Presto, Change-o: Kaufman makes Arrow No. 1 & then steps back

With nothing up his sleeve, Stephen Kaufman has transformed Arrow Electronics from a struggling, debt-laden company into the world's largest electronic component distributor.

When Kaufman joined Arrow 18 years ago, the distribution industry was still widely fragmented. Distributors were regional in scope. They weren't well respected. And value-added services were few and far between. When Kaufman took Arrow's helm in 1985, the company had a horrible debt structure and was, despite its No. 2 status, only one-third the size of then No. 1, Avnet. 'There were weekly reports of our impending demise,' Kaufman chuckles. 'We got past that.'

Kaufman decided to use acquisitions to grow the company, starting an industry trend that would take his company to the top spot. Arrow snagged the top slot from Avnet in 1994 and enjoyed an ever-widening gap until last year, when Avnet's acquisitions of Marshall Industries and SEI put the two distributors neck-and-neck.

'What [Kaufman] has done for that company is remarkable,' says analyst Clarke Walser, principal with Walser & Associates. 'He took a company of marginal to no profit and made it into one of the largest, most profitable companies in the industry.' Much has changed during Kaufman's nearly 20-year tenure. Most gratifying, the 57-year-old says, has been a change in the way other members of the supply chain perceive distributors. 'Distribution, 20 years ago, was like a slightly, not fully reputable distant cousin to suppliers and OEMs,' he says. 'Everyone knew us, but no one was all that proud to have us at the Sunday dinner table. Today, we're valued.'

For example, Kaufman notes that former distribution-company CEO Michael Rohleder was named a senior executive at ON Semiconductor. That kind of move would never have taken place 15 years ago. 'That is an indication that we're all really valuable,' Kaufman says. 'We've come a long way, baby. They now trust us with physical value-added services, like device programming, as well as giving us control over supply-chain management. We've gone from a `parts for dollars' business into a fairly complicated relationship where we become `baked in' to their supply chain.' Having achieved his vision of making Arrow Electronics the number one distributor in the world, Kaufman announced on May 11, 2000 that he was stepping down and handing over the reigns in July to Francis Scricco. Kaufman will continue to serve as Chairman of the Board.

'I think we've got a tradition of innovation in management and technology,' the soon to be ex-CEO says. Lokking back it is clear Kaufman has no regrets.
Above all, Kaufman says he is proud of the name recognition Arrow has earned. 'Twenty, 15, or even 10 years ago, no one outside of Arrow or a handful of companies cared about Arrow,' he notes. 'We were an invisible company. Today, we're a well-known and respected company.'  

Pioneer-Standard: The quiet company

Though it doesn't get as much attention as its larger competitors, Pioneer-Standard Electronics has undergone a gradual facelift and made itself into a strong player under the tutelage of CEO James Bayman.

Bayman took over as CEO in 1995. He took what was predominantly a computer-systems distributor and turned it into a distributor with a more balanced revenue mix, split between components and systems. He's also increased revenue nearly four-fold, from $500 million to nearly $2.5 billion. Bayman credits his employees and their dedication to the business. 'You have to build people, empower people, train them, provide the funding for what they need...and have a modest amount of courage,' Bayman says.

Though its growth has been impressive, the company is still considerably smaller than the top competitors. Ranked as the fourth-largest distributor in 1999, Pioneer is roughly half the size of third-ranked VEBA Electronics, which had estimated revenue of $5.3 billion, and only one-quarter the size of Arrow Electronics and Avnet, each of which had 1999 sales in excess of $8 billion. To compete, Bayman has put a significant focus on demand-creation as the way to increase revenue and profits for the company. 'Jim has done a very good job in motivating his people to really be the David versus Goliath,' notes Rob Damron, managing director at Tucker Anthony Cleary Gull.

Bayman respects his rivals, but believes Pioneer can carve out a niche and maintain its position in the industry. 'Arrow and Avnet are important competitors, but we also have a very loyal customer base,' he says. 'I don't have any concerns about that.' Staying competitive is a constant challenge. 'You have to be better, faster, cheaper,' Bayman says. 'When you strip away all the veneer, that's the order of the day. You need to embrace technology. It's a constant race to provide the tools, training, people and infrastructure that the customer demands.'

