MELVILLE, N.Y. In the wake of the distribution industry's grandest acquisition to date-one that will see the third-largest player carved up by its nearest rivals-customers, suppliers and competitors are left to ponder the ramifications of putting half of the distribution total available market (DTAM) in the hands of just two entities, up from approximately 45 percent today.
After months of speculation, the recent announcement of the long-awaited sale of Veba Electronics LLC for $2.35 billion dealt little in the way of surprise. As expected, Arrow Electronics Inc. and Avnet Inc. collaborated with British buyout specialist Schroder Ventures to secure an historic three-way bid for the $5.5 billion distributor.
Arrow agreed to pay $840 million to acquire Wyle Electronics and the North American assets of Veba's logistics arm, Atlas Services. For its $740 million bid, Avnet will acquire Veba's European operations, including Atlas Europe, EBV Elektronik, RKE Systems and WBC.
Schroder, which led the acquisition, will retain the assets of the Memec Group, a global combine with $1.8 billion in 1999 revenue.
The plan has generally met with favor. Arrow and Avnet will each gain technical-specialist units that will shore up weaknesses at both companies. At the same time, 30-year-old Memec-a self-contained group of technical distributors within the Veba structure-will once again stand on its own among distribution's top five.
But the growing revenue gap, which is now approaching $10 billion, between the "A" list and everyone else has left a void for a large fulfillment organization with the ability to also provide specialized services. Two likely candidates that could vie to fill the gap are Future Electronics and Pioneer-Standard Electronics, industry watchers speculate.
"Today both customers and suppliers have a degree of concern about the size and amount of business that can now potentially be funneled through one or two entities," said Tom Pitera, president of the Industrial Electronics Division of Pioneer-Standard Electronics Inc. (Cleveland). "While customers over the last five years or so have been on supplier-reduction programs, I don't think anyone ever anticipated that roughly 50 percent of the DTAM was going to be retained by two distributors."
While some observers expect a period of uncertainty for suppliers and customers, others consider the move part of a natural consolidation driven by OEMs' desire to streamline their supply chains. The end result may in fact be a more competitive environment, suggested Robert C. Damron, an analyst at Tucker Anthony Cleary Gull (Milwaukee).
"Suppliers benefit from partnering with efficient distributors that are focused on the supply chain. Customers benefit by buying through a larger organization," Damron said. "Maybe customers can obtain better overall pricing and access to a larger product assortment rather than searching through multiple distributors."
Some distributors with revenue of less than $1 billion see the consolidation as an opportunity. "We certainly have to assume there's a concern among the suppliers in regard to mindshare," said Ben Schwartz, vice president of marketing at Jaco Electronics Inc. (Hauppauge, N.Y.). "I think there will be fallout of suppliers on some line cards in North America., but it's really a wait-and-see situation."
Indeed, suppliers whose distribution channels will be significantly altered by the Veba breakup might scramble to find new partners, analysts said.
One semiconductor executive wondered whether too much consolidation is a good thing for a $1 billion-plus franchise. "Ours is a big wagon," said the executive, who asked not to be identified. "The question is, can it be pulled by two big horses, or do we need three?"
Altera Corp., which will see its two North American distribution partners become one, is placing its complete confidence in Arrow but keeping its options open, said Don Faria, vice president of customer marketing and applications at the San Jose, Calif.-based PLD supplier.
Altera was among the first major suppliers to adopt a limited-channel strategy, in line with its customers' supplier reductions. While Arrow and Wyle provide identical field-applications-engineer support to the line, "Seventy percent of the time, customers ended up choosing Arrow over Wyle because of Arrow's fulfillment structure," Faria said.
The disposition of Memec has at least one OEM wondering about the consequences. ADC Telecommunications Inc. sources its entire bill of materials through a combination of Arrow, Memec and TTI Inc., said Gary Lenik, director of materials for the WireLine Division of ADC (Tustin, Calif.).
"The question that remains in my mind is, what kind of management infrastructure will remain in place at the Memec group," Lenik said. "And as they dissolve Atlas Services, what are they going to replace it with?
Details have yet to be worked out, but Memec won't be left high and dry, said representatives of the involved companies. "Memec customers currently being serviced by Atlas will experience no interruption in service," a Memec spokesman said. The company will retain its existing order-fulfillment center in Reno, Nev. Furthermore, the Memec structure and line card are sound, the spokesman said.
"Memec is a very strong organization with a 30-year history as a semiconductor specialist," he said. "Schroder's initial attraction to us was for our strength in demand creation and technical services. Logistics will also be a major focus of our overall strategy."
The company-composed of Impact Technologies, Insight Electronics and Unique Technologies-is on course to see$3 billion in sales this year.
While the breakup of Veba Electronics ends that company's 10-year sprint to catch up to the industry's giants, it also serves as a testimonial to the effectiveness of Veba's business model. The distributor's demand-creation and engineering capabilities were cited by each acquirer as its most attractive quality.
For Arrow-which posted 1999 revenue of $2 billion-the addition of Wyle's semiconductor-specialist and computer-products divisions brings an opportunity to augment its existing business, which is divided into customer-focused sales and marketing units, said Francis Scricco, Arrow's president and chief executive.
For example, Arrow had contemplated forming a unit focused on the needs of communications OEMs, a segment in which Wyle has a solid presence, Scricco said.
"Communications carries a higher requirement for technical expertise and product lines specific to that," he said. "One little jewel we picked up in this is RF," via Wyle's newly formed subsidiary, RF Vision. Besides its strong focus in key end markets, Wyle will add engineering and demand-creation know-how, seen by Arrow as vital to enhance its strength on the fulfillment end.
"Wyle's system for tracking design registrations is more sophisticated than ours. On the Arrow side, we're able to track business across customer segments; they've struggled with that. We've been OK at winning designs, but not as good as they've been," Scricco said.
Avnet, which boasts an engineering group of its own, nevertheless has had difficulty thrusting its global view on the European marketplace and has lost market share in the region as a result, said Richard Menzies-Gow, an analyst at Dresdner Kleinwort Benson, London.
Roy Vallee, Avnet's chairman and chief executive, called its planned acquisition of Veba's EBV Group and RKE Systems "a bull's-eye. The single largest market in Europe is Germany; Avnet's weakest market in Europe is Germany," Vallee said. "This is right where Avnet needs the geographic strength the most."
Together, the units will add $1.8 billion to Avnet's pro forma revenue, according to Vallee, and put the distributor on a more equal footing with Arrow in Europe. EBV and RKE Systems will be run as separate companies, but will share Avnet's global IT and back-office infrastructure.
That's a departure of sorts from the business model of integrating acquired organizations quickly, conceded George Smith, president of Avnet Electronics Marketing for Europe, the Middle East and Asia.
Crista Souza is west coast bureau chief for Electronic Buyers' News, a sister publication to EE Times. Additional reporting by EBN's Rhonda Cornell and Laurie Sullivan.