Competitive Difference: How Avnet's Competition Does Mergers, or Not

The global parts distribution race is on, and Avnet's top rival, Arrow Electronics, would rather partner than buy.

As Avnet expands in Asia, it is sure to run up against a familiar competitor: Arrow Electronics, its longtime rival for market leadership in North America and Europe.

Arrow also sees growth opportunities across the Pacific, naturally, and the race to consolidate the global industry's last great frontier has already started. At about the time Avnet was completing the migration of Memec's Asian business onto its ERP system, Arrow announced a bid for a big Taiwanese distributor, Ultra Source Technology.

But Arrow Senior Vice President and CFO Paul Reilly says his company will be disciplined in its purchases and will not embark on a shopping spree for growth's sake alone. "We don't see a real compelling need to do acquisitions in the Asia/Pacific region," he says. Trading relationships with Asian companies, rather than mergers and acquisitions, could fit more comfortably into Arrow's financial strategy. "We'll consider acquisitions that match up to our model, but we will be opportunistic."

Like Avnet, Arrow is feeling the pressure from Wall Street to improve the bottom line along with the top. "Our objective is to outgrow the market at the sales line and to grow margins faster than sales," Reilly says. "Our return on invested capital is higher than our cost of capital, which our competitors can't match."

When Arrow does purchase companies, it too has a guide to follow. Reilly calls it a "playbook"—it's less formal than Avnet's huge knowledge-management trove, but still the product of years of experience. "It's a tool, and a guide," Reilly says. "We don't deviate too much from it, but we are flexible." Arrow once put an acquired company onto its systems in a single weekend, for example, by improvising air shipments to make sure inventory was available, rather than relying on its usual freight-shipment plans.

Like Avnet, Arrow stresses a merger of cultures, not just the assimilation of assets. When it comes to people, "we take the best of the best," Reilly says. "If it's a tie, we quite often take the target company's people. Fair is fair, and we need to make acquisitions part of our company."

Arrow plans to be on a single, global Oracle financial system by the middle of 2007, and its board has discussed the possibility of moving onto a single ERP system. "We are moving toward more conformity," Reilly says. "We try to recognize the uniqueness of each market, but we want to have a global view when it makes sense for us."

This article was originally published on 02-03-2006
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