Gearing up for Euro expansion

As the distribution giant heads into the final quarter, Avnet sets its sights on further acquisitions, says Sara Driscoll

Acquisitions, vendor signings and growth are all on the cards for Avnet as the global distributor shifts up a gear for the final quarter of 2007.
The firm recently released its fiscal fourth-quarter results, producing record sales and profit ­ numbers Avnet chief executive Roy Vallee is understandably happy with.
Speaking exclusively to CRN, Vallee, said: “I am pleased with our results across the globe. Interestingly, there is no single business unit or geography driving the results. It is the accumulation of them all performing better. With everyone making progress it has led to our stunning result.”
For its fiscal Q4 2007, ended 30 June, Avnet reported turnover of $4.24bn (£2.10bn), a 17.3 per cent increase over fiscal Q4 2006. Profit for the quarter was $124.7m compared with $58.8m for the same period last year.
For the year, turnover was up 10 per cent to $15.68bn, compared with $14.25bn for 2006. Profit for fiscal 2007 stood at $393.1m compared with $204.5m in 2006.
Vallee added: “The computer business in Europe is improving nicely and our expectations are that we will achieve our return on capital.”
The distributor has been focused on Europe recently after a shake up with its management, which saw the departure of UK country manager Colin Robertson and the acquisition of the enterprise infrastructure division of Magirus.
Vallee said Avnet would continue to invest in Europe because there is still growth and money there.
“We will have a range of organic growth as a result of executing well and we have a good cash flow. This combined with the merger and acquisition activity has and will lead to more growth,” he added.
Vallee said the European focus had been due to circumstance, such as more opportunity for mergers and acquisitions (M&A) in Europe than the rest of the world.
“This is likely to continue because the US is already highly consolidated and Asia and the Far East is the least consolidated. Europe lies somewhere in the middle. Also the European Union, which is now facilitating more cross-border activity, favours scale much more than the US or Asia. This is also helping to speed up consolidation in Europe.”

Consolidation
Simon Welch, marketing director at distributor Horizon, agreed consolidation would continue. “Consolidation is inevitable and the environment is favourable. I would certainly expect to see more consolidation while the opportunity and will to take a strong position remains.”
Shamus Kelly, operations director at VAR Portal Partnership, said: “Major players will continue to seek niche distribution opportunities to bolster margins squeezed on core business. If this edge can be gained by acquisition, accelerating the margin improvements, then it is no surprise that M&A activity within the distribution community has always been busy.”
Stewart Hayward, commercial director at VAR WStore, added: “We are still seeing the beginning of the required consolidation. With specialisations becoming commodities, it is inevitable that margins among distribution are eroded and more distributors play by the economies of scale. If only one distributor offers a range they can retain margin. The moment there is more than one with a similar offering, there will be competition and competition inevitably leads to consolidation.”
However, Greg Carlow, managing director of reseller Repton, said there is an influx of new distributors entering the market, which helps to keep the sector on an even keel. “Consolidation drives size and size needs quantities, which means big vendor franchises. About half the new technologies are driven by new vendors, often start-ups. These new vendors need dis tribution, but they are of no interest to the massive distributors who need mega-volume to make their business model work.
“So small and new distributors pick up this type of franchise and some of them will grow as these new vendors replace parts of the big vendors markets. For example, these smaller distributors take market share from the big distributors, who then acquire them. So it’s a fairly steady situation over the long term.”
Vallee said Avnet is aiming to continue increasing its market share in Europe. “The UK and Germany are our biggest markets and two geography priorities. But there are also large European markets where Avnet needs to increase its coverage ­ France and the Nordics for example.
“We will grow our European profile by a mixture of acquisition and organic growth into these markets. Organic growth will be where we already have a platform or unit within that region. But we will look to acquire in regions where it is a brand new market for us, because we tend to prefer to get local expertise and relationships.”
As revealed by CRN last week, the distributor will also look to acquire further in the UK following its Magirus buy.
“We are looking to acquire more in Europe and we are certainly not done in the UK. There are definitely more acquisitions to be made there, the market is huge,” Vallee said.
“Fundamentally, there are two types of firm we are looking for: the first would give us the opportunity after the acquisition to our business at a higher rate. For example, we would love to acquire a firm rich in virtualisation and VMware skills with EMC, or one that can bring us customer relationships, talent, local market knowledge. In return we would bring them resources, investment and resellers. My preference would be to acquire a distributor that can help us to accelerate our growth.
“Also there could be the situation where it is simply by M&A consolidation driven by economics of the deal. We are happy to play the consolidator.”

