The news that Arrow Electronics is to buy rival distributor Computerlinks is a highlight in a slow news summer.
The deal believed to be in the region of around $300m will see the Arrow, a company with more than $20bn in sales but weak profits, gobble up its much smaller European centric rival with sales of just less than $1bn but a more profitable and growing business model.
Arrow makes the bulk of its sales to industrial and commercial users of electronic components alongside enterprise computing solutions. However, sales have dropped five percent in the last year and profitability is relatively low. Through its ECS unit, Arrow has a modest cloud business, although this is relatively under developed.
In comparison, Computerlinks which has a strong security and next generation technology portfolio, has grown its business over the last few years. With pan-European reach, the firm has also invested in an innovative cloud platform, which while still embryonic in terms of sales, has added a broad range of vendors and services in its two years since launch.
Although both companies share a number of key vendors such as Check Point, Arrow through all its different guises has a much bigger broadliner remit with hundreds of vendor relationships compared to its VAD rival.
The deal, which has been rumoured for a while, makes sense for Arrow which needs more bulk to continue its growth and benefit from economies of scale offered by its network of 470 offices across in 55 countries. For private equity owned Computerlinks, an exit was always a possibility and with some economies in Europe starting to show recovery, it seems the time was right.
The consolidation in the distribution channel has been a decade-long journey. In 2010 Arrow acquired security disitie Sphinx. Then last year it bought Altimate, a pan-European storage and server distributor and the wireless and infrastructure business unit of Waching Company Ltd, a Chinese distributor. In the prior two years, the distie grabbed half a dozen distributors to increase its weight and keep growing in a bid to appease investors.
Rival Tech Data, another behemoth with $25bn in sales and 9,000 employees, has also been buying including the 2012 acquisition of several distribution companies of SDG, a leading distributor of enterprise and broadline IT products in the UK, France, and the Netherlands.
Ingram Micro with its $35bn in sales, has also strengthened its portfolio in the last two years with a $650m acquisition of mobile services provider Brightpoint Inc. Other buys include Dubai-based Aptec and Areté Sistemas in Spain.
In fact, if you add in Avnet, the top four distributors have annual revenues in excess of $110bn and much of that has come from acquisitions. As products have commoditised and “exclusive agreements” have gone the way of the dodo, the value of distribution has diminished and without a constant stream of buys, the big four have to either cut costs or add volume to hit growth targets and satisfy investors and shareholders.
What will the deal mean for the channel? If Arrow is smart, not a lot. Computerlinks is a well-run and profitable business that has carved out a niche as a trusted VAD that likes to bring new technology to market. Being part of Arrow should not dampen that ethos but if the new owner is keen to trim fat, it may mean some “streamlining” so a few operational functions may be merged. The model of VADition joining Exclusive Networks is the best case scenario for all involved and following a bit of chair swapping that usually occurs after these types of deals, everything should be back to “normal” by Christmas.
The real winners are the smaller specialist VADs like Wick Hill, Zycko and Cloud Distribution that can still resort to the “independent” top trump card.
The channel is all about relationships and trust, and being part of a $20bn a year giant could be a blessing and a curse. Either way, there are many others in the distribution space that know, deep down, they will also be assimilated – it’s just a case of when.
