WSJ May 21, 1999
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Tech Data to Handle PC Buying
For GE Unit That Supplies Firms
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
In another sign of the changes sweeping personal-computer distribution, Tech Data Corp., the nation's second-largest wholesaler of PCs, agreed to handle $2 billion a year in computer purchasing for GE Capital Information Technology Solutions, the fifth-largest supplier of PCs to corporate buyers.
The agreement comes as corporate PC dealers have been shifting to providing computer services because of falling margins on sales of computer hardware. Just last week, Entex Information Services Inc. similarly turned over its PC purchasing to CompuCom Systems Inc.
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PC Dealers Bow Out
Squeezed by falling PC margins, corporate dealers are forgoing procurement and distribution for services
May 1999: GE Capital Information Solutions outsources PC purchase and assembly operations to Tech Data May 1999: CompuCom Systems acquires hardware business from Entex Information Services December 1998: MicroAge proposes sale or spinoff of its Pinacor distribution operation October 1998: Vanstar agrees to be acquired by rival Inacom
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News of the agreement sent Tech Data shares 14% higher, closing at $39.375, up $4.9375 in Nasdaq Stock Market trading Thursday. The Clearwater, Fla., company said it expects profit for the fiscal year ending Jan. 31 of $2.40 to $2.45 a diluted share -- or seven to 12 cents above the consensus First Call estimate.
Analysts said consolidation is likely to accelerate. In addition to cost pressures, PC makers are paring back on authorized resellers to lower their costs. Two weeks ago, Compaq Computer Corp. said it will pare its resellers to four, including Tech Data, from 39 in the next few months. Distributors wholesale computers, and dealers sell to the end customer.
"You will see more of the corporate resellers doing outsourcing deals with the big distributors," predicted Robert P. Anastasi, managing director at Robinson-Humphrey Co. He said smaller distributors may face pressure to merge to better compete with Tech Data and Ingram Micro Inc., the two largest companies in the market.
GE isn't paying Tech Data to take on the new business. Tech Data President Anthony A. Ibarguen said the GE agreementand Compaq's decision to reduce authorized distributors should add $500 million to $1 billion to its projected $16 billion in sales this fiscal year.
James E. Mohn, president of GE Capital Information Technology Solutions, said the agreement allows the $5.8 billion company to continue to supply computers to its customers without the carrying costs. "We're getting out of the warehousing and back-office distribution business so I can focus on much higher-margin services business," he said.
Mr. Mohn said discussions have been under way for six months. Compaq's decision to require his firm to buy its products from a distributor came after it was already committed to outsourcing the work. He said GE is also considering using Tech Data as its equipment supplier outside the U.S.
A crucial factor in the consolidation is the rise of PC makers Dell Computer Corp. and Gateway Inc., which sell directly to customers.
As part of its outsourcing arrangement, Tech Data agreed to take over the lease and employees associated with a 200,000-square-foot warehouse and assembly operation in Maryland. GE Capital ITS, a unit of General Electric Co., said it plans to close five other warehouses.
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