Investors sent Tech Data shares up a whopping 22 percent to close at $84.80 Monday after the distributor disclosed its planned $2.6 billion acquisition of Avnet Technology Solutions' data center business.
Avnet shares, meanwhile, closed up $2.68, or 7 percent, to $41.89 on the news. Avnet's Technology Solutions business has struggled in the fiscal year ended July 2, with sales falling 9 percent to $9.65 billion compared with $10.58 billion last year.
"What Tech Data is doing acquiring Avnet Technology Solutions is very smart; they are in a mature business and they are consolidating it," said Martin Wolf, president of martinwolf M&A Advisors of Walnut Creek, Calif., one of the top channel investment advisory deal-makers. "The cost take-out will be huge. Each revenue dollar that Avnet generated will be more profitable in the Tech Data model. To the extent they integrate it properly, their shareholders are going to be rewarded handsomely. This is a big deal. There are very few channel companies that have $9 billion in sales."
The deal is expected to significantly boost Tech Data's non-GAAP earnings per share in the first year after closing, the company said. The Clearwater, Fla., distributor expects to achieve annual cost savings of roughly $100 million within two years of closing thanks to technology platform efficiencies as well as duplicative functions and corporate expenses.
Avnet, for its part, said in April that it planned to cut $25 million in personnel and other expenses from its Technology Solutions business.
The Tech Data-Avnet Technology Solutions deal is strikingly different than rival Synnex's 2013 $1.2 billion acquisition of Concentrix, thrusting Synnex into the business process outsourcing (BPO) market, said Wolf.
"Synnex went to where the puck is going and they have been rewarded," Wolf said. "Tech Data is going in a different direction, saying they are going to have the best house in the distribution neighborhood. It may not be the best neighborhood because it is not cloud or recurring revenue, but it is an improvement on their core business."
Wolf expects the deal will put pressure on smaller value-added distributors and lead to more consolidation in the distribution market. "There will be more consolidation," he predicted.
Under the terms of the deal, Tech Data will pay $2.4 billion in cash and $200 million in shares – about a 7 percent ownership stake -- to Avnet for the Phoenix-based company’s Technology Solutions business. The deal is expected to close in the first half of 2017, bringing 5,000 new employees to Tech Data from Avnet.
Tech Data CEO Robert Dutkowsky said the deal will boost Tech Data’s data center business and make the company’s line card the most complete of any distributor in the data center space.
The news of the acquisition comes after Avnet CEO Rick Hamada unexpectedly resigned July 11.
Hamada was replaced on an interim basis by Avnet board member and former Lenovo CEO Bill Amelio, who is now the company's permanent CEO. Amelio called the Tech Data deal "the best strategic path for Avnet's future success and profitability."
STEVEN BURKE contributed to this story.