IT services firm acquires Vanstar

Vanstar Corp., a newcomer to the federal market last year through its acquisition of Sysorex Information Systems Inc., does not plan to change its position in the federal market after its merger with Inacom Corp., officials with both firms said.

Inacom and Vanstar earlier this month announced plans to combine the two companies in a $480 million stock swap that will create a large services firm and a global distributor of computer products made by IBM Corp., Hewlett-Packard Co., Compaq Computer Corp. and other vendors.

"Our intention is to continue this operation now known as Vanstar Government Systems as the federal market entity of the new merged company," said Carleton Jones, president of Vanstar Government Systems Inc. "We can say quite definitively there is a firm commitment by both companies...to continue to pursue the federal government market."

Inacom could not be reached for comment.

Vanstar Government Systems was created when Vanstar bought Fairfax, Va.-based Sysorex in July 1997 in a $46 million deal. The company holds a General Services Administration schedule and has several federal contracts, including recent deals with the Bureau of Prisons and the Army.

Inacom, based in Omaha, Neb., and Vanstar, based in Atlanta, together have 12,000 employees and annual revenue of approximately $7 billion. But Inacom said it will lay off some employees and take a pre-tax charge of up to $155 million to cover the cost of the merger.

Jones said he does not expect layoffs in his group because there is almost no overlap between Inacom and Vanstar Government Systems.

The acquisition means Inacom will place more emphasis on the services integration business. The combined company will have $800 million in service revenue, and 7,300 of the combined company's employees are service professionals.

"The combined company will have all the capabilities that Vanstar had on the product side and...all the combined strength in services that Vanstar and Inacom had before the merger," Jones said.

But federal market observers said it is not clear whether Inacom has what it takes to succeed in the federal market.

"One question will be, Does Inacom have the stomach to deal with the margins in the federal government and the cyclical nature of the business?" said Alan Bechara, vice president and chief operating officer of Comark Federal Systems Inc.

Bechara also noted that Inacom is accustomed to service contracts offering higher margins than those typically found in the federal market.

Mark Amtower, president of Amtower & Co., Ashton, Md., said the deal makes "tremendous sense" for Vanstar, but it will be good for its government group only if Inacom understands the true potential of the federal, state and local market.

The federal opportunity lies in being a low-end, nonmanufacturer integrator, Amtower said. Nobody has filled that niche, he added, and with the government's voracious appetite for custom-configured boxes from any manufacturer, the niche is waiting to be exploited, he said.

Rumors that Vanstar was for sale circulated after it posted a $10.4 million loss for its first fiscal quarter, ended July 31.

Under terms of the merger, Vanstar shareholders will receive 0.64 shares of Inacom common stock tax-free for each share of Vanstar common stock they hold. The board of directors of Inacom will expand from nine to 13 to make room for William Tauscher, chairman and chief executive officer of Vanstar, and other Vanstar board members.

The deal is subject to federal regulatory approval and must be approved by shareholders of both firms. It is expected to close late this year or early next year.

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