Avnet Tries Buying Its Way to the Top - ' Fueling the Right Kind '
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It won't be easy to wring big profits from Asia. Doing business there is often less profitable than it is in Avnet's traditional markets, said Carter Shoop, an analyst with Deutsche Bank Securities, in San Francisco. "They need to be there for top-line growth, but it will drag down their margins a bit," Shoop said. "It's a bit of a conundrum for them."
Kamins said, "We have gotten more rigorous over time with ROI [return on investment] calculations. Our primary motivation used to be geographical expansion. Then we got more focused on buying better assets that yielded greater profits, and on growth and management talent." In this low-margin, globalizing business, choosing the right acquisition targets and integrating them smoothly will be more important than ever.
Wall Street is eager to see how the industry will solve the riddle. Shares in both Arrow and Avnet trade at roughly the same levels as they did five years ago, though Avnet's margins have lagged behind Arrow's for the past several years.
One reason was Avnet's ill-timed 2001 purchase of rival Kent Electronics, of Houston, just as the tech bubble was deflating. In the most recent 12-month period, Avnet had net income of just $156.8 million on its $11.7 billion in revenues, versus Arrow's profits of $227 million on sales of $10.9 billion.
"Both companies are focusing more on return on invested capital, and on things like the balance sheet and supply chain management, rather than just being No. 1 by a couple of percentage points," said Kevin Sarsany, an analyst with Foresight Research Solutions, in suburban Chicago. The Memec deal, he said, gives Avnet a big boost. "Memec makes Arrow No. 3 in Asia now, and it gives Avnet a reason to cut its costs further, by rationalizing its own legacy operations as part of Memec's integration."
Avnet likes to get its deals done fast, and Memec was no exception. As the negotiations between Avnet and Memec progressed, Vallee asked Kamins and Phillips if the IT integration could be done within 90 days of closing. "Ed said, 'Yes, we could,'" Phillips said. "I told him he must be mad. But then I began to understand the depth of experience, the sheer amount of institutional knowledge and experience Avnet has."
Beyond the centrality of IT to the business, the quick pace was a cultural imperative. "You can ask people to put their lives and their projects on hold for 90 days, but not for a year," Kamins said. The need for speed is part of the Avnet way.
"The idea is to prioritize ruthlessly," Phillips said. "Be clear about what priorities really matter to delivering business integration, and go after them. Wherever possible, place other priorities on hold to maintain focus on delivering integration as quickly as possible."
Big decisions, such as the choice to standardize operations on Avnet's regional ERP platforms, rather than on Memec's global system, were made in a few weeks. Both systems were deemed adequate to the task, so factors such as lower training costs (given the larger number of Avnet users) carried the day.
"We could have had lots of discussions between business partners and IT about who had the best systems," Phillips said. "But we said, 'Time is of the essence; let's get the regions working off the same platforms as soon as possible to become one business.' From my point of view, it was a fairly objective set of decisions, although for some of my people who had poured their lives into our systems, it was very difficult."
Story Guide:
Avnet Tries Buying Its Way to the Top
Fueling the Right Kind of Growth
Quick Mergers Require Quick Migrations
Relying on Mergers for Growth
What Makes a Good Merger Candidate?
Competitive Difference: How Avnet's Competition Does Mergers, or Not
Next page: Quick mergers require quick migrations.
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