CDW-Micro Warehouse Deal Continues Trend of Consolidation In Distribution

The acquisition is widely seen as a sage move by CDW and could signal the opening bell in a round of targeted acquisitions in a market that has been suffering for the past two years. It could also mean more friction between CDW and the distribution market, according to experts.

"I'm sure this isn't the end of the consolidation we will see in the IT wholesale distribution space," says Gartner principal analyst Michael Haines. "IT distributors have been challenged during the past two years [by an] economic slump and related downturn in IT spending. Consolidation is inevitable, and CDW was in a position to be a consolidator."

Janet Waxman, IDC vice president of hardware channels and alliances, says the acquisition will bring CDW to new markets; 75 percent of Micro Warehouse's corporate and public-sector revenue is from customers that are new to CDW, according to the two companies. "I think the partial acquisition is a good thing," Waxman says. "CDW has proved

a model that works well. And it gets CDW more involved with the consumer market, one in which it had limited presence before."

Specifically, the deal calls for Vernon Hills, Ill.-based CDW (No. 18 on the 2003 VARBusiness 500 list of top solution providers) to expand its customer base with the purchase of Norwalk, Conn.-based Micro Warehouse's customer base, which accounted for annualized August sales of more than $900 million. Roughly 50 percent of Micro Warehouse's U.S. revenue is from corporate customers, 35 percent is from the public sector and 15 percent is from consumers. CDW also picks up Canadian operations with approximately $40 million in Canadian sales and roughly $14 million in inventory, intellectual capital, trademarks and copyrights without being saddled with Micro Warehouse's accounts receivables or liabilities. Micro Warehouse (No. 36 on the VARBusiness 500) will adopt the CDW name.

Experts say the deal will lead to greater competition between CDW and distributors such as Ingram Micro and Tech Data. While VARBusiness classifies CDW as a solution provider, the company's wholesale IT-products business conflicts with distributors. Ironically, CDW buys a large percentage of its products from Tech Data and Ingram Micro. Still, CDW, which generated more than $4 billion in revenue for 2002, often presents a problem for other VARs because of its low wholesale prices.

According to Gartner's Haines, the move will make CDW more competitive if it can leverage its new assets and customers effectively. "On the downside, the competition from the large players, like Tech Data and Ingram, is still fierce, and the larger players have a number of advantages due to their size and volume pricing position," he says.

Matt Sheerin, senior analyst at investment banking firm Thomas Weisel Partners, says the purchase was carefully considered. "CDW, which has tons of cash -- more than $500 million -- has been looking at deals for close to two years," he says. "I think the move was smart."

Sheerin also sees some opportunistic deals on the horizon in this space. "Pioneer-Standard Electronics (recently renamed Agilysys), which earlier this year sold its electronics-distribution business to Arrow, is looking at acquisitions that would increase its strategic presence in the higher-end server space," he says. "I would not be surprised to see them doing something in the not-too-distant future." Sheerin also thinks Tech Data "probably is looking at some small opportunities."

Tech Data has already capitalized on good buys. The industry's second-largest distributor earlier this year acquired three overseas distributors, including the Azlan Group, a networking and telecommunications distributor based in the United Kingdom. While Tech Data's profits in the second quarter, ended July 31, disappointed analysts, the company's sales were up 4.6 percent, and gross margins increased more than 5 percent year-over-year, thanks in large part to the addition of the Azlan Group.

In addition, several distributors are scrambling to pick up business from DaisyTek, a $1 billion-a-year distributor specializing in IT accessories and supplies that filed for Chapter 11 bankruptcy protection this summer. With the growth of Synnex and the success of smaller distributors such as D&H Distributing and ScanSource, the market could be headed for more consolidation sooner rather than later.

"This is going to be an interesting space to watch over the next couple of years as distributors try to reposition their value to vendors as well as resellers and solution providers in an increasingly competitive environment," Sheerin says. n