BTG sells product business to GTSI

In a bid to strengthen their individual positions in the federal market, BTG Inc. and Government Technology Services Inc. last month announced BTG would sell its product reseller business to GTSI in exchange for $8 million in cash and 3 million shares -- or 30.8 percent -- of GTSI's stock.

For years, BTG and GTSI have competed in the reseller market.

GTSI has been the largest PC reseller on the General Services Administration schedule business during the past several years, while systems integrator BTG entered the market five years ago when it acquired PC manufacturer BDS Inc. and, later, ACtech Inc.

However, both companies have reported either slim profits or losses in recent quarters as falling prices on commodity hardware and software have created very slim margins for resellers, industry observers said.

"The obvious conclusion one draws is that we both have businesses that are not big enough to handle the [market changes], which are margins are shrinking and costs have to be kept under control," said Edward H. Bersoff, BTG's president and chief executive officer. "Based on the way the market was behaving, consolidation was the obvious conclusion."

As part of the deal, BTG will continue to pursue business involving off-the-shelf technology, but the company will rely on GTSI to fulfill the product orders, the companies said.

On contracts that involve a mix of products and integration services, BTG will remain the prime, with GTSI as the subcontractor. However, BTG plans to hand off to GTSI such product-focused contracts as its GSA schedule and the National Institutes of Health's Electronic Computer Store II, Bersoff said.

BTG estimates it will hand off about half of its annual product-oriented revenue, which is $400 million to $450 million this year, the company said. GTSI also expects to take on a still-unspecified but "substantial" number of BTG personnel in sales and related areas.

The partnership will make it possible for "each party to go with its strength," Bersoff said. By giving up the product business, which the company had not been able to exploit as much as it expected, "We will now be able to focus our attention on the integration business, which has been an extremely profitable area over the years," he said.

Bersoff said, BTG's annual services revenues are more than $200 million today, compared with $27 million six years ago when the company did services only.

Strong IT Infrastructure

Dendy Young, GTSI's president and CEO, said his company would be able to take on BTG's product-fulfillment business without making extensive changes in its warehouse, facilities and information technology infrastructure. "We believe we will be able to do better with their business than they have done because of our strong IT infrastructure," Young said.

According to industry analysts, GTSI's ability to increase its business volume without substantial increases in infrastructure should improve its financial situation.

"If you can bring more volume through without increasing your distribution costs, you have got a winner," said Robert Guerra, president of Guerra and Associates. Guerra compares the commodity PC business to the grocery business, where the focus is doing high-volume business but keeping very low inventory.

William Loomis, an equity analyst at Legg Mason Wood Walker Inc., a Baltimore, financial services firm, said GTSI would benefit from the emphasis Young has placed on developing an IT infrastructure for tracking infrastructure. In a high-volume business, "it is critical you know exactly what you have in your warehouse," Loomis said.

Industry watchers said GTSI also should benefit from expanding its product line and its customer base. BTG carries many software and networking products that GTSI, with its focus on PCs and peripherals, does not. Also, BTG has a solid base of customers in the civilian agencies and the intelligence community, while GTSI traditionally has had most of its success in the Defense Department.

Under the terms of the agreement, which will have to be approved by GTSI shareholders, BTG would have one seat on GTSI's board of directors, and the two companies would mutually agree to a second director.