GTSI Corp.

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GTSI Corp.

3902 Stonecroft Boulevard
Chantilly, Virginia 20151-1010
U.S.A.
Telephone: (703) 502-2000
Toll Free: (800) 999-4874
Fax: (703) 222-5204
Web site: http://www.gtsi.com

Public Company
Incorporated: 1983 as Government Technology Services, Inc.
Employees: 693
Sales: $934.7 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: GTSI
NAIC: 423430 Computer and Computer Peripheral Equipment and Software Merchant Wholesalers

GTSI Corp. provides IT solutions to federal, state, and local governments. Based in the northern Virginia town of Chantilly, located just outside of Washington, D.C., the company resells computers, software, and networking products. Its most significant business comes from the Defense Department, and total contracts with the federal government, all tolled, account for approximately three-quarters of the company’s sales. GTSI sells approximately 350,000 items offered by 3,400 vendors. In addition to Chantilly, the company has offices located across the United States as well as in Germany and Korea, where the Defense Department maintains a major presence.

Founding the Company in 1983

GTSI was founded in 1983 as Government Technology Services, Inc. by Kevin O’Donnell. In the beginning the company sold microcomputer software to federal agencies. In 1985 it added peripherals to its product line and also began selling to state governments. It was not until 1986 that GTSI began to sell personal computers. In addition, it now offered networking products and such services as configuring, installing, and maintaining the PCs in local area networks. To this point GTSI primarily worked through General Services Administration (GSA) as an approved vendor for federal agencies, but in 1987 it also began to bid on large government contracts. By early 1988 GTSI had established nine field offices across the country in order to land business from state and local governments. Its vendors included top hardware manufacturers, such as NCR, Hewlett-Packard, and Unisys, as well as software publishers, most notably Microsoft and Lotus. The company employed some 350 people, maintaining a technical support staff and a burn-in center for computer equipment.

In 1988 GTSI posted revenues in the $180 million range, and a year later that number improved to $277 million, of which approximately 40 percent of sales was through the GSA schedule, a procedure that allowed federal agencies to buy individual items that cost less than $25,000. By now sales were about evenly split between hardware and software. In August 1989 GTSI made a change in management when O’Donnell stepped down as chief executive officer in favor of Ray Lunceford, who had previously headed the company’s Federal Markets Division. O’Donnell continued to serve as the chairman of the board. A little more than a year later, in October 1990, Lunceford was replaced by Richard M. Rickenbach, who had previous executive experience at Control Data Corp., where he was general manager of a systems integration group for electrical utilities, and Scientific Information Services, a Minnesota company he headed. GTSI refused to discuss the reason for Lunceford’s departure, merely acknowledging that he had left the company.

GTSI landed its most significant deal in its brief history in 1990 when it was awarded a $769 million, five-year contract from the Defense Department. This “Companion Contract” called for the military to purchase 350,000 personal computers and work stations in a five-year span. GTSI was contracted to supply software and peripherals to support that equipment. Due in large measure to this success, GTSI saw its sales top $300 million in 1990, 60 percent of which came from large contracts, and the balance through the GSA schedule. In the previous four years, the company enjoyed a 600 percent growth in revenues. By now the company had adopted two complementary business models: one involved the reselling of off-the-shelf products sold in large volumes at low margins, and the other, a value-added model, configured off-the-shelf products to meet the specific needs of customers, primarily involving workstations and networking. Taking advantage of its impressive growth, GTSI went public in the summer of 1991, with half of the money raised earmarked to pay down debt and the rest allocated to finance expansion.

