PC Connection Sees Passage Into Fed Market With ComTeq Purchase

By Richard McCaffery, Staff Writer Publicly traded PC Connection Inc. has scooped up reseller ComTeq Federal Inc. for an undisclosed amount to get a foothold in the federal market.Privately held ComTeq, a computer products reseller founded in 1994 with $64 million in sales last year, will get access to technical resources and fresh capital from its new parent company. ComTeq founder Gary Sorkin has been looking to upgrade the Rockville, Md., company's Web capabilities, accounting systems and call center technology."They have a lot of technical resources," Sorkin said. "They brought tremendous strengths to the table."ComTeq sells PCs, servers, hardware, storage equipment and software to the federal government. PC Connection sells 25,000 computers and related products mainly to small and midsize commercial businesses.The acquisition is a bit of a twist on the recent spate of purchases in the federal sector. Most of the deals have been driven by federal companies looking to get bigger to compete for larger government contracts. PC Connection simply was looking for a fast way to grow in the federal market. Less than 5 percent of the Merrimack, N.H., company's business is with the federal government.Conversely, all of ComTeq's business is with the federal government. It has 40 employees, and its customers include the Federal Energy Regulatory Commission, NASA, the Navy and the National Institutes of Health. In addition, ComTeq won a four-year deal with the Internal Revenue Service in October 1998. That deal is valued at up to $60 million. "ComTeq adds significant expertise to our competencies," said Patricia Gallup, PC Connection's chairman and chief executive officer. "They have many years of experience working with the federal government. That is not a core competency of PC Connection." ComTeq will operate as a wholly owned subsidiary of PC Connection. No layoffs are planned, and officials from both companies said one of the first priorities will be getting ComTeq's Web abilities up to snuff. As a direct marketer of computers and related products, PC Connection has used the Web and mail-order service to deliver products to customers overnight.In the first quarter, 5 percent of PC Connection's $129 million in sales were conducted online. Another 7 percent of sales were conducted online with some assistance, such as from a telemarketer, to close the deal. PC Connection officials said the number of online sales is growing quickly.Gallup founded the company in 1982 when she needed to buy a computer and had to drive more than two hours from her home in New Hampshire to get to the nearest computer store. PC Connection sells name-brand equipment from manufacturers such as Compaq Computer Corp., IBM Corp., and Microsoft Corp., mainly to small and midsize businesses via mail order.Sales have grown from $197 million in 1994 to $732 million in 1998. PC Connection's sales rose 33 percent in 1998 over the previous year. The company more than tripled its net income to $18.6 million last year, up 258 percent from $5.2 million in 1997.The 1,100-employee company is one of the country's oldest direct marketers of computers. PC Connection sells its products from catalogs, through its Web site and via a telemarketing sales force.The company went public in March 1998 and raised $57 million, which it used to pay off $13 million in bank debt, issue a $33 million dividend to existing shareholders and for working capital. PC Connection's stock is trading around $13 a share, down 50 percent from about $26 at the end of last year. The problem is it has been a tough year for computer resellers and distributors, thanks to ferocious competition from Dell Computer Corp. of Round Rock, Texas, and falling computer prices. Gallup said the company's main competition comes from Dell as well as nimble online resellers, such as CDW Computer Centers Inc. of Vernon Hills, Ill. For the quarter that ended March 31, PC Connection boosted its net income to $4.4 million from $3 million the year before. Sales jumped 33 percent, from $169 million to $225 million. The company beat analysts' earnings estimates by 1 cent a share, according to Zacks Investment Research Inc., Chicago.But PC Connection's receivables, or money it is owed by customers, continued to increase. At the time of the company's quarterly report in March, receivables stood at $64 million, up from $59 million for the quarter ending Dec. 31. A 7 percent jump in receivables in one quarter is no big deal for a company that grew sales 33 percent in the same time period.But for 1998, receivables nearly doubled, from $30 million in 1997 to $59 million in 1998. That usually is not a good sign in an industry that demands rigorous control of receivables and inventory.Receivables typically grow when a company pushes its sales, but one of the keys to maintaining manageable growth is controlling receivables.Tracey Thompson Turner, PC Connection's president of corporate communications, said the reason receivables have been on the rise is because the company is landing bigger accounts with bigger business customers. Many of these customers now are given the standard 30 days to pay for purchases, as opposed to small businesses and consumers, which are PC Connection's traditional customers, who pay for purchases on the spot with credit cards.PC Connection reduced its inventory for the latest quarter, from $63 million in December 1998 to $55 million in March.