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Consolidation of biggest firms shows how IT distribution has changed

June 21 2021
by John Abbott


Introduction


The announcement in late March that Tech Data and its rival SYNNEX plan to merge in a deal with an enterprise value (EV) of $7.2bn will result in something of a reset of the IT distribution landscape. If the transaction closes, the pairing will create the largest worldwide distributor, displacing current number one Ingram Micro, with combined revenue of $57bn, 22,000 employees, and about 200,000 products in its catalog. But what exactly is the role of the IT distributor today in the rapidly evolving world of cloud and 'everything as a service?' After all, the mature IT distributors all grew up selling physical hardware and shrink-wrapped software. And will a new dominant player affect the current competitive landscape and inspire further M&A?

451 Take

Like many others in the IT sector, distributors need to retool themselves for the cloud. Customers are increasingly seeking as-a-service subscription models and hybrid capabilities to suit work-from-anywhere scenarios. The role of the distributor can be to help its sales partners address this opportunity, accessed and managed via the distributor's own cloud platform, while the distributor also orchestrates the integration of multiple partner products as a single offering, matching them to the most appropriate back-end cloud infrastructure, from one or multiple hyperscalers. There's also an increased emphasis on advanced products – cybersecurity, hybrid cloud, data analytics, networking and IoT – and on building out key vertical market skills. If distributors don't do this, they are in danger of being disenfranchised, either by smaller suppliers going to the customer direct, through umbrella subscription management services, or through the cloud suppliers themselves via their app stores.

Context


After two years of negotiations, Tech Data was taken private in June 2020 for $6.1bn (EV) by New York City-based private equity firm Apollo Global Management. The company immediately announced its intention to invest $750m over the next five years on digital transformation and cloud-based platforms, building on the already established StreamOne cloud marketplace. Investors clearly saw the need for accelerated progress toward full digitalization, perhaps beyond the pace that public shareholders might tolerate.

Tech Data's larger rival Ingram Micro had been taken private in 2016 by a China-based conglomerate, the HNA Group, through a heavily leveraged $6bn deal. But HNA, struggling to pay off its debt, soon put Ingram back on the market, eventually selling it to Platinum Equity Partners for $7.2bn at the end of 2020. Ingram, which had continued to grow during its period of Chinese ownership, similarly cited the need to accelerate digital transformation, expand cloud offerings and services, and broaden its geographic reach.

Tech Data and SYNNEX


Under terms of the most recent transaction, publicly listed SYNNEX will own 55% and Tech Data's owner Apollo Global 45% of the combined entity. Tech Data CEO Rich Hume – an ex-IBMer – will become CEO. The deal is intended to conclude major transitional periods at both companies. Tech Data had only recently been taken private, so this transaction will bring it back into public ownership. SYNNEX split itself into two in January 2020, spinning off its Concentrix customer experience division to return to a pure-play distributor model. Concentrix came out of SYNNEX's $505m acquisition of IBM's customer relationship management business in 2013, bolstered by the further purchase of Convergys in 2018 for $2.8bn. Concentrix is now a separate, publicly listed company.

There is some overlap. Both do a lot of business in PCs and printers from HP Inc (12% of total sales for SYNNEX, 10% for Tech Data) and in networking with Cisco. Both also do significant business with HPE and Lenovo. But there is also significant differentiation. Apple accounts for 16% of Tech Data's business. Roughly half of Tech Data's business is still endpoint-related (PCs, laptops, phones and printers), with the other half focused on advanced offerings such as networking. SYNNEX has less endpoint and more advanced tech business, but it also reaches further down into the small business sector. SYNNEX has also built up its own logistics, systems and integration skills – its incubation of Hyve Solutions is an example – as well as exploring some internal homegrown technology development projects. Geographically, Tech Data has more European and Latin American business, while SYNNEX is strong in Japan and Canada.

Of the two, Tech Data has the longer track record in cloud. By 2014, it had already built a significant cloud infrastructure business, with longstanding arrangements with SaaS providers like Salesforce, as well as an electronic data interchange unit. In 2016, it acquired the Technology Solutions division of fellow distributor Avnet for $2.6bn, one of the largest deals in this segment at the time. (The rest of Avnet continues as a distributor of electronic components.) From Avnet, it inherited a healthy datacenter business and cloud computing channel-distribution capabilities. Avnet was one of the earliest of the big distributors to address the cloud opportunity directly, through its Cloud Marketplace, now integrated with StreamOne. By 2018, Tech Net was generating about $1.5bn from cloud services resales. SYNNEX introduced its CloudSolv cloud services automation platform in 2011, rebranding it as Stellr in 2018 to reflect the convergence of cloud, mobility and IoT – and it obtained deeper unified communications and collaboration and networking skills via the purchase of Westcon-Comstor in 2017.