Beginning to Offer Apple Products in 1993

To better meet customer needs, GTSI in January 1992 began to offer Sun Microsystems workstations using the Unix operating system, along with necessary software and peripherals. In 1992 this business accounted for $35 million of the company’s $360 million in revenues posted for the year. Until this point GTSI was exclusively devoted to IBM-compatible PCs using Intel processors, then in 1993 the company began to offer a complete line of Apple Computer products. In effect, GTSI had become a one-stop shop for personal computers, offering federal agencies all major platforms. The company enjoyed a number of successes in 1994. It won a major portion of a three-year $724 million contract to supply PCs to the Air Force, a deal that had been delayed for two years because losing bidders had filed a series of appeals. GTSI was also one of a handful of companies selected to supply Unix-based products and services to NASA. In addition in 1993 GTSI had its contract with GSA renewed, allowing it to maintain its coveted spot on the GSA schedule, which in 1992 resulted in $671 million in hardware and software sales. GTSFs share of that amount was $152 million, and still represented a significant portion of its business. One GTSI official told the Washington Post that GSA approval was in essence a hunting license. GSA requirements were laborious, which dissuaded many companies from pursuing approval; however, for GTSI, schedule sales provided a foundation for the business.

As the federal government began to buy PCs at an increasing rate in the 1990s, a number of local companies became computer resellers. In an attempt to create a powerhouse in the field, GTSI acquired one of its biggest rivals in 1994, buying Falcon Microsystems, Inc. from its founder and sole stockholder, M. Dendy Young, at a cost of $16.5 million in cash and an option that allowed Young to buy 100,000 shares of GTSI stock, as well as additional payments based on future contingencies. With margins in the industry so low, and market conditions growing tougher, executives from both companies felt it was in their mutual interest to combine operations. In the previous year, 1993, GTSI recorded $523.6 million in revenues and Falcon had $160 million.

Falcon’s founder was born in Rhodesia, since renamed Zimbabwe. Young came to the United States because of his success in building a computer from scratch as a teenager in the early 1960s, which he entered in a science fair sponsored by the U.S. Agency for International Development. Young won a full scholarship to the university of his choice, which was the Massachusetts Institute of Technology, where he graduated with a degree in electrical engineering in 1970. After going home and working for two years with Computer Sciences Corp., he returned to Boston to further his education, this time earning an M.B.A. from Harvard. He then spent several years working at Federal Data Corp. and a short stint with a similar company before deciding to strike out on his own. In 1982 he created Falcon Systems, a systems integration company catering to the federal government. A year later the company won its first major contract, around the same time that Young became interested in the computer reselling business. In particular he saw that Apple Computer products were not being sold to the government. Recognizing an opportunity he sought a letter of supply from Apple in order to gain GSA schedule approval, only to discover that no one at the computer company appeared interested in the idea. According to Computer Reseller News, Young refused to give up: “Finally, after months of trying, a regional manager at Apple signed the letter. And despite the fact the manager was not officially authorized to grant Falcon permission to sell Apple’s products, the General Services Administration, anxious to get Apple on its schedule, turned a blind eye.” The reselling portion of Young’s company grew rapidly, prompting him in 1987 to sell the integration business to Oracle Systems for $20 million, which he then plowed back into the Apple reselling operation, now renamed Falcon Microsystems. The company was the exclusive seller of Apple to the federal government until 1993, when other firms, such as GTSI, gained authorization from Apple. As a consequence, Falcon added new vendors: IBM, Compaq Computer, Silicon Graphics, and Dell Computer. Although Falcon and GTSI now began to compete against each other on contracts, they still maintained their niches in the marketplace. While GTSI was strong in Microsoft DOS and military customers, Falcon was dominant in Apple sales to civilian agencies. Merging the two operations appeared to be a wise choice for both companies, although Young called it one of the toughest decisions he ever had to make. He agreed to remain as a consultant to GTSI to help in the transition, but was not in line for a permanent post with GTSI. As part of the deal, he signed a five-year noncompete agreement. It would become a moot point, however, because less than two years later he would be called on to take the helm of GTSI, which was very much a floundering company by this time.

Company Perspectives

For nearly 20 years, GTSI has delivered maximum value to public sector customers by teaming with global IT leaders like HP, Panasonic, Microsoft, IBM, Sun Microsystems, and Cisco. We help our customers do their jobs more effectively through a combination of our broad range of products and services, our extensive contract portfolio, and our ISO 9000-registered logistics.

