GTSI Touts Size as Key to Reseller's Financial Success

GTSI Touts Size as Key to Reseller's Financial Success

By Bob Starzynski
Staff Writer

Government Technology Services Inc. executives say the purchase of rival BTG's $200 million reselling business should give the reseller the muscle it needs to turn an annual profit after more than two years in the red.

"Companies that will be successful in reselling in the long run will need to be very large," said Joel Lipkin, vice president of business development for Chantilly, Va.-based GTSI. To be successful, he said, "we need to handle high volumes of selling with these low margins."

Under the deal announced last month, Fairfax, Va.-based integrator BTG will sell its technology product reselling operations - about one-third of its business - to GTSI for about $23 million in cash and stock. The deal is expected to be completed in February.

Many analysts hailed the pending deal as a win-win situation: BTG gets rid of its low-margin reselling to allow a clearer focus on integration services, while GTSI buys out a major competitor for a bargain price of about 10 cents on each dollar of revenue.

GTSI does almost all of its reselling with the federal government; the Department of Defense's Army, Navy and Air Force are the company's largest customers. GTSI's biggest competition today is the manufacturing industry itself, including Dell Computer Corp., Compaq Computer Corp. and Gateway 2000.

Although details about the transfer of employees and other assets remain to be worked out, GTSI has a clear direction, Lipkin said. "We honestly believe there will always be a role for a reseller that offers an added value," he said. "It's not enough to be a distribution point and take orders anymore. We really depend on our relationships."

Many analysts believe BTG can turn several disappointing quarters of losses back into steady profits if it focuses on high-margin services. It is getting rid of a business that has gross margins of 8 percent to 10 percent and keeping a business that has 40 percent gross margins.

But one key question remains: How does GTSI, which has not had a money-making year since 1994, grow its revenue and return to profitability? GTSI and BTG executives who crafted the pending deal say that this acquisition is a step in the right direction.

A mutually exclusive tie between BTG and GTSI must wait until their existing contracts with other resellers and integrators expire.

-Ed Bersoff, BTG

"Increasing their amount of business gives them economies of scale," said Ed Bersoff, BTG's president and chief executive. "They won't increase their gross margins. But they will be able to increase operating margins. That should be profitable."

Richard Leggett, an analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va., said, "Now that they have taken the assets of one of their largest competitors, they can become a premier provider [of government reselling services]."

But not everyone shares their optimism. Skeptics wonder if GTSI can rekindle a revenue stream that has fallen to $492 million in 1996 from $617 million in 1994, and raise a bottom line that went from a profit of $2.6 million to a loss of $17.8 million over the same time.

"[GTSI] has a tremendous challenge of trying to find profitability," said Bob Dornan, senior vice president of Federal Sources Inc. in McLean, Va.

"Picking up BTG's low-margin business is not going to change things for GTSI," said Tom Meagher, an information technology analyst with Ferris, Baker Watts Inc. in Washington.

"GTSI has been the largest company in its market for years and hasn't been profitable for years. I don't see how this [deal] solves that."

Dendy Young, GTSI's president and CEO of two years, recently admitted that his company has not found the key to higher margins and greater revenue. In a company statement issued in November, Young said, "we have seen the government fundamentally change its procurement process, reducing barriers to entry and emphasizing the importance of relationships."

GTSI's Fluctuating Sales

GSA Schedule Sales*
$142 million
$152 million
$138 million
$122 million
$204 million
$138 million
$248 million
*Figures include sales of microsystems, large systems and mainframe computers.

Sources: Federal Sources Inc., McLean, Va., and General Services Administration

Reforms to government purchasing have changed the resellers' playing field over the past few years. Companies like GTSI used to chalk up sales because computer manufacturers did not want to deal with the intricacies of selling directly to the federal government, Dornan said.

But sweeping acquisition reforms have made it easier to sell to the government. Computer manufacturers, such as Dell Computer Corp. of Austin, Texas, and Compaq Computer Corp. of Houston, have increased their direct selling to the government severalfold over the last two years. This trend, Dornan said, will not reverse course.

By purchasing BTG's reselling business, GTSI is making a statement that it does not intend to abandon its reselling market and instead turn to the more lucrative services industry, Meagher said.

A pivotal question is how the two companies will work together in the future. Both companies have existing contracts with other resellers and integrators, said Bersoff. Therefore, a mutually exclusive tie between BTG and GTSI must wait until those existing contracts expire.

GTSI will pay BTG $8 million in cash and give its former competitor preferred stock that is convertible to common stock after shareholder approval. Bersoff will get a seat on GTSI's board and will have the right to appoint an additional board member. Once the preferred stock is converted to common stock, BTG will own one-third of GTSI.

Although BTG will keep several large indefinite-delivery, indefinite-quantity contracts that include reselling systems, Bersoff said, the company will turn to GTSI and its distributor relationships for most of the equipment that it will integrate and service. Likewise, he said, GTSI will turn to BTG when it sells systems that the customer needs to have integrated.

"There are some needs that we will have that are not in BTG's core competency," Lipkin said. "We will always look to them first, but will still utilize the other service providers."

Dornan and Meagher don't believe that the key to profitability for GTSI is simply melding BTG's business with its own. Rather, the key to profitability involves an internal assessment, they said.

"GTSI's reselling activity with [the General Services Administration] over the past several years has been up and down," Dornan said. "The challenge for them is to become highly efficient or focused on a tight technology niche or relationship niche."

"GTSI needs to figure out what they make money on and drop the products they don't make money on," Meagher said. "They need to winnow out their offerings, not expand them."

Bersoff said that there will inevitably be layoffs from the consolidation of business, but he could not give an exact figure.

Lipkin said that the number of employees retained will be determined by what is needed to make GTSI profitable. About 300 people work in BTG's reselling business.

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