of staying put with the strategy it had been practicing since its formation. “[Comdisco's managers] thought they were supermen, that nothing could go wrong. They got very aggressive and very sloppy. They lost their discipline, and when the music stopped, it was not a good situation to be in,” says the source.
FROM RAM TO RICHES
Ken Pontikes was an ambitious go-getter when he founded Computer Discount Corporation in 1969 with $5,000 he had borrowed from his father. A former IBM salesman, Pontikes focused his company on reselling IBM mainframes and succeeded in generating $1 million in revenues in his first year. The company gained momentum quickly and went public in 1972 – a year after being reincorporated as Comdisco – as one of the largest US dealers of used IBM computer equipment. By this time, Comdisco had also started leasing IBM equipment.
Over the next decade and a half, Comdisco expanded into global leasing and services operations. When Comdisco Ventures was launched in 1987 to provide venture lending and equipment leasing options for seed and early-stage technology companies, Comdisco's revenues topped $1 billion. Comdisco flourished under Pontikes's leadership, and he built an aggressive sales force that acquired and serviced large corporate clients.
Tragedy struck when Pontikes was diagnosed with liver cancer in late 1993. He passed away in July 1994, having named his son Nick heir apparent and ultimate successor as Comdisco's chief executive officer.
A NEW ERA
Nick Pontikes had come aboard Comdisco in mid-1992 at the age of 27. He had spent his previous years working at investment bank Drexel Burnham Lambert, the junk bond trading house headed by Michael Milken. He started off at Comdisco as director of international marketing and quickly moved his way up to chief operating officer in November of 1997.
After being appointed chairman and CEO in January 1999, at the very peak of the dotcom boom, Pontikes redirected Comdisco toward what seemed to many the promised land of the new economy. When Pontikes took over, Comdisco had four subsidiaries: leasing, services, Comdisco Ventures and a minority stake in Prism Communications, an earlystage broadband company with little infrastructure and a small customer base. The new CEO decided to focus on the latter two.
A month after he was named CEO, Pontikes had Comdisco acquire the shares in Prism it didn't already own for about $53 million in cash. But after burning through almost $500 million of Comdisco capital in less than two years Prism failed, and Comdisco withdrew its funding support in October 2000.
As for Comdisco Ventures, one US venture lending veteran says it became involved in “drive-by investing. The people were basically saying “Here's a term sheet, put your name in the box provided, and that's it.” That was the level of due diligence. They dabbled too much in dotcom and used commercial paper programmes to finance companies. In a venture portfolio, when the debt portion starts reaching a third of total capital, you run into a whole lot of risk. When the bubble burst, the bad loans came back to haunt them.”
Capitalising on the volcanic growth of dotcom companies, Comdisco Ventures did succeed in garnering a net income of $246 million on revenues of $673 million at the end of September 2000, filings show. (Comdisco as a whole had reached revenues of $4.2 billion that year.) However, when many of the technology and Internet-based companies Comdisco Ventures had made loans to went belly up, the company's fortunes changed.
Pontikes resigned in December 2000, after Comdisco had pulled the plug on Prism. At the end of January 2001, an initial public offering of Comdisco Ventures that had been planned since April of 2000 was cancelled, and a month before Comdisco filed for bankruptcy protection in July 2001, Comdisco Ventures chief Labe resigned.
PICKING UP THE PIECES
The party may be over, but Comdisco is still cleaning up. On August 12, 2002, the company emerged from Chapter 11 bankruptcy protection as Comdisco Holdings. Under its reorganisation plan, the company has a mandate to fully liquidate all remaining assets over three years. Calls to Comdisco Holdings for this article were not returned.
Meanwhile, Pontikes and former Comdisco chief financial officer John Vosicky are the defendants in a class action lawsuit filed by purchasers of Comdisco stock between Nov. 3, 1999, and Oct. 3, 2000. The complaint alleges that the company misrepresented its performance and that mismanagement led to inflation of the share price to artificial levels.
As for the venture debt portfolio, this past February, Lexington, Massachusetts-based Windspeed Ventures agreed to manage Comdisco Ventures's loan portfolio. Worth an approximate $800 million at the time when the company started to default, sources estimate the portfolio is currently worth between $200 and $300 million.
Windspeed Ventures declined to comment. However, as market conditions improve, Comdisco's once highflying venture debt portfolio might still be able to wring out some liquidity.