Reinventing the distributor


There's increasing pressure for large distributors to field a more comprehensive, end-to-end portfolio that is capable of aggregation so that customers can deal with a single supplier, even for more complex and dynamic IT projects (which are now much more in demand). In other words, distributors need to evolve from a primarily linear model representing single-channel partners in a project to a multi-point model, using collaborating ecosystem participants. In this model, the distributor acts as the orchestrator of access, interaction, delivery and services required – and is able to do so at scale.

This might well include providing a monthly subscription-based offering that combines hardware, services and software from multiple sources. While such bundling carries with it the danger of potentially squeezing the value provided by individual channel partners, the distributor's argument is that it typically acts as an accelerator, moving projects more rapidly toward higher-value contracts under which everyone benefits. Through financial services, distributors also push additional credit into the channel, helping smaller partners keep up with the demand for technology refresh.

Competitive landscape


Amid the pandemic, Ingram Micro has doubled down on the technologies and services required by new working patterns such as hybrid work and greater reliance on e-commerce and cloud-based platforms. That helped drive double-digit growth in its most recent quarter, when sales were up 23% from Q1 last year to $13.4bn, and profit up 24% to $984m. The company's sale to Platinum Equity is expected to close in the second quarter. Expanding its offerings and services in high-value markets, as well as greater geographical reach, are the drivers behind the deal with Platinum.

Privately held D&H Distributing reckons that it will be the third-largest broadline distributor in the channel following the merger of SYNNEX and Tech Data, and the only one to focus primarily on SMB and midmarket partners. Its combined US and Canada revenue is above $5bn. The vendor reports double- and triple-digit growth in areas such as cloud and everything as a service.

Arrow Electronics is a much larger enterprise but primarily focused on component distribution. As such, it's been affected by demand outstripping supply in recent quarters. But overall, it also benefited from the heightened demand in many of its verticals and says that it has flexibility in its business model, combined with greater visibility. Because the demand for components is more widely spread than in the past – not concentrated on just PCs and phones – there's less trouble with stockpiling. And for its enterprise computing division, sales are strong, and the company is also seeing a shift toward more complex transformational projects that drive better margins (in a traditionally low-margin business). Overall, Arrow's Q1 revenue was up 31% over the same time last year to $8.39bn.

CDW ($4.8bn in Q1 sales) and ScanSource ($730m in Q1 sales) also saw strong demand. ScanSource still has a large, legacy on-premises-focused business in barcodes, networking and security, but it's been working for the past four years on as a service, hybrid cloud, mobility and the bundling of hardware and software with network and cloud. That's partly due to its acquisition in 2016 of cloud services and business telecom distributor Intelisys for $83.6m.

In Europe, there are several sizable players focused on the distribution of advanced IT products and services. Switzerland-based ALSO Holdings reached  €11.9bn ($14.5bn) in revenue in 2020. The vendor is particularly strong in France and Germany, and is steadily moving into Eastern and Southern Europe. It's growing organically and via a series of smaller purchases (10 since 2015), filling in technology gaps and geographies. For instance, it bought PIN Computers in May for an undisclosed sum to strengthen its business in Serbia, Montenegro and Bosnia-Herzegovina. Other European firms to watch include Esprinet (Italy and Spain, 2020 revenue of $5.4bn) and Logicom (2020 revenue of $953m).

Conclusion


In a rapidly changing world, all distributors are aware of the risk of disintermediation as technological advances make it easier for specialized channel partners, manufacturers and cloud suppliers to interact directly with end users through their own cloud marketplaces. For example, there's a threat from new subscription management services such as Zuora, which can work with IT suppliers to scale up their own subscription models. Zuora, for instance, works with companies such as Bentley Systems, Cambrian Networks, Cloudflare, Joyent, Nutanix, RightScale and Splunk. Related advances in areas such as automated warehouses, localized logistics, presale integration and rack-level deployments could also be a threat – or an opportunity – for the distribution sector.