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Deals I’d Like to See, Part 1: Avnet or Arrow Merge With WPG

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?

4 comments on “Deals I’d Like to See, Part 1: Avnet or Arrow Merge With WPG

  1. SP
    October 12, 2010

    I agree it would be good for the electronics industry if there are less big distributors. But this merger or acquistion would be really the big one and something to watch for. I guess from the engineer's perspective it would be good.

  2. Anna Young
    October 12, 2010

    Bolaji, You make the case seem simple. Yet, giant egos and the inability to look beyond the present have in the past made it difficult for corporate executives to take decisions that could be greatly beneficial for investors. Examples? I've got at least one for you. Remember when Microsoft was offering $40 billion-plus for Yahoo Inc? Just for this post I checked Yahoo's market value and it was just $20 billion! Everyone has overlooked that history as Yahoo fumbles all over the place. Give us your take on this Bolaji. I would like to read that.

    Many company executives don't always see the chance to break completely away from the pack. My impression is that Arrow and Avnet made critical decisions that in years past set them apart from the competition in North America and in Europe. I have a feeling you may be surprised at what these two companies might do next. They may not go after WPG–the Taiwan distributor may not welcome their advances anyway–but the rest of the competition in China, Taiwan and in other south East Asian countries should watch out. Avnet and Arrow are on the prowl and they'll be mopping up as the opportunities open up. Your article may force them to think about larger deals even if it is not the WPG kind.

  3. Steve Saunders
    October 13, 2010

    As an investor i don't really care whther the product of such a union owkrs long term – i just want to know which company to invest in short term to make some money.

    Bolaji, both of these companies are public; which stands to win in such a deal? 

  4. bolaji ojo
    October 13, 2010

    Steve, Pound-for-pound, right now, my bet would be on Avnet unless Arrow takes the more daring move. These two companies were for years neck and neck in their segment but Avnet is pulling steadily away from Arrow and this is reflected in their quarterly numbers. If Avnet merges with WPG, the payoff would be enormous and the transaction would put a gulf between it and Arrow.

    To stem the tide, Arrow must make the big move and quickly too.) Neither has to take the extraordinary step of merging with WPG as I suggested in the blog because they are both doing fine. They dominate in Europe and in North America; they led the regions' consolidation and are not in jeopardy of losing their dominant roles there for many more years. However, someone (I don't recall who) once said: “If you stand still, you'll get run over.”

    This is exactly why Avnet and Arrow must focus more on opportunities in Asia, which is also by far their fastest growing region. The electronics supply chain has shifted away from Europe and North America and so has the procurement dollar it once attracted. Similarly, now, the design chain is heading in that direction and it is the wave of the future. If I was an investor reviewing the market, I would want a company that is not standing still and that's why Arrow and Avnet are rapidly expanding in Asia. They cannot move in lockstep in Asia as they did in North America, however. One of them must break away from the pack or WPG will eat their lunch.

    Who has the muscle to make the move? They both do but here again Avnet has a bit of the edge. In the June quarter it had more cash ($1.1 billion versus $577 million for Arrow) and its long-term debt is slightly lower. It is also growing faster although Arrow's gross profit margins were better in the last two quarters. The market caps for the two companies reflect investors’ view that one is ahead of the other; Avnet's market capitalization as at midday on Wednesday, Oct. 13, was $4.23 billion while for Arrow it was $3.25 billion. These two companies can command higher valuation but in other to do this, they must become more “Eastern” and less “Western.”

    As to which one of them to invest in, over to your investment advisor. I would put money in both of them and hope their managements get even more daring.

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