One of those demands is global reach. Larger OEMs and contract manufacturers need distributors to serve their needs worldwide. 'If you're going to play in the big leagues, you've got to play overseas,' says Clarke Walser, principal with Walser & Associates. 'That's not a debatable issue anymore.'

Bayman saw that writing on the wall and came up with a creative solution, since Pioneer did not have the deep financial pockets of its larger competitors. While Arrow and Avnet went global through acquisition, Pioneer forged alliances with a European partner (Eurodis Electron) and an Asian partner (WPI).

'Jim is not nearly as visible a guy as Roy [Vallee, of Avnet] or Steve [Kaufman, of Arrow],' Walser says. 'He's a quietly effective guy' Other analysts agree. 'He hasn't had quite the resources that Arrow and Avnet have, but he's done the best he could with what he does have,' Damron says. 'Pioneer doesn't have the balance sheet to make acquisitions, so they've made the alliances to give the company the global scope it needs without making a big investment.

Vallee keeps going.....and going

Roy Vallee has nearly reached the end of his sophomore year as CEO and Chairman of Avnet, and his batteries show no signs of fatigue.

'We've all had a tough time of it in the past three plus years,' Vallee says. 'We now appear to be in the early stages of an upturn.' Avnet could easily ride the wave, but that's not enough for Vallee. 'My goal is to ensure Avnet outperforms our peer group in the up-cycle,' he says.
Vallee has certainly put his mark on the company. After taking over from industry pioneer Leon Machiz in June 1998, Vallee oversaw a complete corporate restructuring in the midst of an industry downturn. The new blueprint organized the company according to customer segments, as opposed to the traditional component-type divisions.

Since then, Vallee has formed an Internet joint venture (ChipCenter LLC) with rival Arrow Electronics, sloughed off the company's catalog business, formed a third operating group (the Applied Computing Group), and initiated a company-wide migration to SAP (so that all the company's computer systems speak one language). Prior to Vallee, Avnet had trailed Arrow in both the globalization and consolidation trends. 'Avnet was a little sleepy over the last 10 years until Roy took over,' says analyst Rob Damron, managing director at Tucker Anthony Cleary Gull. 'Arrow had surpassed Avnet—in size and better financial results. He's really turned the company upside down.'

Vallee has masterminded four large-scale acquisitions, plus several smaller ones, adding more than $3 billion in sales to the company's tally. 'The company is now pretty much neck-and-neck with Arrow in size and scope,' Damron says. 'Both Arrow and Avnet have excellent leaders, and they're driving the distribution industry to the next level.'

And still, the acquisitions will not stop.

The CEO expects the company to make major acquisitions-ones that involve large-scale integration into an existing Avnet group or unit-every few years. 'Doing one every two years gives the operation time to absorb, adjust, and settle down,' he says. The smaller ones, meanwhile, will continue as opportunities arise. Last year's $830 million acquisition of Marshall Industries was historic in more ways than one. Besides being the largest-ever distribution deal, it sealed the fate of shelf-sharing restrictions by bringing together one of the largest distributors of North American semiconductor suppliers with the leading distributor of Asian semiconductor lines.

Vallee often stresses that acquisition is not the company's only path to growth. The company is investing heavily in Avnet Design Services and its Integrated Materials Services (IMS) division. With the design services, the distributor gets involved in the product-development process at an earlier stage, becoming an integral part of the time-to-market race. IMS, the $1 billion supply-chain-management arm of the company, has grown at a compound-annual rate of 40 percent, and Vallee anticipates the unit will come to dominate the company.   

The little catalog company that could

Catalog company Digi-Key, though much smaller than the mighty Newark, has steadily built itself into a success, thanks to two decades of leadership from President Mark Larson.

Prior to Larson's arrival at the Thief River Falls, MN-based company in 1976 as general manager, Digi-Key sold components to electronics hobbyists. The company had revenues of $800,000 and employed 15 or 16 people, Larson says. 'One of the problems I could see was that the hobbyist orders were too small,' he recalls.

So, the company moved into supplying parts to the engineering community, which placed similar orders, just larger ones. Between 1978 and 1984, the company segued out of the hobbyist niche and into the design engineering/prototype market. Three years ago, it established a volume-production unit to handle orders for small production runs.

