Avnet Inc.’s acquisition offer for Premier Farnell plc is undoubtedly one of the more controversial M&A moves in its history coming fast on the heels of the abrupt sacking last month of its CEO and his replacement by a member of the board of directors. The shock of the Premier Farnell transaction is not just in the timing of the deal, however, but also in the acquisition target.
A troubled enterprise struggling through a series of reorganizations, high executive turnover, intensely pressured profit margins and a jumbled branding message, Premier Farnell shouldn’t be the most desirable company on anyone’s acquisition list. Somehow, though, the company has landed on the shopping list of Dätwyler Group AG, a Swiss company, and subsequently on Avnet’s.
Not only did Avnet find Premier Farnell a compelling target it is also willing to pay a hefty premium for the British distributor. In fact, Avnet could end up paying even more than the £1.85 per share offered because Premier Farnell’s stock price has climbed above this level, closing on Friday at approximately £1.95 in anticipation of a bidding war. (See: Avnet Bid May Spark Bidding War for Premier Farnell).
Premier Farnell’s board of directors has thrown its support behind Avnet’s bid but the same group earlier supported Dätwyler’s offer. The competition is a sweet development for Premier Farnell; its stock price has more than doubled from the 52-week low and has risen 79 percent since Dätwyler made its initial offer. It’s not difficult to see why the management has been swift to shift its allegiance from one already high bidder to an even higher bidder.
“The Board of Premier Farnell confirms that it has withdrawn its recommendation of the offer from Dätwyler Holding AG and that it intends unanimously to recommend the Avnet Offer. The Avnet Offer price of 185 pence per share in cash values Premier Farnell at a premium of 12.1 percent to the Dätwyler Offer price of 165 pence per share in cash,” Dätwyler said in a statement. “In evaluating the Avnet Offer, the Board of Premier Farnell has considered various aspects of the Avnet Offer including valuation, transaction timing and execution risk, and considers the Avnet Offer to represent a superior offer for Premier Farnell shareholders, as compared to the Dätwyler Offer.
If Premier Farnell’s warm embrace of its suitors is understandable, Avnet’s move is a bit more difficult to fathom. Does this company need another unwieldy acquisition at this time in its history? If the answer is in the affirmative, then the follow up should be why Premier Farnell is the right acquisition target for Avnet. The list of questions about the transaction include: Why exactly does Avnet want Premier Farnell so badly that it would offer almost $1 billion for the troubled enterprise; How and why was it so quick to come up with an offer for Premier Farnell only a few weeks after sacking the CEO who may or may not have initiated the transaction and; If former CEO Rick Hamada had not opened discussions with Premier Farnell before leaving on June 11 did interim CEO William Amelio have enough time to do the necessary due diligence before launching this offer.”
One can only assume that Avnet had been exploring the possibility of acquiring Premier Farnell previously and might have been deadlocked in its discussion with the company. It is also possible that Hamada had a disagreement with the board of directors over Premier Farnell, in addition to other issues. These are all questions Avnet’s management should address at the company’s upcoming analysts’ conference call.
Pros and Cons of the Deal
In the meantime, though, the offer for Premier Farnell remains baffling. If successful, Avnet would gain a company that has a good knowledge of the digital world, deep connections with design engineers and an attractive mailing list. It will also inherit a boatload of problems. Premier Farnell’s troubled North American division, Newark element 14, for example, has gone through two name changes and about five CEOs since 2003. The parent company also has reportedly been trying to integrate multiple computer platforms and lacks a deep stack of seasoned executives that can add to the pool of experienced managers at Avnet.
Avnet, too, is going through its own internal turmoil. Hamada’s replacement William Amelio must lead the company through a bunch of difficult maneuvers, including: an unexpected CEO change; the search for a new CEO; continuing organizational restructuring; a refocusing on the digital market; the completion of its global ERP rollout and, now; the proposed acquisition of Premier Farnell. Acquisitions are difficult to integrate notwithstanding the experience of a company like Avnet that has made nearly 100 such transactions in the last couple of decades. A large-size deal at a time of tepid growth and in the midst of an ongoing reorganization mean the company may be biting off more than it can comfortably fit into its already stretched cheeks.
Why then would Avnet want to tack on a troubled company like Premier Farnell to an already full plate of challenges? Industry observers believe Avnet is concerned at what is beginning to look like a gulf in operational performance between itself and rival Arrow Electronics. It is also seeking to ward off nimble rival distributors like Digi-Key, Electrocomponents and Mouser, all of which are leveraging their background in the catalog business to penetrate deeper into the design chain.
Avnet also hopes to improve gross profit margins by adding Premier Farnell's high-service business to its operations. This may be more difficult than the company expects because of likely opposition from wary component suppliers concerned that they may be further squeezed by the big distributor. The suppliers aren’t keen on allowing Avnet to improve its own profitability at their own expense, according to an industry source. Avnet’s gains would be the suppliers’ loss, which means they may throw a few hurdles on its path. Of course, Avnet already has relations with many of these suppliers and may be able to convince them they would benefit from the move.
Avnet should certainly take advantage of its solid balance sheet and the strong dollar to add on operationally beneficial acquisitions. The company has grown in the last couple of decades through both internal expansion and acquisitions. This should continue. However, it could have gone for a company with fewer challenges and that can come with even more benefits.
If Avnet’s goals in Europe include strengthening and improving its competitive position against Arrow, it could have gone after a more stable entity with a reduced risk profile. One such company is Electrocomponents plc. Over the last year, the Oxford-based company has improved operations and added many strong and experienced executives with varied backgrounds under group CEO Lindsley Ruth, another veteran of the industry who joined from Future Electronics last year. Reputed for his deep knowledge of the industry, Ruth would be a strong addition to Avnet’s senior executive team and a candidate for the company’s top job.
Perhaps Avnet’s leaders thought Electrocomponents would be a lot more expensive than Premier Farnell. That would be correct. Electrocomponents’ market value has been swinging higher under Ruth, rising to £1.29 billion ($1.71 billion) on Friday, July 29. Its stock price closed on the same day at £2.93 per share, just under the 52-week high of £3 per share. To win this company, a buyer must be willing to pay a double-digit premium that would put the purchase price well above $2 billion. Avnet, which is taking advantage of the weak British currency might have balked at paying such a sum.
It should rethink this strategy. If Dätwyler returns to the bidding room with a higher offer for Premier Farnell, Avnet should walk away from this flawed deal and look at any of the better positioned and less-challenged European distributors. Unfortunately, though, the picking isn’t quite robust.
Bolaji Ojo is editor-in-chief and publisher of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at email@example.com.