Some financial transactions seem to be possible only in the realm of dreams, but once in a great while, one of such extraordinary deals actually occurs, stunning many by the audacity of the executives involved and potentially turning an entire industry on its head.
I have been fantasizing about such a deal in the electronics component distribution market. In my dream, Arrow Electronics and top rival Avnet Inc. fight a duel over who would get to merge operations with WPG Holdings, the Taiwan-based distributor that may soon jump to the No. 1 ranking in the industry, according to research company iSuppli Corp.
The company that would emerge from such a union would straddle the oceans, command a formidable East-West presence, and give suppliers and customers enormous economies of scale. Of course, the losing party (either Arrow or Avnet) would also be at a great disadvantage, forcing it to scramble after smaller Asian rivals. It’s a mouth-watering thought.
This is not such a crazy idea. The high-tech sector has seen quite a few such breathtaking transactions, including the 2001 acquisition of Compaq Computer Corp. by Hewlett-Packard, creating “an $87 billion global technology leader.” Prior to the deal, HP’s annual revenue was $45.2 billion.
Also, IBM, once the world’s biggest personal computer maker, sold its PC division to China’s Lenovo Group, while Alcatel bought Lucent Technologies, the quintessential American technology company and parent of Bell Labs.
My point is this: Mega-deals sometimes make sense for companies seeking to leapfrog the competition, wrap up a stretched-out consolidation process, or break into new markets more easily than traditional growth or bite-sized acquisitions would permit. The growing disparity in the fortunes of major distributors and smaller rivals, on one hand, and major distributors operating in the world’s fastest-growing regions, on the other, would seem to support the case for Arrow or Avnet to buy or merge with WPG, their biggest Asia/Pacific rival.
If Avnet or Arrow isn’t talking to WPG, one of them should take the initiative and initiate a merger with the Taipei company. As noted here in a previous column, Distributors Battle for Control in China, China’s distribution market is ripe for consolidation, and the top players are set to fight a bruising war for control in the segment. It doesn’t have to be the case.
The merger of either of the West’s two biggest players with WPG could forestall a bloodbath in the marketplace, help the partners leverage each other’s strength in North America, Europe, and Asia/Pacific and accelerate consolidation in China, thereby giving customers the benefits of their strength in a changing manufacturing landscape.
It’s possible many would see significant obstacles to such a transaction. The cultural clash between East and West may be one of those challenges, but this is a non-issue. In fact, Arrow and Avnet are already present and making acquisitions in Asia. I have a few other mega and smaller transactions I would like to see in the electronics industry and will be discussing these in future columns. Any thoughts?