GTSI encountered a number of problems following the merger. First, the integration of Falcon with GTSI proved to be problematic. In a December 1994 article, Computer Reseller News reported, “Some former Falcon workers said corporate-culture clashes and other issues have slowed the consolidation effort, and key people have left the combined company.” At this time GTSI also found itself the object of an unwanted takeover bid. Milwaukee-based Diana Corp., a distributor of meat and seafood with a small computer equipment business, offered $16 per share to purchase all of GTSFs stock in an effort to enter the federal reselling market. Although GTSI was able to fend off this attempt, it served as an unwelcomed distraction at a difficult time for the company. Its business was starting to feel the effects of cutbacks in military budgets, primarily due to the end of the Cold War. In February 1995 GTSI reported a significant decrease in profits for 1994, prompting the board to remove Rickenbach from the chairmanship and investors to lose confidence in the company’s stock. To make matters worse, GTSI soon learned that it was the object of a Justice Department inquiry, the result of a special suit that had actually been filed in federal court against GTSI and Novell Inc. in 1992. Provisions of such suits allowed whistleblowers to sue on behalf of the government and awarded them a portion of any settlement or fine. To protect claimants the suits were sealed until the Justice Department decided to act. In this case, a former Novell employee, Mary Slutman, accused GTSI of failing to pass on rebates it received from Novell to government customers. At this stage the suit was a public relations blackeye, and it would linger in the background until the autumn of 1997 when GTSI finally agreed to pay $400,000 to settle the matter out of court while not admitting guilt. Slutman received an estimated $68,000.

Dendy Young Named CEO in 1995

The condition of GTSI deteriorated to the point that in May 1995 the management hired Atlanta-based Robinson-Humphrey Company to search for a buyer. When Rickenbach resigned several months later, GTSI called off Robinson-Humphrey and looked to focus its efforts on turning around the business. Board member Gerald Ebker, a retired IBM vice-president, assumed Rickenbach’s position while a search was conducted for a permanent CEO and president. Late in 1995, just 18 months after selling Falcon to GTSI, Young was brought in to rescue the company, which had laid off a tenth of its staff and was lurching toward bankruptcy. Forbes in a 2003 profile of GTSI described Young’s assessment of what he found when he took control: “The business was basically okay; management stank. He dismissed all six senior executives and brought in eight new ones, then paid himself $1 a year in 1996 and 1997, in part to motivate a demoralized staff.” According to Young, GTSI “had all of their eggs in one basket,” meaning product sales. In order to provide some diversification and improve the bottom line, he instituted technology teams to create customized bundles of hardware, software, and associated services to meet customer needs. These teams concentrated on networking, Internet functions, enterprise networks and intranets, mobile computing, and wireless communications.

GTSI had recovered enough to take advantage of a second chance to grow by external means. In late 1997 it agreed to acquire the computer reselling business of BTG, Inc., another northern Virginia company. Founded by Ed Bersoff, BTG started out as a high-end developer of complex computer programs and services, often performing highly critical, and highly profitable, work for the military. In 1992 BTG began to compete directly with GTSI on the reselling of off-the-shelf computer products, and the two companies and their employees developed an antipathy for one another. As the environment for reselling became more difficult, due to increased competition and new procurement rules imposed by the government, BTG began to experience escalating losses. In November 1997 Bersoff approached Young about selling his computer division to GTSI and the two men, over a beer at a hotel bar, quickly came to a basic understanding on a cash and stock deal. The final price was $7.3 million in cash and three million shares of GTSI stock. The news was not well received by BTG employees, many of whom, according to the Washington Post, regarded GTSI as “Darth Vader” and a “sweatshop.” As a result GTSI was not as successful as it would have preferred in retaining BTG talent.

In 1998 GTSI integrated BTG into its operations and streamlined its information technology systems, while its new management team became better coordinated. By mid-year GTSI was able to announce its first profitable second quarter since 1994. Having turned the corner, GTSI began to implement new strategies to produce stronger results, including the realignment of its dozen technology teams. The terrorist attacks that occurred in the United States on September 11, 2001, also positioned the company for ongoing growth, as IT spending by the government became a top priority. In order to fully take advantage of this opportunity, however, GTSI needed to improve on the service side, which was the fastest growing part of GS A’s technology budget, but still represented just 3 percent of GTSI revenues.