Avnet Doubles Down on Temporary Turmoil; Will it Work?

Perhaps Avnet Inc. should not have built a technology system sales and support unit to complement its core electronics components distribution operation but by agreeing to sell the division to Tech Data the company has layered on another level of complexity to an already challenged business, thereby increasing the likelihood of a major misstep that could hurt it down the road.

It's a high-stake gamble on the part of newly-appointed CEO William Amelio. The payoff is uncertain even in the most optimistic scenario of an unlikely sales surge but it does promise to eliminate a drag on margins and create the opportunity to direct resources to potentially beneficial acquisitions versus investing in a slow-growing, capital intensive operation. The strategy will take years to fully develop and the advantages may not be obvious for a while. So, why has Avnet's board of directors approved this drastic step?

Avnet was already grappling with many challenges prior to the announcement on Monday that Tech Data would acquire the distributor’s Technology Solutions (TS) division for $2.6 billion. Phoenix-based Avnet was juggling several projects that would be difficult to manage at any other time in addition to dealing with a fuzzy growth environment and numerous unknowns about the direction of the electronics market.

The company was in the midst of a management upheaval following the elevation of board member William Amelio to the position of CEO after the abrupt sacking of 32-year veteran Rick Hamada
It is still trying to conclude a problematic ERP rollout
Wants to buy troubled British distributor Premier Farnell and is awaiting regulatory approvals for the transaction from Israeli and European authorities
Working to boost margins companywide and moving to unwind a high-volume supply chain deal in Asia that has helped to depress profits
Figuring out how to spark growth in the Technology Solutions group and energize sales of components in North America, which continues to trail the rest of the globe in demand
Externally, Avnet has to convince analysts, investors and shareholders that it is not falling farther behind North American rival Arrow Electronics in several key sectors of the market

The sale of Avnet TS can only add to the perplexing bunch of issues Amelio must navigate in the efforts to spark growth at the company by refocusing it on the electronics design engineering and supply chain markets. Premier Farnell will not be an easy integration due to the company’s own internal problems, branding challenges and prior frequent management turnover. On top of this, the recent senior executive change at Avnet itself is fueling concerns in its senior management rank.

The sale of TS will further rob the company of many talents and foster the creation of an atmosphere of extreme uncertainty amongst employees wondering who would be retained, who would be laid off, who would be forced to retire and who might simply move on to a more stable corporate environment.

Finally, Amelio’s strategy of positioning Avnet as a dominant player in the design engineering and supply chain support market may prove more difficult than planned. While the objective is admirable, it is being pursued at a time of extreme industry flux, demand uncertainty, supplier consolidation and rising unwillingness of OEMs to shell out money for high-end design engineering support services.

Here are the challenges Avnet faces pursuing its strategy:

Put its House in Order: Avnet must quickly sort through its current management uncertainties, develop, maintain and acquire all the pieces to effectively serve the desired market. This will take years more. Avnet is already a major player in the design engineering and supply chain services sector but it is also a fast-evolving market with numerous players.
Beat Back the Competition: Nobody should underestimate the force of the rivalry going on in the distribution market as players jostle for the opportunity to serve the high-margin design engineering market. The higher payoff expected by industry players has attracted all kinds of companies, small and big alike. They will not be quickly dislodged and not all of them are potential acquisition targets. In fact, some won’t be available at all so Avnet cannot count on consolidating the segment to gain market share. The company will be fending off not only archrival Arrow Electronics but also small and medium-size players like Digi-Key, Mouser, Electrocomponents, TTI and a horde of others in Europe and Asia. Many of these companies are entrenched in their niches and are aware of Avnet’s intentions. They will be rushing to shore up market positions at a time Avnet will be distracted by the integration of a major acquisition and the rejigging of its management team.
OEM, EMS and Supplier Concerns: Other players in the electronics design and supply chains are wary of allowing any single company to establish a dominant position in the provision of services to engineers. Arrow and Avnet almost established a duopoly in the component distribution business through their aggressive consolidation moves of the last two decades and rivals are wary of another such development. In the past, smaller rivals in the West moved upstream to the higher margin design engineering support business to avoid the juggernauts but will have to slug it out with them this time. Companies like Digi-Key and Mouser have had years to hone their competitive strategies and will fight hard to keep each market point. Suppliers, too, are especially aware that any margin gains by Avnet and other larger distributors will come at their expense; they won’t give these up easily and may demand a price that will erode the higher profit Avnet expects from the business.
Changing Market Conditions: The design engineering and supply chain market is changing faster than anyone can predict. This is probably the biggest challenge facing Avnet and its competitors. Non-traditional players are exploring the components distribution market with innovative offerings (Amazon.com is one example) and Avnet may finish putting in place the elements it needs to serve the sector only to find that the market had moved in a different direction. It will have to keep monitoring and changing with the market to keep a competitive edge. That’s when a diversified revenue position would be advantageous but by jettisoning TS it would have removed that possibility.

Of course, Avnet may pull it off. It may successfully integrate Premier Farnell and in record time. It also may squeeze greater than expected advantages from the acquisition and subsequent transactions. It may also swiftly reorganize operations, calm down and retain restless executives, reassure employees and motivate them to fight off the competition. It may even win over more OEMs, contract manufacturers and suppliers and establish itself as the go-to-company for design engineers and supply chain executives. Finally, it may successfully stay ahead of and ride market changes to higher sales and margins.

That’s a lot of maybes. The next five years will tell whether Amelio was right to further break down the pieces of the company before putting it all together again.

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 bolaji.ojo@epsnewsonline.com.

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