Six Potential Targets/Suitors, Bidding Battles And Regulatory Risk: How The Ingram Micro-HNA Deal Went Down

Ingram Micro considered buying two significant IT distributors and spoke with five other firms about being acquired before settling on a deal with Chinese conglomerate HNA Group.

The Irvine, Calif.-based distributor detailed its due diligence process in a proxy statement filed late Thursday with the U.S. Securities and Exchange Commission (SEC), explaining why it felt HNA affiliate Tianjin Tianhai’s $6 billion purchase offer was superior to either the other acquisition proposals or remaining an independent, publicly traded company.

"Tianjin Tianhai's all-cash proposal represented near-term, substantially higher value and certainty to Ingram Micro's stockholders relative to Ingram Micro's prospects as a stand-alone company," Ingram Micro wrote in the 184-page filing.

[Related: Ingram Micro Execs: Vendors, Partners Embracing Proposed HNA Acquisition]

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The board’s uncertainty about remaining independent stemmed from several factors, including the global macroeconomic environment, the distributor’s recent and anticipated operating results, and the competitive dynamics of the IT distribution industry.

Ingram Micro pushed hard to consolidate its position in the IT industry in the months before speaking with HNA, such as in January 2015, when it entered into discussions to acquire one of its large distribution competitors using a combination of cash and stock. But the acquisition target determined the antitrust risk was too significant and cut off discussions, according to the proxy.

Then Ingram Micro explored acquiring either a global information and communications technologies company or its value-add distribution business, going so far as to submit a written indicative proposal. But the acquisition target notified Ingram Micro in January 2016 that its board of directors had no interest in a transaction.

The first nibbles from potential acquirers came in spring 2015, courtesy of a financial sponsor, identified as Party A in the proxy statement. Ingram and Party A signed a non-disclosure agreement in May, but the firm was willing to offer only $33 per share, which Ingram thought offered less value to stockholders than continuing to pursue its existing business plan.

Then in late August, a strategic party with a potentially complementary business located in China -- identified in the proxy as Party B -- expressed an interest in acquiring Ingram, but didn’t detail a price.

Hainan, China-based HNA burst onto the scene in late September, but was initially interested in purchasing only a 20 percent equity stake in the distributor. But by mid-November, HNA had upped the ante, expressing a desire to acquire all of Ingram Micro for as much as 30 percent premium to the distributor’s current stock price.

One month later, Ingram Micro CEO Alain Monie had a casual lunch with Greg Spierkel, who led the distributor from 2005 to 2012. Spierkel said a strategic party -- identified in the proxy as Party C -- would be interested in having a conversation with Ingram Micro.

But when Monie asked Party C if it would be interested in purchasing the distributor, the firm said it wasn't in a position to acquire a company of Ingram's size.

HNA, meanwhile, offered on Dec. 23 to acquire Ingram Micro for $41.20 in cash, a 33.6 percent premium over the distributor’s most recent closing price. On Dec. 30, the two parties signed a non-disclosure agreement, and a week after that, Ingram Micro provided some of its financials to HNA courtesy of a virtual data room.

Ingram Micro also actively pursued a deal with a strategic investor listed in the United States with a complementary business located in China, identified in the proxy as Party D. But both in October 2015 and January 2016, Party D rejected Ingram's advances and indicated that it had no interest in combining with the distributor.

Another financial sponsor, identified as Party E, expressed some interest in a transaction with Ingram Micro and ended up signing a nondisclosure agreement on Jan. 14 and proposing to acquire the distributor in the low $30-per-share range on Jan. 21.

Ultimately, Party B ended up being the most formidable competitor to HNA, roping in a Chinese venture capital firm -- identified as Party F -- to put together investors and raise capital for the deal. Party B's final bid for Ingram Micro came in at $38, not far off HNA's reduced offer of $38.90 because of a decline in the distributor's stock price in early 2016.

But Ingram and its advisers believed HNA was in a superior position regarding U.S. regulatory scrutiny, which the distributor believed Parties B and F would be subject to, as both were partly owned by the Chinese government (the Chinese government doesn't have any ownership stake in HNA or Tianjin Tianhai).

Other strikes against Parties B and F included a lack of experience financing transactions the size of the proposed Ingram deal, a complex financing structure involving many constituents and sources, and concerns that Party B had been leaking information about a potential transaction with Ingram Micro to Asian media entities.

Ultimately, Ingram opted on Feb. 17 to move ahead with HNA, issuing a joint news release after the market closed that day announcing the transaction.

"Terms offered by Tianjin Tianhai and HNA Group represented the highest value with the greatest certainty of achievement among available alternatives," Ingram Micro wrote in the proxy.

HNA's acquisition of Ingram could be the first of many tectonic shifts in the IT distribution landscape in the coming years as well-heeled foreign investors look to make a play in North America, said David DeCamillis, vice president of sales and marketing for Denver-based Platte River Networks.

"I wouldn't be surprised to see more mergers and acquisitions," said DeCamillis, who works extensively with Ingram Micro. "Will some of the smaller disruptors get disrupted? Probably, because they haven't focused as much on cloud."

But even if the ownership structure changes, DeCamillis is confident that distributors will persevere, given the indispensable role they play in the channel's procurement process today.

"To me, distributors will still have a robust market, at least in the next five years," DeCamillis said.