'You have to be impressed,' says Clarke Walser, principal with Walser & Associates. It was not so long ago that Newark absolutely controlled the catalog business. Digi-Key is now a competitor and is a strong player in that space.'

Digi-Key has grown tremendously since Larson's arrival and subsequent promotion to president in 1985. Privately held, the company had estimated revenues of $234 million in 1999. 'I think they have found a profitable niche and they seem to be very good at what they do,' says Robin Gray, executive vice president of the National Electronic Distributors Association.

Larson boasts that his company consistently outperforms the overall distribution industry and Newark, which is part of Premier Farnell PLC, with estimated revenue of $1.2 billion in 1999.

Newark grew 7.9 percent in its last fiscal year, while Digi-Key grew 18 percent in the same time, Larson says. In the last calendar year, Digi-Key sales grew 14 percent, while sales at the Allied Electronics catalog grew 10 percent. 'Digi-Key is still a very small player in the market,' Larson acknowledges. 'But we do really believe Digi-Key has an impact on the market that goes well beyond the size of the company.'

The company ranks 15th in Cahners Research's list of the largest distributors, but Larson boasts that Digi-Key has started more than one industry trend and has some unique qualities. Larson boasts that Digi-Key was the first distributor to offer same-day shipping, at a time when one- to two-day delays were common. Sometimes, even orders placed late in the day got shipped out that night. The company consistently ranks at or near the top of lists of engineers' favorite Web sites. 'I like to feel like we've raised the bar, even though we're a small player,' Larson says.

And then there's the venture into the production-order side of the business. Catalog houses traditionally serve either maintenance repair organizations (MROs) or engineers doing prototype work. Catalogs can charge higher prices than traditional distributors because the average order size is so small. But Larson says customers asked for a production-volume service. Catalog sales still dominate, bringing in an estimated 70 percent of revenues. But the company president expects that share to fall to 30 percent within the next five years. 'I expect to grow the volume side significantly,' he says.

New leadership, new ownership, same course

Though he's still a relatively new kid on the block, Wyle Electronics CEO Tom Beaver has jumped right in.

Wyle is the largest component of the VEBA Electronics Group, and with 17 product lines, the company maintains the VEBA group's strategy of being a specialty distributor. 'I'm having the time of my life,' says Beaver, who joined the distribution industry after a career on the supplier side, notably at Motorola.

Beaver took the helm in January, at an awkward time. Last summer, German parent VEBA AG announced it would rid itself of non-core businesses when it merged with Viag. And electronic component distribution is considered a non-core business.

As a result, the company faces a somewhat uncertain future. Options include a management buyout, taking the company public, or getting acquired (whole or in pieces) by another company. Beaver believes the situation will be settled soon. The company has been working on a leveraged buyout (LBO) plan that would get it the financial backing it needs, ultimately followed by an initial public offering.

After 30 years at Motorola, Beaver left to work at a power supply company. But then he jumped at the Wyle job because he had grown attached to his old turf. 'I missed the semiconductor industry,' he says. 'I missed chips.'

Wyle's technical approach to the industry also appealed to Beaver's history in electronics. 'Wyle really wants to be a technical solutions provider, not just the buy-and-sell-parts historical distribution role,' he says. Among his plans, Beaver hopes to propel the demand-creation model to which Wyle and the other VEBA companies subscribe. He also hopes to maintain the family-like corporate culture that has seen Wyle through from its origins as a testing laboratory, into its incarnation as a distribution company, and on to its current size and status.

Behind Wyle stands VEBA Electronics. With 1999 group sales in excess of $5.4 billion, VEBA ranks third behind Arrow Electronics and Avnet. Besides Wyle, VEBA companies include EBV Elektronik, Insight Electronics, Unique Technologies, Impact Technologies, the Memec companies, and Raab Karcher Electronic Systems. The companies are all specialty distributors, each carrying a small number of supplier product lines.

Atop VEBA Electronics sits president and CEO Ferdinand Pohl, who took his post in April 1998. Born in 1947 in northern Germany, Pohl studied economics at the University of Muenster. Greg Provenzano, president of Insight Electronics, notes that Pohl's leadership style fits well with the structure of the VEBA organization. 'The group companies have autonomy,' Provenzano says. 'He doesn't run it as a business bureaucracy. He's very committed to the demand-creation strategy.'