Industry consolidation has changed the electronic components supply chain, and it’s not over yet, as values increase and investors turn their eyes to the distribution sector.
A consolidating electronic components supply chain can mean many things to buyers. Among the upsides are the opportunity to get more from a single source and have greater access to services and expanded technology offerings–for many, a welcome change when incorporating Internet of Things (IoT) and Artificial Intelligence (AI) capabilities into today’s designs. But market consolidation also can cause a wave of nervousness and anxiety as relationships change, product lines are consolidated, and confusion lingers over brand, expertise, pricing, and the like.
No matter how you feel about industry consolidation, it’s likely here to stay. An improving economy and more business-friendly tax environment are pushing up corporate values, and interest among the investment community is piqued, especially on the distribution side.
“The tax law is going to put a lot more EBITDA [earnings before interest, taxes, depreciation, and amortization] on the books for these companies … and that heightens [their] value,” says John D. Wagner, a managing partner with 1stWest Mergers & Acquisitions, a middle-market investment banking firm that helps match sellers of industrial and electronic components distribution companies with a broad range of buyer types. “With the stock market so high, there is a lot of liquidity out there.”
Although consolidation has slowed in some segments of the electronic components industry, Wagner says buyers should expect deals to continue on the distribution side, especially as private equity groups seek to invest in smaller organizations and potentially prepare them for sale to larger entities down the line. On top of that, other industry observers say a still fragmented distribution market contributes to an atmosphere that is ripe for buying and selling in general.
Ups and Downs
The wave of acquisitions that rocked the semiconductor manufacturing landscape in 2015 and 2016 slowed dramatically last year–to a combined value of $27.7 billion compared to the record-high $107.3 billion value set in 2015 and $99.8 billion in 2016, according to market researcher IC Insights. Semiconductor industry watchers expect 2018 to be slower as well, as companies continue to integrate previously announced deals, and organizations up and down the supply chain adjust to the resulting market changes.
Consolidation continues on the distribution side, with some major deals announced in the last few years: Avnet’s 2016 purchase of Premier Farnell and TTI’s 2017 purchase of semiconductor specialist Symmetry Electronics come to mind. In addition, some of the industry’s largest players continue to diversify their offerings by acquiring companies with adjacent technological capabilities: Arrow Electronics’ purchase of design and service company eInfochips late last year is one example, as is Avnet’s purchase of hardware and manufacturing solutions provider Dragon Innovation, also announced in 2017. On the private investment side of things, America II Electronics was acquired by private equity firm Wynnchurch Capital, LLC last November, with both firms citing the deal’s ability to fuel the distributor’s global growth.
All of this adds up to a dramatically different supply landscape than existed five to 10 years ago, and one that is decidedly more global in nature. In addition to its Symmetry purchase, TTI announced the acquisition of a South Korea-based independent semiconductor distributor last December, expanding the interconnect, passive, and electromechanical (IP&E) specialist’s geographic reach as well as its foray into the semiconductor side of the market.
It’s largely a “wait and see” business for these most recent acquisitions, as it takes time to complete a deal and then fully integrate the purchased company. As IC Insights analyst Rob Lineback points out, while the newest deals get all the headlines, the wave of mergers that occurred in 2015 and 2016 are the ones that are beginning to have an effect on the buying community now. He and others advise that buyers keep a close eye on the deals that are most likely to affect their company.
“The headlines are all made when these deals are struck …. But there’s a lot that happens between that and when the transaction is completed in terms of how the operations change, which products are maintained, and [so on],” Lineback explains. “That’s the important thing for customers to stay glued to.”