Editor's note: This article has been updated with a statement from Avnet.
Maxim Integrated Products, which was officially acquired by Analog Devices Inc. (ADI) in August, is discontinuing its relationship with distributor Avnet Inc. Maxim accounted for roughly 3 percent of Avnet’s fiscal 2021 sales of $19.5 billion.
The transition will take place over the next several months, said Avnet in a statement. The company added its Farnell business is not impacted by the move and will continue to carry Maxim products. Low-volume, high-mix "catalog" distributors, like Farnell, service design engineers and operate differently than volume and fulfillment businesses.
The move is not entirely surprising following ADI’s decision in 2017 to consolidate its global volume distribution business under Avnet rival Arrow Electronics Inc. ADI had acquired Linear Technology, which did not distribute through Avnet, the prior year. Analog Devices had distributed through both Arrow and Avnet for years, but Arrow was ADI’s – and Linear’s -- largest distributor.
It is not unusual for component suppliers to consolidate under a single distributor following a merger or acquisition. Rival semiconductor companies used to refuse to be sold side-by-side within a distribution organization for competitive reasons. If a distribution M&A brought these suppliers together, one line was usually dropped. Likewise, when suppliers merge, they often pare down their distribution roster.
On the other hand, a distributor can benefit from a supplier merger if it retains the combined product portfolio. Both ADI and Maxim sell more than 50 percent of their volume through distribution, so the gain to Arrow could be considerable. Both Arrow and Avnet are in their pre-earnings quiet periods and declined to comment further on the impact of the ADI/Maxim decision.
There’s never a good time to lose a key supplier, but distributors have faced some blows in recent years. In late 2019, Avnet and five other distributors lost the Texas Instruments line. TI had opted to take more of its customers direct. This followed a move by TI to discontinue its demand creation business with the channel. Under the program, suppliers reward distributors for securing a socket in an OEM design. Rewards can eat into supplier profit margins.
Distributors had until December of 2020 to phase out the TI business. Avnet has worked steadily to "replace" it's TI business with suppliers on its line card. Most opportunities have been in new design wins, which take awhile to reach production.
Avnet remains well-positioned to support its current customers and will continue to strengthen and grow its current industry-leading supplier partnerships, the company stated.
"Analog Devices terminated its relationship with Avnet in 2017 following ADI's acquisition of Linear Technology, which had an exclusive distribution agreement with Arrow. Roughly $500 million in sales shifted from Avnet to Arrow. Avnet is currently Maxim’s only global volume distribution partner, and made up 22 percent of Maxim’s revenue in FY19, or roughly $500 million," reported Wall Street analyst Stifel in July 2020. "We believe margins in that business are above company average due to its demand-creation model. For Arrow, ADI represented roughly $2 billion, or 30 percent of ADI's sales in FY19, up from 28 percent in FY18 and 14 percent in FY17. Arrow performs both demand-creation and demand-fulfillment."
Unfortunately for Avnet, there are considerable cost savings associated with distribution consolidation. Many suppliers continually train their distributors on their technology. They also compensate distributors for demand-creation. For customers, there are price advantages to buying large quantities from a few suppliers and big customers are first in line in the channel if component supplies become scarce.
Still, Avnet’s history and sales volume with Maxim made executives optimistic the relationship would continue following the ADI acquisition. Moreover, customers try to avoid buying too much product from a single supplier and see competition in the distribution market as healthy. For one thing it helps keep prices in check.
“Given Arrow's strong global capabilities, extensive demand creation network, and global ERP system, adding Maxim would make sense from a logistical and economic standpoint, particularly if ADI integrates the Maxim products under one portfolio,” said Stifel last year. “For Avnet, we estimate roughly $20 million to $25 million in potential lost operating profit. For Arrow, the additional business would require some additional investments in engineering resources, and potentially some margin concessions to ADI, but net-net should be accretive fairly immediately.”
One argument in Avnet’s favor was Arrow had no relationship with Maxim since the mid-2000s. Coming up to speed on the products, technologies and customer base could be challenging, Stifel added. “But unless the Maxim business is kept separate, retaining Avnet may also require ADI to give access to its own product lines and shifting business away from Arrow. We don't see that making sense at this point.”
Avnet's share price declined ~4% to $36.09 immediately following the Maxim announcement, according to Seeking Alpha.