Avnet CEO: Sale of Technology Business To Tech Data Best Way To Boost Software Selling Prowess

The best way of transforming Avnet's Technology Solutions business to a cloud-led sales motion was by selling the $9.65 billion division to Tech Data, Avnet's CEO said Monday.

"In data center, it was a hardware-led selling opportunity," Avnet CEO Bill Amelio told investors. "When you go into third platform with cloud, it becomes a software-led sale. We needed to bolster up those [software] skills either by hiring those skills or by doing an acquisition to acquire those skills."

As the data center goes increasingly off-premise, Amelio said Avnet would have needed to make key acquisitions in the space over an extended period of time in order to keep up. Given the size of the investment that would have required, Avnet's executive team and board ultimately determined that a $2.6 billion sale of the business to Tech Data would make the most sense for all parties involved.

[RELATED: Tech Data CEO: Buying Avnet TS Will Create Broadest Set Of Offerings Of Any Distributor]

"We essentially put together two companies [Avnet TS and Tech Data] that now have a bit more scale and more girth to them," Amelio said. "They're going to be focusing entirely on making sure that the TS business in the Tech Data space is going to be a low-cost winner."

The growth of cloud computing and hyper-converged infrastructure has caused the role of the data center to evolve as organizations change the way they purchase and consume IT resources, Amelio said. Distributors must therefore become better at accommodating cloud, mobility and data analytics as organizations increasingly turn to IT to streamline operations and influence business outcomes, he said.

"This focus on selling IT solutions … is driving convergence on the traditional value-add and volume distribution models as solutions embrace a broader suite of products and services," Amelio said.

Avnet in July created specialized business units around data center, cloud, security, analytics, mobility and education to help accelerate software-driven technology sales. But Amelio said it was clear key acquisitions would also be needed to return the business to satisfactory growth and margin levels.

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.

Avnet's primary value-added distribution competitor -- Arrow Electronics -- is further along in its journey to a software-led sales motion. Arrow reported in May that software was now the largest component of its overall technology business – contributing roughly $720 million in technology sales each quarter -- after year-over-year software revenue skyrocketed by 36 percent.

Arrow CEO Michael Long said in August that he wouldn't be surprised if the Internet of Things accounts for 40 percent to 50 percent of Arrow's revenue over the next four to five years.

Meanwhile, Avnet's remaining $17 billion Electronics Marketing (EM) business will be focused primarily around supply chain, web enablement, embedded solutions and the Internet of Things, Amelio said. Selling its TS business to Tech Data also frees up capital for Avnet to complete and integrate its $1.19 billion acquisition of U.K.-based electronics components distributor Premier Farnell.

Shareholders of Tech Data and Avnet have reacted favorably to the news, with Tech Data's stock soaring 20.4 percent in trading Monday to $83.51 per share and Avnet's stock climbing 4.2 percent to $63.74 per share. The deal was announced before the market opened Monday.

Avnet also painted a clearer picture of how its Technology Solutions business fit into its overall financial landscape. In addition to $9.65 billion of annual sales, Avnet's TS business contributed $318 million of non-GAAP operating income, between $142 million and $157 million of non-GAAP net income, and between 69 cents and 79 cents of non-GAAP earnings per share, according to the distributor.

Avnet expects a one-time earnings per share gain of between $3.75 and $4.75 per share when the deal closes in the first half of 2017, the company said.