There was a period in the electronics distribution industry during which an acquisition in Europe would barely get a second glance. That’s because foreign acquisitions by U.S.-based distributors were happening at roughly one per week. In some cases, it was almost a daily occurrence.
Although it appeared at the time that industry leaders Arrow Electronics Inc. and Avnet Inc. were playing a game of one-upsmanship acquiring competitors across the globe, both companies were (and still are) too well-managed to throw millions of dollars around for that goal alone. These acquisitions were strategic, and they still are.
But many of the ‘take-aways’ have changed. Distributors are acquiring for different reasons now.
In the 1990s — the heyday of acquisition — the primary reason was expansion. U.S.-based distributors had consolidated in the Americas and had begun to achieve economies of scale by centralizing warehousing and offering multiple product lines as one-stop shops. Although the countries (and distributors) of the EU largely remained distinct, many of the practices made sense. Pan-European distributors were consolidating linecards and warehouse/service centers. Acquisitions by U.S. distributors further consolidated line cards, enabled a broader product offering, and gave distributors leverage to build massive centralized warehouse and service centers serving the EU and its neighbors. Each country could be served independently, but more efficiently.
As manufacturing began its migration away from the EU and the Americas and into the Far East, distribution acquisition continued. The reasons were the same as before but a new wrinkle had been added: it was difficult to do business in many Asian countries without partnering with a local company. Eventually, some partners were acquired, but the pace of consolidation in Asia is slow relative to the EU. Still, acquisition expands a distributors’ reach, expands line cards, and in some cases introduces new services to the region.
Distributors have followed their customers to the Far East, where managing and fulfilling massive bills of material is a critical function. Customers not only want the ability to buy the same products in every region; they also want the ability to transport products across regions as necessary. Acquisition has helped distributors establish a global footprint, and many are trying to duplicate their services footprint across the world as well.
Growth through acquisition, however, hasn’t sustained the financial goals distributors strive to achieve. Organic growth – deriving new revenue with existing customers and services — is one way to generate revenue. Another is to expand into adjacent areas of business. This is where the new wave of acquisition is going.
The most recent example is Avnet’s acquisition of MSC Group. In addition to distributing components, MSC Group has expertise in the embedded space — a growing area for distribution. Embedded applications are complex, time consuming and potentially expensive for customers to develop. Key suppliers such as Intel Corp. already provide the building blocks for embedded systems: these boards simply need to be expanded toward a specific application or set of functions. Multiple components have to be pulled and added to build an embedded system: distributors carry all or nearly all of the essential ingredients.
Arrow Electronics has also been expanding into embedded systems. It’s recent acquisition binge, however, has been expanding its foothold in another adjacent market: reverse logistics/after-market services. These terms encompass a variety of services ranging from the repair and maintenance of installed products; taking back products such as cell phones and PCs for refurbishment and resale; to the breaking down, recycling and reclamation of electronics goods. This massive market opportunity has largely been served by a far-flung variety of small, specialty companies: business that provided just recycling, just collection, just repair, etc. Arrow and Avnet are bringing these and other services under a single umbrella: a one-stop shop, so to speak, for products no longer being used by their original owner. (Avnet has also made a series of acquisitions in the after-market.)
So the acquisition trend continues. In both design and after-market services, Arrow and Avnet began acquiring in the Americas. The trend is moving to the EU and inevitably will reach the Far East. This is not to say that the practices established in the Americas are “the best” and should be pushed on the rest of the world. These practices will be adopted if they provide a clear value to the electronics end-customer. If they do, they’ll catch on in the EU and Asia-Pacific — much as RoHS has flowed from the EU to the rest of the world.
As a two largest electronics distributors in the world – both Arrow and Avnet generate revenue in excess of $20 billion – they are the most likely companies to acquire. In that respect, the trend remains the same. It’s the end result that’s changing.
The more things change, the more they stay the same. That’s not necessarily a bad thing.