Tech Data lands $2-billion GE deal The Clearwater company's second blockbuster deal is part of a shake-up of the technology distribution industry. By AMEET SACHDEV St. Petersburg Times
1/1/1999
CLEARWATER -- Tech Data Corp. will become the exclusive supplier to General Electric Co.'s information technology unit in a deal worth $2-billion a year in sales to the computer-equipment distributor. The blockbuster alliance cements Tech Data's vital role in a rapidly changing technology distribution industry. It sparked a 14 percent increase in the company's stock, continuing a rally that began two weeks ago.
Tech Data of Clearwater will buy, assemble and ship computer equipment for GE Capital IT Solutions under a three-year agreement announced Thursday. Tech Data also will take over operations of a distribution warehouse in Frederick, Md., now run by the GE unit, one of the largest suppliers of technology products and services to corporate America. The deal comes on the heels of last week's decision by Compaq Computer Corp. to slash the number of distributors that sell its products from 39 to four. As one of the winners, Tech Data stands to gain up to $1-billion in new Compaq sales.
These changes underscore a shake-up in the technology distribution industry as manufacturers and wholesalers seek a better way to compete with the direct-sales model perfected by Dell Computer Corp. Tech Data has emerged as a central player in streamlining the supply chain.
"This augurs a new era of wholesale distribution," said Steve Raymund, Tech Data's chairman and chief executive. Investors seem to think so, too. Tech Data's stock rose $4.933/4 to close at $39.371/2 Thursday. In the past two weeks, shares have shot up 47 percent, erasing most of the loss the stock has suffered since the beginning of the year.
It's a stunning turnaround in Wall Street's perception of Tech Data and other distributors. Six months ago, concerns about falling computer prices and the impact of the Internet on middlemen like Tech Data put investors in a sour mood. "It's amazing how the pendulum swings," said Robert Anastasi, an analyst at Robinson-Humphrey in Atlanta.
The back-to-back Compaq and GE announcements led Tech Data to revise its earnings estimates for the current fiscal year, which began in February. The company now expects to make $2.40 to $2.45 a share, up from the $2.34 average estimate of analysts before Thursday, according to First Call Corp. Annual sales will be $16.5-billion to $17-billion, up from an earlier forecast of $16-billion.
Tech Data also told analysts that sales in the first quarter ended April 30 exceeded $3.8-billion. Company officials said they are comfortable with the current earnings estimate of 52 cents a share. First-quarter results will be released June 7.
The GE unit turned to Tech Data about six months ago to find ways to reduce its costs. GE was buying computers direct from manufacturers and components from a variety of distributors, including Tech Data. The company stored the equipment at its distribution center, where it also assembled computer systems before shipping them to customers, such as NationsBank Corp.
Now, GE Capital IT Solutions will send all of its orders to Tech Data, which will purchase and ship the product. But Tech Data will be invisible to GE's customers. "This is purely a logistics deal," Anastasi said. "There's an element of Federal Express here."
Revenues are expected to grow faster next year when Tech Data will have completely integrated GE's 200,000-square-foot distribution center. Less than 100 GE employees will transfer to Tech Data. The addition of $6-billion in sales over three years makes this the largest outsourcing deal in Tech Data's history.
Compaq's decision to pare distributors is likely to accelerate the outsourcing trend among other large corporate resellers, analysts said. Tech Data and Ingram Micro Inc., based in Santa Ana, Calif., will be the biggest benefactors because of their size and global reach. Indeed, the GE unit is looking to duplicate its new model in the 17 other countries where it operates.
"This changes who Tech Data is and how they operate," said Steve Ashley, an analyst at Robert W. Baird & Co. in Milwaukee.