Increased portfolio
However, when Avnet acquired the enterprise arm of Magirus, it left behind the part that had the VMWare, virtualisation and EMC skills. When asked why, Vallee said: “We would have loved to have bought that part of the company, but it was not for sale. Magirus wanted to focus its resources on this part.”
Over the past several months, Avnet has made strides to change its European operations. Last month CRN reported how the distributor is ditching three of its four existing business units ­ Avnet Partner Solutions, Avnet Visual+Data Solutions and Avnet Applied Computing Solutions ­ in favour of a more vendor-oriented model.
With its acquisitions of Magirus and, earlier last year Access, the distributor has made the transition from an IBM-only player in the UK, to working with IBM, Sun and HP, among others. By the end of the year, Avnet’s solutions business will operate under four product groups across Europe: IBM; HP; Sun; and Eizo and a solutions and services area that will complement its main lines.
Through taking on a wider vendor portfolio, the distributor has also been looking to increase its technology range.
Vallee said the technology trends in the US and Europe are similar. “There is growth in areas such as storage, communications industries, servers, networking, security and virtualisation. These are all hot markets for both regions,” he said. “These will all be focus areas for Avnet going forward.”
Carlow agreed and said: “The UK and US are similar. A good proposition in Minneapolis is a good proposition in Manchester. There is more government-funded opportunities here and it takes six to 12 months for new technology directions to get here. At the moment we are seeing growth in virtualisation, blade servers, security and technologies that reduce manpower costs; self-install, self-configuring, self-tuning/optimising and self-healing technology are all growing.”
Welch said: “Unified communications will drive the market and adoption of this pulls through networking, storage, data service provision and ­ importantly for the channel ­ services.”
Vallee said one way the distributor may look to push its new technology portfolio is through a vertical focus. “In the US we are testing and learning from a vertical market focus, such as in healthcare and moving into government. We may look to bring this strategy to Europe.”

Vertical focus
However, VARs were doubtful about a vertical focus for distributors.
Carlow said: “Vendors and distribution should take technology focus and resellers should turn those technologies into solutions for the vertical markets,” he said. “If a distributor had a load of skills in finance what would that do? Maybe get another six resellers selling into that vertical, but it would not get another 60 because it takes a lot of time to infiltrate the finance sector as a supplier.”
Hayward said: “I think any distributor that takes a vertical focus is risking a downturn or removal of opportunity in that area. Will they move with the next big thing or be stuck selling old technology in a market that doesn’t want it?
Also, there is always a bigger, better, broader distributor who will be there saying ‘yes, we can do this, but we can also do this, this and this…’ which will always be attractive to a customer looking to consolidate their ordering with a single supplier.”
One distributor battle that has begun to set channel tongues wagging is the comparisons between the similar strategies of Avnet and its fellow US rival, Arrow.
Welch said: “Both firms are following the trend for global position and wide-scale expansion. This, however, often results in thin value coverage to maximise on economies of scale and thus get a financial return on their investment.”
Kelly said: “The two global players have been perceived as being in a race for top slot for a number of years, with various surveys placing one ahead of the other on different measures. It is at a local level that partners really see the differences. Global programmes and muscle may attract vendors, but mid-sized partners are all looking for value-add service and individuals within each of the distributors can make or break that.”
Vallee said it was only natural for the two distributors to be compared. “We are doing the same things and both making acquisitions,” he said.
“There are resellers who partner with us and resellers who partner with Arrow, and the way to win is to help those resellers to grow faster than the others.”
Avnet rejigs strategy to boost vendor focus