Avnet Tries Buying Its Way to the Top

By Edward Cone  |  Posted 02-01-2006

Avnet Tries Buying Its Way to the Top

Avnet wrote the book on corporate acquisitions. But it's still working on the happy ending. The "Cookbook," as the in-house reference guide is known at Avnet, an $11 billion electronic-components distributor, is actually a set of documents stored on a file server.

At more than 1,000 pages, it represents Avnet's accumulated wisdom on integrating newly acquired companies; the firm has purchased 33 of them in the last 10 years alone.

The Cookbook deals in detail, including timelines, risk-mitigation strategies, prioritized activities, employee-welfare concerns and even some paragraphs on state laws.

Started in the late 1980s, it's been updated continually, and includes chapters on IT, finance, human resources, logistics, materials, sales and more. Each functional area of the company assigns a knowledge worker to keep that part of the book up to date.

"Acquisitions have become a best practice for us, and we learn from every one we do. So we created a book that has the rules of the road—the methods and procedures for doing an acquisition," said Ed Kamins, chief operational excellence officer and former CIO at the Phoenix-based company. "I would stack up our process for acquisitions against anybody's. A lot of people make the same mistakes over and over again. We make them once."

Now Avnet needs to apply its knowledge-management prowess to new markets as it battles its longtime rival, Arrow Electronics, for global supremacy in a fast-changing business. For years, Avnet and Arrow have vied for the top spot in the electronics distribution industry as they consolidated the North American and European component markets, in which the two companies control about 60 percent of the market between them.

The next big prize: Asia, where the distribution business remains highly fragmented, and an increasing concentration of electronics manufacturing is located. "Asia is a key focus area, specifically China," said Avnet CIO Steve Phillips. If Avnet is to become the largest player in a consolidated global industry, it needs to keep adding chapters to the Cookbook. "Each acquisition we make in the region brings additional scale, experience and knowledge of the Asia market," Phillips said.

Having a guidebook is a big help in a business where IT is critical to day-to-day performance: You need the systems to do the job. "It's just so important, because there are so many customers, and hundreds of suppliers, and millions of parts numbers," said Matthew Sheerin, an analyst with Thomas Weisel Partners, in San Francisco. "Things like supply chain management are core to what these companies do."

Avnet divides the world into three distinct regions, each with its own management and ERP (enterprise resource planning) system, but the Cookbook guides practice everywhere. The goal: to integrate new acquisitions tightly and smoothly within each region, while allowing regional managers a certain degree of freedom.

Avnet's recent foray into Asia began with the 2001 purchase of China's Sunrise Technology; its second big deal there—and its first purchase of a competitor with truly global operations—was the July 2005 acquisition of a $2 billion company called Memec Group Holdings. "We could not have done the Memec deal if we had not gone through many others before," Kamins said. "It was important to have well-established management teams and IT infrastructure in all three regions where Memec does business—that let us orchestrate it almost as three different acquisitions."

The deal for Memec gives Avnet an early lead over both Arrow and another large competitor, Taiwan's World Peace Industrial Co., in the Asia phase of the game (although Arrow and World Peace have already responded with acquisitions of their own). But simply adding volume won't be enough to make the growth strategy succeed.

The focus now is on growth that flows to the bottom line, and on managing acquisitions for long-term performance. "Today our expectation for return on capital is simply higher" than it was when acquisition-fueled expansion was the company's primary strategy, Avnet Chief Executive Roy Vallee said in a speech late last year.

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: Fueling the right kind of growth.

    Fueling the Right Kind

    of Growth">


    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.

    Quick Mergers Require Quick

    Migrations">

    The migration was fast, too, but carefully planned. "We allow people to take risks in terms of migration schedules, but mitigate those risks with rigorous testing," Phillips said. "For example, when we started the live migration of Memec America's systems onto Avnet America's platforms, it was actually the fifth migration run, following four practice runs to ensure things would go well."

    Following the successful integration of Memec's operations in the fall, Avnet now runs two regional ERP systems—SAP in Asia and a custom-built mainframe-based system called Genesis in the Americas—and is moving toward a single SAP system in Europe. That's down from more than 10 systems around the world just a couple of years ago.

    Avnet said it hopes to save $130 million a year by combining its operations with Memec, much of that from the efficiency of the merged regional systems. Phillips said the company is currently on track to deliver on that goal for fiscal 2007.

    The experience gained through integrating Memec will also allow Avnet to write new chapters of the Cookbook with specific relevance to the Asian market. "With Memec, the Cookbook will expand and translate our experience to the region," said Avnet Chief Technology Officer Bill Chapman.

    "For this deal, we took the Cookbook from the United States and gave our people in Asia processes and procedures and relationships they didn't have before. The Cookbook provided a baseline for our conversations. People weren't sitting around waiting for a leader. It worked well. Now we have the opportunity to make it even more effective."

