Distribution Bombshell: Tech Data To Buy Avnet's Technology Solutions Business for $2.6B

Tech Data Monday said it is purchasing Avnet's Technology Solutions business for $2.6 billion in a blockbuster deal that reshapes the value-added distribution landscape.

The Clearwater, Fla.-based distributor said acquiring Avnet's $9.65 billion TS business will supercharge Tech Data's data center business, jolting the share of overall revenue coming from the data center from just 29 percent to 45 percent while more than doubling non-GAAP operating income after cost savings.

"We are excited to announce this transformative transaction, which creates a premier global IT distributor with the most diverse end-to-end solutions from the data center to the living room," Tech Data CEO Bob Dutkowsky said in a statement.

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The combined company expects to flex its muscles in helping customers capture business around next-generation technologies including converged and hyper-converged infrastructure, as well as security, analytics and the cloud. Combined, these represent a more than $450 billion market opportunity, and are expected to grow at a 13 percent compounded annual growth rate through 2019.

"Industry standardization, innovation and converging technologies have transformed our industry," said Patrick Zammit, president of Avnet's Technology Solutions business, in a statement. "The broader portfolio created through this combination will enable both businesses to better capitalize on these trends."

Under the terms of the agreement, Avnet will receive $2.4 billion in cash when the deal closes in the first half of 2017, as well as 2.785 million shares of Tech Data common stock, representing an approximately 7 percent ownership stake. The deal brings Tech Data 5,000 Avnet Technology Solutions employees.

The deal is expected to significantly boost Tech Data's non-GAAP earnings per share in the first year after closing, the company said. The distributor expects to achieve annual costs savings of roughly $100 million within two years of closing thanks to technology platform efficiencies as well as duplicative functions and corporate expenses.

The acquisition will enable Tech Data to obtain a foothold in the Asia-Pacific region, where it currently doesn't have a presence. Once the deal closes, the share of Tech Data's overall revenue coming from Europe will fall from 61 percent to 53 percent, while the Americas will jump from comprising 39 percent to 44 percent of overall revenue and Asia-Pacific will go from 0 percent to 3 percent.

"Tech Data will be even better positioned to capture opportunities in next-generation technologies, deliver differentiated value to our customers and vendor partners, support career development for our employees, and generate strong returns for our shareholders," Dutkowsky said.

The acquisition comes just two weeks after Avnet named ex-Lenovo leader Bill Amelio as its CEO. Amelio replaced Rick Hamada, who stepped down from the company on July 11.

Avnet's TS business struggled in its 2016 fiscal year, which ended July 2, with sales falling 8.8 percent from $10.58 billion last year to $9.65 billion this year. The company said in April that it planned to cut $25 million in personnel and other expenses from its technology business after demand for data center hardware and software plummeted.

For Tech Data's 2016 fiscal year, which ended Jan. 31, sales fell 4.7 percent from $27.67 billion last year to $26.38 billion this year, while net income soared by 51.7 percent from $175.2 million last year to $265.7 million this year.

"Avnet Technology Solutions is a business that we've competed against and admired for many years," said Dutokowsky in an email to partners. "They have great people, great solutions, and great services, with a passion for winning similar to our own. Their expertise in value-added distribution is highly complementary to our Azlan business in Europe and our Advanced Infrastructure Solutions (AIS) business in the Americas, and it aligns perfectly with our growth strategy."