With Avnet Deal, Tech Data Spans From Glass House To Your House
September 26, 2016 Timothy Prickett Morgan
And then there were three. For the past several years, the two dominant master resellers of Power-based systems–that would be Avnet and Arrow Electronics–who also sell a whole lot of other kinds of IT gear into datacenters, got a little competition from Tech Data and Ingram Micro joined the fray and started peddling Power gear and related storage.
Rather than compete with Avnet, Tech Data decided to shell out a whole lot of money to buy its Technology Solutions division, thus vaulting itself into a better competitive position in the IT distribution business relative to Arrow and making it the clear number two ahead of Ingram Micro. To be specific, Tech Data is issuing $2.1 billion in debt, $300 million in cash, and about $200 million in stock to acquire the Technology Solutions division from Avnet. Tech Data was not interested in buying all of Avnet, which includes a larger component distribution business.
Avnet’s Technology Solutions business is an important distributor of Power Systems iron from Big Blue, but it has long since diversified into X86 and other iron and gets the bulk of its revenues from outside of this area. Technology Solutions has an annualized revenue run rate of about $9 billion a year through the end of July, and it peddles servers, storage, switching, software, and services–the core Five Ss–from over 40 different vendors to over 20,000 downstream partners, who in turn resell these wares to end user customers. Technology Solutions, which itself was embiggened through acquisitions as well as organic growth, has 5,000 employees globally and operates in 35 countries with a heavy emphasis in the Americas and Europe.
Like that of other IT suppliers, the Technology Solutions portfolio reflects the customer base and hot areas they are interested in these days, including converged and hyperconverged systems, analytics, cloud, mobility, and security. The new generation of systems, which are analytical and which link devices to mission-critical back end systems, are growing–these are called the 3rd Platform by IDC–and the market for those traditional back ends is declining but still a big market. Take a look at these stats that Tech Data used to justify the Technology Solutions deal. Here’s the IT spending breakdown and the growth over the next five years:
And here is how the elements of that 3rd Platform are growing between 2016 and 2019, inclusive:
The growth is a reason to be in these businesses, but not necessarily a reason to buy Avnet’s Technology Solutions division. As usual, this deal is all about scale and using that scale to wring a little more profit out of the distribution racket by heaving a little more leverage with suppliers and a wider and broader base of customers. Tech Data is saying that, by virtue of its combined software, cloud, mobility, and consumer electronics distribution units, it can sell products that range from the datacenter all the way to the living room, but we think a better phrasing (perhaps showing our age a little) is that Tech Data will be able to span from the glass house to your house.
For the 12 months ended in July, about 29 percent of Tech Data’s $26 billion in revenues came from datacenter hardware and software, with another 10 percent coming from mobility and the rest from other hardware and software and consumer electronics. With Avnet’s Technology Solutions unit, about 45 percent of the combined company’s $35 billion in revenue for the twelve months ending in July came from datacenter hardware and software, and that mobility slice shrinks down to 7 percent while the other IT gear and consumer electronics make up the remaining 48 percent of sales. This is a more balanced company, like Hewlett Packard Enterprise used to be (and no longer desires to be) and like Dell Technologies is getting more like. The question now is if Tech Data, having increased its datacenter business, might be tempted to split off the consumer stuff, as HPE did, or will want to go deeper into the datacenter, as Dell has done with its acquisition of VMware and EMC.
What we can say for sure is that Tech Data’s long-time CEO, Bob Dutkowsky, likes the datacenter. Dutkowsky started as an IBM salesman in 1977 and spent two decades there, and was an executive assistant to former chairman and CEO Lou Gerstner and had many sales positions, including head of RS/6000 sales for a stint. In 1997, Dutkowsky moved to EMC to run its marketing and channels, and two years later took over its RISC server business when the storage maker acquired Data General. A year later, Dutkowsky moved to GenRad, a maker of electronic test equipment, as CEO, which was eaten by Teledyne. He then joined application software maker JD Edwards until it was sold to PeopleSoft, which was then eaten by Oracle, and then ended up in charge of virtual server maker Egenera. Staying at Tech Data 10 years, Dutkowsky seems to have found a home like he used to have at IBM. And now, he is tied to all of the IT suppliers, not just the one that bleeds blue.
The deal for Technology Solutions gives Tech Data more presence in the Americas and Europe and gets it a toehold into Asia, too.
Avnet and Tech Data are both publicly traded companies, and both the company’s boards approved the deal before going public last Monday. Tech Data believes that it can cut about $100 million in costs in two years, boosting profits at the combined company, but that these cost cuts will cost it around $150 million. The company also expects there to be about $200 million in tax benefits it can book, which helps wash out the costs. What is clear is that this deal is about scale and scope.
It is hard to say what the Technology Solutions acquisition by Tech Data will mean for resellers in the Power Systems ecosystem. A number of dealers we spoke with who are downstream from Avnet didn’t even know the deal had been done, that is how focused they are on the work they are trying to do for their clients and to make a living in this cut-throat business. At least one person very familiar with Avnet said that what this really presaged was a massive consolidation in the number of business partners in the channel, and that just like the IT vendors and master reseller tiers were consolidating, so too will be the downstream partners who actually interface with customers in small and midrange accounts. It is hard to argue with this logic.
From Monday in the wake of the deal being announced until the market closed on Friday, Tech Data’s market capitalization rose by 7.5 percent to $3.12 billion. Avnet’s shares fell by 4.5 percent, giving it a $5.28 billion market capitalization. Technology Solutions accounts for about 34 percent of Avnet’s revenues and about 30 percent of its operating income, so it is actually slightly less profitable than the remaining Avnet components business. This may seem counterintuitive, but them’s the numbers.
The acquisition is expected to close in the first quarter of next year. How long before Arrow tries to buy Ingram Micro, or vice versa?