Avnet Buys GE's Access Server Distribution Biz for $412.5 Million

Published: November 6, 2006

by Timothy Prickett Morgan

Electronics and IT infrastructure distributor Avnet is one of the largest such distributors in the world, and this week it got quite a bit larger as it acquired one of the jewels of the IT distribution business: General Electric's Access Distribution business. Access may not be a brand name that a lot of end users know, but it is projected to have over $2 billion in sales in 2006 and is the largest distributor of servers made by Sun Microsystems.

According to Roy Vallee, chairman and chief executive officer at Avnet, the company was interested in buying Access Distribution for a number of reasons. For one thing, Avnet has traditionally pushed servers and infrastructure products from IBM and Hewlett-Packard, which makes up the bulk of sales in its Technology Solutions group. It never had much of a presence with Sun or its customers. With the Access Distribution deal, Avnet's Technology Solutions unit will have approximately $7 billion in sales and the overall company will grow to around $17 billion in annual sales.

In fact, according to Vallee, Avnet's previous relationship with Sun was only through that company's acquisition last year of tape and library maker StorageTek, and that business accounted for less than $100 million a year. With Sun growing revenues again because it has revamped its UltraSparc-based Sun Fire server line with competitive--in terms of performance and price--UltraSparc-IV+ machines and gaining market share in big handfuls thanks to its new "Galaxy" Opteron-based and "Niagara" Sparc T1-based servers, Avnet needed to get into the Sun game.

Moreover, Access Distribution has 600 partners who by and large are not in the Avnet Partner Solutions distribution channel, and those partners in turn have many thousands of customers who currently do not get very much gear from Avnet. Avnet has focused heavily on IBM and HP products, and now Sun products will be its number two line in terms of annual sales. According to Vallee, about 80 percent of that $2 billion in calendar 2006 will come from Sun's products, with the remainder resulting from the resale of products made by Hitachi, F5 Networks, Avaya, and Check Point Technologies, among others. Access Distribution has 22 suppliers aside from Sun, and has built up technology practices around security, networking, and VOIP telephony using their hardware and software products.

Not only will the Access Distribution buy give Avnet a new product line to sell and a new customer base to chase, but it will give it more reach in the global IT business. While 90 percent of Access Distribution's business is done in North America, 10 percent gets done overseas. And Vallee said that Avnet has been weaker than it likes in a number of European countries, and that even though overseas sales are relatively small, the deal gives Avnet more presence in France, Spain, Portugal, the Netherlands, and unspecified Asian countries.

All of this begs the obvious question: Why did GE want to get rid of Access Distribution? This is a particularly perplexing question considering that GE held onto Access Distribution through the lean years, when Sun was in decline from 2000 through 2005. Perhaps GE wanted to sell merely because Sun is on the mend, and now it is worth more money than it would have been even a year ago. In any event, GE didn't say anything about it, but Vallee provided some insight.

"We have wondered for a long time how the business fits into the portfolio," Vallee said in a conference call with Wall Street analysts. Apparently, other unnamed parties were also wondering the same thing, but Avnet was able to convince GE that it was the best buyer out of all the contenders.

Avnet plans to pay cash for the acquisition. The company has approximately $1 billion in cash, credit facilities, and other financing at hand to do the deal. The company did not divulge its long-term plans, but there was some talk that over the long run, it will get back the cash it uses for the deal or the credit it spends through some kind of offering. Avnet could go to the bond market, and it might even consider offering stock, among other options.

Avnet expects the deal to close by the end of 2006, and says that it has identified approximately $15 million in synergies between Avnet and Access Distribution, which is MBA-speak for redundant functions and people that can be eliminated to boost profits. Without having access to the fine-detailed financials for Access Distribution (which it cannot get until the deal is closed), Avnet said the acquisition is immediately accretive to earnings and will probably add 20 cents a share to earnings in calendar 2007. Avnet's fiscal year ends in June.

The current plan calls for Anna McDermott, president and chief executive officer at Access Distribution, to stay on at Avnet, as will most of upper management and most of the company's other employees. Access Distribution will be operated as a separate business unit within the Avnet Partner Solutions reseller arm, which has separate units for IBM and HP gear and their respective reseller channels. That unit will remain located in Westminster, Colorado.

Access Distribution began its relationship with Sun back in 1991, when Sun was largely a workstation maker and the distributor was called Access Graphics. As Sun grew during the workstation, ERP, and dot-com booms, Access grew and was acquired by Lockheed Martin. In November 1997, GE acquired Access Graphics for $2.8 billion in stock when it was generating more than $1 billion in sales. John Ramsey, the father of JonBenét Ramsey, was president and chief executive officer of Access Graphics when his daughter was murdered in December 1996, and he remained at Lockheed Martin when Access Graphics was transferred to GE.

At the time GE Capital Information Technology Solutions had 10,000 employees and Access Graphics certainly fit into its business model of distributing IT products and providing financing for them.

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