The Microchip Technology/Microsemi Corp. distribution channel is beginning to gel following the March acquisition of Microsemi by Microchip. Microsemi has joined Microchip in its authorization of Avnet Inc. to carry its complete product portfolio across the globe.
This is the first major move by the merged entity as it assesses its combined distribution channel. For Avnet, it’s a re-franchising of Microsemi, which parted ways with Avnet two years ago.
“From our standpoint it’s a real win,” said Lynn Torrel, Avnet senior vice president for global customer and supplier management. “We are very excited about the expanded franchise. We do very well with Microchip in terms of driving their revenue, and they are a fantastic company with a broad-based product line. We work with them globally to create demand.”
When Microchip acquired Microsemi, Torrel said, Avnet reached out to the companies early. “We have a lot of experience in the Microsemi portfolio; we know their technology; we had a lot of expertise within our team and a lot of purchasing knowledge. [Microsemi] has a lot of military products, and their portfolio is easy to manage. We had been very strong with them in the past, and we began our discussion with them based on our historical performance.”
Suppliers often rationalize their channel after a merger or acquisition. The merged entity could add distributors that only carried one supplier or drop a distributor they didn’t have in common. Adding the Microsemi franchise comes during a high point for Avnet, which finished its fourth fiscal quarter of 2018 at $5.06 billion, up 10 percent year-over-year. Sales for the fiscal year reached $19 billion, up 3.6 percent from the prior year.
Avnet has been in an almost constant state of change since CEO Rick Hamada was ousted in 2016. Avnet sold its Technology Solutions business; a number of senior executives left the company; it’s had to re-develop its entire ERP system; and it’s been absorbing several acquisitions. Among those, catalog distributor Premier Farnell specializes in demand-creation and Avnet has been capitalizing on the higher profit margins associated with design wins.
“I think one of the exciting aspects we are bringing to this — and we have worked closely with [Microchip and Microsemi] — is they had seen our historical performance; our knowledge of their customers; and the new customers that have been sourcing from us through Hackster.io, element14 and Premier Farnell,” said Torrel. “We are identifying new customers early in the design cycle and the broad-based technology that Microchip has added with Microsemi is increasing the number of customers we can deliver this technology to. We’ve expanded our capabilities; we have the expertise, and we have FAEs that can be quickly brought up to speed.”
The Microsemi acquisition strengthened Microchip’s presence in defense, aerospace, data center and communications markets; expanded its Ethernet portfolio to serve industrial IoT, enterprise and carrier markets; added specialized microcontrollers to serve the enterprise storage and optical networking markets; extended Microchip’s portfolio of timing, low power wireless, analog power and mixed signal solutions; added discrete and FPGA new product capabilities, and drove further scale in manufacturing, customer reach and sales channels. Distribution accounts for 49 percent of Microsemi’s sales.
Among global broadline distributors, Arrow Electronics Inc. and Future Electronics Inc. carry both Microchip and Microsemi. The two suppliers also share catalog distributors Digi-Key and Mouser. Microchip also distributes through Allied Electronics, Micross Components, Master Electronics, Phoenics Electronics, and ES Components in the Americas. Microsemi lists Falcon Electronics, RFMW Ltd. — recently acquired by TTI Inc. — Richardson RFPD and Semi Dice Inc. as distributors in the Americas.
“We expect to see [Microsemi-related] revenues picking up in the back half of the year,” said Avnet CEO Bill Amelio during Avnet’s Q4 conference call with analysts. “So, stay tuned. So that's a great pickup for us, and we're excited about having the line back. We have great expertise.”
The expansion will also further reverse a trend for Avnet: Sales from suppliers lost because of supplier channel changes were $36.8 million, $45.1 million and $45.8 million in fiscal 2018 for the Americas, EMEA and Asia regions, respectively, compared to sales of $263.2 million, $388.1 million and $328.3 million in fiscal 2017 for the Americas, EMEA and Asia regions.
“As you know, we had [Microsemi] for a long time and we were in fact the best demand creator in that line for Microsemi, and we will continue to be that way as we move forward,” Amelio added. “I'd say [the relationship] is more stable today than it was a couple years ago. And I think I would foresee it being that way with respect to [other] supplier lines. With the exception of some acquisitions occurring in the supply space, that could then change some of the rules of the game.”
“We are seeing stability with all our top suppliers,” Amelio continued. “We spend a lot of time with them. [President of Avnet’s Core Distribution Business Phil Gallagher] and I, we've visited over hundreds of our decision makers out in the supply chain and we have regular ops reviews with them and make sure that they understand exactly what our commitments are. And we work diligently to ensure that we achieve those commitments.”
Moves among semiconductor suppliers have disrupted the entire distribution industry. Following Analog Devices Inc.’s (ADI) acquisition of Linear Technology, ADI consolidated its global fulfillment distribution exclusively under Arrow Electronics Inc. Separately, Texas Instruments Inc. discontinued its demand-creation program with distributors, eliminating the opportunity for its channel to secure high-margin design opportunities.
“In the last couple of years there was a lot of [line card] movement,” Gallagher told analysts. “And a lot of it caused by accelerated M&A and consolidation on the supplier side. It was accelerated, but it wasn't new. If you go back 25-30 years, unfortunately some of us have been around that long, these things happen. There was a lot in a short period of time.”
Gallagher has been meeting with suppliers since he re-joined Avnet from TTI in 2017. “We don't sit in the supplier board room, so we don't know what they're absolutely thinking or when the next shoe may drop,” he said. “But we feel very good – never comfortable, but we're confident on where we are sitting with our supplier relationships right now and particularly with bringing Microsemi back is a big win for us.”
Torrel concurs. “Any organization [following M&A] looks at its channel strategy,” she said. “None of us knows what the future may bring – it has already brought changes none of us expected. But as long as companies look to drive synergies, we want them to expand their portfolio of products with Avnet. We are focused on supporting the needs of our supplier partners.”
“We are thrilled about re-engaging with Microsemi and supporting their products again,” she concluded. “You can just feel the energy.”