Arrow Electronics: Reaping the benefits

Arrow CEO's first year finds the company flourishing.

By Heidi Elliott -- Movers & Shakers, 11/1/2004

It used to be that not a month would go by without Arrow Electronics making an acquisition. Those days are gone.

William E Mitchell, CEO and President, Arrow Electronics

CEO and President William E. Mitchell notes that Arrow has a long history of growth through acquisition—starting in the mid-1980s and including sizeable deals like the 1991 purchase of Lex Electronics and the 2000 purchase of VEBA's North American business.

Thanks to acquisitions that continued at an often-dizzying clip for years, top distributors Arrow and Avnet have a combined acquisition total of more than 100, making each competitive on a global scale.

Arrow's big-deal binge culminated in the January 2003 purchase of Pioneer-Standard Electronics' Industrial Electronics Distribution group. But for the most part, acquisitions were over by the time Mitchell took the reins as CEO in February 2003. "Our path has really been to transfer the company from acquisition-driven to customer driven," the CEO says. "We've made real progress in that."

Mitchell's job has been to refocus the company on achieving organic growth. And he's been succeeding. In the second quarter of this year, ending in June, worldwide component sales grew 30 percent over the prior year. At the same time, worldwide computer systems sales increased by 29 percent. "That's our focus on customers, our focus on execution," Mitchell notes. "The market isn't growing that fast."

But the market is—at long last—growing. Research company iSuppli notes that the industry has finally returned to growth mode. After the most severe downturn ever experienced in electronics, the end of 2003 marked an economic turn for the better.

Analyst Rosemary Farrell tracks semiconductor inventories at major points in the supply chain and notes in a recent report that the sector is healthy.

Nonetheless, she cautions that an inventory correction may occur. "Although there was some inventory building throughout the electronics supply chain in the second quarter, most notably in notebooks and mobile handsets in Asia, stockpiles in the front end of the supply chain remain relatively in balance," the report says. "However, the end of the second quarter brought a raft of reports of rising inventory in the distribution channel, with a few chip companies reporting lackluster resale numbers from distributors. But the inventory build at distributors in the second quarter was part of an overall inventory correction. The distribution segment ended the first quarter of 2004 with inventory levels nearly 14 days below their target."

Analysts and industry executives believe the industry will rebound for the rest of the year, and growth will continue through next year. "We expect that excess inventory in the semiconductor channel will work itself out," says Rob Damron, managing director of Twenty First Century Equity Research. "Growth will accelerate in the fourth quarter and continue into 2005."

Mitchell is also upbeat. "What we're seeing is mostly seasonal [slowdown] through the world, coupled with a bit of inventory correction," he says. "It's much more a normal cycle. We're selling more units than ever, the end markets are showing demand, and it appears much more rational than the year 2000."

Arrow's results so far this year are impressive—its second-quarter numbers included the best sales and earnings results in three years. For the first six months of this year, Arrow reported sales of $5.43 billion, an increase of more than 30 percent over $4.10 billion in the first six months of 2003. Excluding special charges, net income for the same period was $119.4 million—more than four times the $26.9 million in the prior year.

Arrow has been a leader in distribution for many years, swapping the top spot with Avnet. Arrow was the first to start the acquisition spree in Europe, taking the company first international, then global. Arrow now has 200 locations in 41 countries. Arrow was also the first distributor to offer fee-for-service programs, starting in May 2001. The company offers services that look to improve the efficiency of the supply chain, as do rival Avnet and other distributors. Since then, the electronics industry has been slow to accept these services, but distribution executives insist that going after new customers with existing services—and offering new services to existing customers—will result in acceptance of the fee-for-service model.

One of the particularly bright spots for the electronics industry is Asia. With manufacturers flocking to Asia in part for its low-cost labor and in part due to the potential local market, major distribution companies have also set their sights on Asia. Analyst Damron notes that roughly 40 percent of all components purchased are in Asia. About 10 percent of Arrow's total sales come from Asia, and the region is booming. For the second quarter of this year, sales in the region increased 9 percent sequentially, and rose 46 percent over 2003 levels. "Those numbers are great," Damron says. "Arrow's sales growth in Asia is phenomenal."

Mitchell's expertise in the Asia/Pacific region is part of what won him the CEO spot. He has rolled out a new strategic framework for the region that is customized for each market within the geography, because the overall market is quite fragmented from country to country. "There's no one-size-fits-all strategy," Mitchell notes. "You have to have a very tailored strategy in that region." For example, in Taiwan large ODMs (original design manufacturers) drive the market.

Arrow is at a slight disadvantage in the Asian market compared with its competitors; Avnet has a bigger presence in the region, but specialty distributor Memec, which has more than 25 percent of its revenues coming from Asia, outdistances both broadline distributors—plus it has operations in Japan. Still, Mitchell argues Arrow is growing in the region "quite nicely" and the company is on track with its plan. "We would expect Asia to be 20 percent of total revenues by 2007," says Mitchell, adding, "We'd love it if it were a year earlier."

Though a fragmented market now, Mitchell expects Asia will follow the same pattern as the U.S. and European markets before it—with mom-and-pop distributors consolidating into bigger players, and bigger players becoming giants. He predicts that eventually the top five distributors will control 65 percent of the market, much like the market here.

"We expect that market to consolidate over time, and we'll participate in that," Mitchell says. Let the acquisitions begin again.