    Avnet prepares for growth by talking with its customers to identify possible acquisition candidates, and to learn more about the specifics of a given target. Memec, for instance, shared some major customers with Avnet, and Kamins's team interviewed those customers, under a nondisclosure agreement, about the fit between the two companies. "In the world of distribution, the customer is our boss," Kamins said. "We need to know what they think, and if they will come along after the deal."

    Avnet got more than people and customers from Memec. It adopted the acquired company's practice of issuing a monthly performance scorecard to track IT performance, and learned from Memec's more sophisticated understanding of governance and regulatory issues.

    "This kind of stuff shows the true value of the Cookbook," said Chapman, who came to Avnet from Motorola in 1999. It's not just a tool for answering questions that come up when integrating two companies, but a way of freeing managers to focus on larger issues, by nailing down routine procedures so they don't have to worry about them.

    "In a normal company, you're trying to figure out how to manage things like reference information in different ERP systems," Chapman said. "Here, systems, even financial processes, are all documented. The Cookbook goes into the master plan for the business, and includes all sorts of different scenarios, all the way down to coordinating an open order—how to deal with it, whose responsibility it is. It's about merging organizations and back offices so you execute cleanly. That gives you time to look at things like differentiating applications that connect to a supplier or customer, and it helps usher new companies into the Avnet culture. With those things predefined, it frees you up to say, 'What did they do well? What can we keep?' It enables cultures to merge."

    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: Relying on mergers for growth.

    Relying on Mergers for

    Growth">

    Acquisitions are part of Avnet's DNA. Founded as a radio-parts distributor by Charles Avnet in 1921, the company was taken public by his sons in 1959. Avnet began its modern growth phase in 1991, with the purchase of British semiconductor distributor Access Group, and since then it has acquired 42 more companies. Today, about 60 percent of the business is in semiconductors and other components, with the rest in computer distribution.

    Avnet's acquisition planning begins long before it breaks out the Cookbook, which fits into a larger strategic plan for buying and integrating companies.

    "Our integration model ensures that we fully leverage the additional experience and knowledge of acquired companies for the benefit of Avnet, as well as its suppliers and customers," Phillips said.

    He described that model as "best people, best practice." It means Avnet doesn't just pursue companies to add market share, but brings on talent and processes from acquired companies when it sees an advantage in doing so.

    Phillips himself shows the model in action: The former CIO of Memec, he joined Avnet this summer as part of the deal, replacing Kamins, to whom he now reports.

    Kamins said, "It's not assumed that we'll buy a company but we'll keep our people and do everything our way. We have found in many cases that there are aspects of the acquired company that we adopt and make our standard. There are people who are expert leaders that we don't want to lose, so we adjust our organizational structure accordingly so we can keep them."

    In the past, hanging on to talent has been tough for Western companies in Asia, said Deutsche Bank's Shoop. "The big problem when you do acquisitions is retaining personnel, and after Avnet acquired Sunrise, a lot of the core staff left. Both Arrow and Avnet have gotten burned on acquisitions that way."

    So the company has made an effort to improve its retention rate. "Avnet doesn't just say, 'Our guys are the best.' They have a real discussion of who is best for the combined team," Phillips said. People in North America knew their status as part of the combined company within a week of announcement of the Memec deal, and special incentive bonuses were offered to convince key employees, including members of the transition team, to stay.

    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: What makes a good merger candidate?

    What Makes a Good

    Merger Candidate?">

    Kamins said Avnet looks for three important things in a merger deal. "One is strategy—they have to be in a business, and in a marketplace, that's supportive of and collaborative with our own strategy. Two, the financials have to be in order. If you don't do your homework, you end up paying too much. We've had cases where we were surprised." The third element, he said, "may be more critical than the other two: The culture has to fit."

    That may sound a little mushy, but Kamins gets down to specifics when he talks with executives about their mutual compatibility. As the Memec deal was coming together, for example, he met extensively with Phillips to take his measure.

    "When we first got together, I didn't know if we wanted him, or him us," Kamins said. "I said to him, 'Memec is run globally and centrally, the IT people around the world have hard-line responsibility to you. Avnet is different; we operate on a regional basis with a more entrepreneurial style. Our IT leader in Europe has direct responsibility to the European business head, and to me as CIO. Are you comfortable with that?' I looked him in the eye, and he said yes."

    The conversation continued over the course of a couple of months. "We probably spent 20 hours together," Kamins said. "We knew we weren't BS-ing each other. I knew he was telling me what he really thought." Phillips said, "It was a very important discussion we were having, one that allowed us to come to a subjective view of what could work." If things in Asia go according to plan, it's a conversation Phillips will be having many times in the future.

    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