Memec: It's IPO all over again

Will the second time be the charm for Memec?

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

Memec has waited five years for market conditions to be ripe for an initial public offering (IPO). Though the company is still waiting, it's one step closer today.

David Ashworth, CEO, Memec

The San Diego-based semiconductor distributor filed an IPO registration statement with the Securities and Exchange Commission (SEC) in May, when a window opened in the stock market and the climate was favorable for technology stocks.

The company has been here once before, in 2000, less than a year after the three-way split of the former VEBA Electronics, which put Memec back on its own footing as a stand-alone company (Arrow Electronics and Avnet took other parts of the VEBA holdings). At that time, tech stocks were the darlings of Wall Street. Then the bottom fell out of the market, and the electronics industry plunged into its deepest recession ever. Memec's IPO was put on indefinite hold.

Now Memec is ready to try again. And while the company remains on the same course, the landscape is completely different. "A new world exists today," says CEO David Ashworth. "The process was completely different in 2000." Since Memec filed its first IPO registration, the corporate world has been sullied by one scandal after another. Thanks to the likes of Enron, Worldcom, and Arthur Andersen, the rules for public companies, as well as the process of taking one public, are much more stringent. Executives are extremely limited in what they can say once registration has been filed, as is the case with Ashworth for this article. "We're not allowed to say what we could before," he notes.

Other than the IPO, it's business-as-usual at Memec. And business has been good. Registration documents filed with the SEC show that Memec ended 2003 up 12 percent from the prior year, with net revenues of nearly $1.8 billion. The company cited its strategic initiatives, including strengthened supplier relationships and an expanded customer base, as drivers in that growth.

The company also saw improved conditions in the semiconductor market itself. All geographic regions notched improvements. Net revenue in the Americas was $774 million, up 2 percent from the prior year. The Asia/Pacific region grew 29 percent to net revenue of $439 million. In the Europe, Middle East, and Africa region (EMEA), net revenue increased 11 percent to $446 million. And in Japan, net revenue jumped 26 percent to $138 million.

At the age of 30, Memec is relatively young in the industry. But in that time, Memec has been through a lot. Founded in 1974 by Dick Skipworth, the company went public in 1981 with annual sales of about $12 million. Germany's VEBA AG bought the company in 1991 when its sales were about $160 million, and it became part of that conglomerate's balance sheet. On October 16, 2000, Memec officially became an independent entity following VEBA's divestiture of its component-distribution business. Venture firm Schroder Ventures got the Memec portion of VEBA's distribution group out of the deal, while Arrow Electronics and Avnet took the rest.

Memec is a specialty distributor, focusing on the semiconductor market. That means it limits its supplier base to a small group—140 companies, including Xilinx, Actel, and Texas Instruments—with a product offering of 20,000 parts. Because of the focus, specialty distributors, more than any other type of distributor, focus on demand-creation for their suppliers, working to get design wins for their suppliers' components. That sets such companies apart from broadline distributors, which carry a vast number of suppliers and cannot, by definition, be experts in a single niche. "The focus is on a smaller group of suppliers, where they are really an extension of their suppliers' sales forces," says analyst Rob Damron, managing director of Twenty First Century Equity Research.

Memec consists of three specialist semiconductor distribution companies: Insight, Unique, and Impact. Each operates independently, but the three share logistics services and engineering resources. Memec has a total of 2,400 employees and boasts that three-quarters of them (1,800) are field application engineers (FAEs), technical sales or technical marketing employees, or account representatives.

The company has four main end-market segments, with the communications market dominating, at 40 percent. Industrial and medical customers make up 27 percent of the base, data processing 21 percent, and consumer electronics 4 percent. The dominance of communications brought Memec to its high point of $3.3 billion in sales, but was also responsible for the crash down to $1.6 billion once that market turned sour.

Of the top 10 distributors, Memec is among the most geographically diverse. Less than half (43.1 percent) of its business comes from the Americas. Europe and Asia are virtually equal, with EMEA comprising 24.8 percent of net revenues, Asia/Pacific 24.4 percent, and Japan 7.7 percent. Memec edges out the competition with its Asian footprint. Giants Avnet and Arrow Electronics report sales figures in Asia closer to 10 percent of their sales. "Memec is well-positioned in this market," Damron says.

Memec is not standing still, either. The company has big plans for a big potential market: China. With about 12 percent of total net revenues coming from China, Memec already has 32 offices and 275 technical employees. The company intends to build on this base by adding more FAEs and technical support staff, plus opening more offices. The company also plans to expand its presence in India, Eastern Europe, and Latin America.

"We intend to use our deep understanding of customer requirements and in-depth application expertise to gain market share in our existing vertical markets," the company said in its registration filing. "Additionally, we plan to expand our business with small- and medium-sized customers by providing call-center and online-purchase capabilities through our recently formed Memec Express division."

What remains in limbo is the IPO. Memec is still waiting, despite the registration filing this spring. A year ago, Ashworth said three conditions would have to be in place before going public: a stock market inclined to invest in the technology sector, a greater ability to forecast the economy, and improved profitability. Those conditions have not been met.

"Since they filed, semiconductor stocks have gone down," Damron says. "In that environment, it will be difficult to get an IPO done."

Meanwhile, the company will continue to do what it's done for three decades. "We're just running the business as we've always done," Ashworth says. "We're making sure we're not ahead of the curve or behind the curve in terms of the rest of the industry."