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Resellers see services as panacea

Computer resellers are snapping up smaller competitors in an effort to bolster their ability to offer services and beat back the adverse effects on sales of shrinking profit margins.

And the big keep getting bigger.

Major computer resellers are snapping up smaller competitors in an effort to bolster their ability to offer services, which carry higher profit margins these days and enable companies to beat back the adverse effects on sales of shrinking profit margins.

The consolidation trend comes as the hardware wars increasingly drive resellers toward services. During the past few years, margins on hardware have winnowed considerably, prompting resellers to branch out into services. Some resellers actually ask their customers to order hardware on their own because it can cost less and because it ultimately allows the reseller to reduce inventory costs.

Resellers are finding that an increasing number of computer makers are adding a direct sales model to their operations via their Web sites, while at the same time developing more of a build-to-order manufacturing system in order to keep prices competitive with direct vendors. Although resellers are still getting business from these indirect computer makers, the changes they have brought about are cutting into reseller profit margins.

Compaq (CPQ), for example, last October launched a page on its Web site to handle direct sales. The computer maker also is shortening its inventory turnaround time by relying more on a build-to-order manufacturing technique.

As a result, reseller giants like MicroAge (MICA) and Vanstar (VST) are snapping up smaller resellers in hopes of bolstering their services, operations, and profits.

"We have seen a market consolidation heavily underway since early 1997," said Charles Smulders, an analyst with Dataquest. "We see the majors acquire the smaller ones that have service-based skills."

Indeed. Last July, Vanstar announced plans to acquire Sysorex Information Systems, a government technology service provider, in a $46 million cash and debt deal. Sysorex, which is the largest reseller of IBM products to the government, expanded Vanstar's efforts to reach the government market.

MicroAge, meanwhile, has announced the acquisition of five resellers since October, when it acquired California-based companies Access Microsystems and Cass Marketing. Additionally, MicroAge announced earlier this month that it had purchased Miami-based InterPC, New York-based Computer Mechanic, and Arizona-based Advanced Information Services. The acquisitions were part of the company's strategy to not only expand its distribution reach, but to enlarge its integration services operations as well.

Earlier this week MicroAge posted an 18 percent jump in net earnings over year-ago figures, to $7.4 million. Its revenues for the quarter increased to $1.3 billion, up 31 percent from the previous year.

Vanstar also saw its earnings rise, reporting earlier this month a 36.4 percent jump in second-quarter revenues over year-ago figures, to $741.7 million. The company's profits, however, fell to $9.3 million for the quarter, down 16.2 percent from a year ago.

Even direct vendors, the ones putting so much pressure on resellers, are turning to services. Dell (DELL), for example, increasingly is using resellers and the services they can provide to aid its efforts to reach the corporate market.

For the moment, Dell has been grabbing market share with its price performance, Smulders said. Indirect suppliers like Apple (AAPL) have responded by turning to a direct model for some product lines, and by seeking to reduce manufacturing time in order to achieve a quicker turnaround time in delivering products.

"It's the large corporate resellers and the regional resellers that are feeling the greatest pressure from these changes the vendors are implementing," Smulders said. "The combination of the direct model and the just-in-time manufacturing is posing a challenge. So the challenge to resellers is adding value around the sale of the [computer]."