Tech Data goes private with Apollo acquisition
Monday, November 18 2019
After several weeks of speculation, number two global technology distributor Tech Data confirmed its acquisition by private equity firm Apollo Global Management. Apollo is paying US$130 per share for all outstanding shares, a 24.5% premium on Tech Data's share price before the rumor broke, and valuing it at US$5.4 billion. This is the largest acquisition in global IT distribution since Ingram Micro's purchase by Chinese conglomerate HNA in 2016 for US$6 billion, and leaves the world's top two technology distributors in the hands of private owners. This is a particularly bitter blow for Ingram Micro, after its own talks to sell to Apollo broke down at the end of 2018, reportedly because Apollo wouldn't accept HNA's asking price of US$7.5 billion (including a US$1.5bn debt). Ingram now faces continued uncertainty over its future under HNA, while competing with a more agile, better financed, Tech Data. Apollo is paying around 30% less than the reported price for Ingram, for a business that generated operating profits last year of US$494 million on sales of US$37 billion (compared to Ingram’s US$550 million operating profits on sales of US$50 billion)
The deal looks likely to go through in the first half of 2020. Tech Data's board has approved the offer, and shareholder and regulatory agreement can be expected. Tech Data also has a ‘go-shop’ option for alternative third-party bids, until 9 December, and this may prompt a rush of rival bids, although a serious contender with the financial muscle to outbid Apollo is unlikely to emerge. This will also see publicly-quoted Tech Data delisting after 33 years on NASDAQ.
Why has Apollo acquired Tech Data?
Apollo is one of the largest US investment firms, with over US$320 billion in assets under management, spanning a wide area of industries. It has a growing level of exposure to the technology sector; it owns managed cloud and hosting provider Rackspace and, in 2014, acquired US networking reseller Presidio, taking it to IPO in 2017 (although Presidio is now back in the hands of another PE firm, BC Partners). However, this is Apollo's first major investment in an IT distributor and demonstrates a growing recognition in the investment community of the importance of distribution as the technology industry evolves.
For vendors and channel partners, this move should be seen as positive. Stability and continuity in operations and strategy will be priorities. Apollo is unlikely to force any management or structural changes to the business. The senior leadership is expected to remain in place, led by CEO Rich Hume. Unlike with a trade acquisition, there will be no integration process or organizational shake-up to distract management attention. Yet Apollo brings substantial funding power and a clear mandate to invest in growth and profitability, as it ultimately seeks to maximize its return. This is likely to mean financing Tech Data's expansion in specific growth areas, such as cloud, services (including managed services), security and IoT. The most immediate change will be the increased flexibility and freedom from quarterly investor scrutiny that private ownership brings. One of the biggest challenges for publicly-listed distributors operating on single digit gross margins is balancing longer term investments in innovation or new growth with delivering quarterly investor returns. At the same time, it potentially gives Tech Data greater freedom to invest in more opaque regions for publicly-held US companies, although as a US-quoted company itself, Apollo is subject to its own compliance requirements.
Need for profits may lead to exits from some struggling countries
The global distributors, including Ingram and Tech Data, make the majority of their profits from larger countries, usually a mix from The US, Germany, UK, France and India. They have found it difficult to use global scale to deliver profits in smaller markets. Tech Data has twice exited the Middle East (pre and post Avnet Technology Solutions acquisition) and once exited Latin America (although it reentered with the purchase of Avnet TS).
Probably the quickest way to boost profitability and so satisfy private equity investors is to exit smaller, non-performing countries. Ingram, under intense pressure to boost profits so that HNA can find a buyer, is already going down that path by exiting South Africa and more recently with the breaking news that it will exit Costa Rica, a facility that it was expanding as recently as 2015. This also raises questions about Tech Data's future strategy in APAC under Apollo ownership: APAC represents an important growth opportunity, but currently contributes a tiny share of profits and revenue, and will require significant investment in specific countries to grow.
This trend is good news for the local distributors in those countries, Tarsus being an obvious beneficiary in South Africa. Meanwhile a swarm of local distributors including Intcomex, Compusoluciones, CVA, SolutionBox, Distecna, Licencias OnLine and Microglobal are performing well in Latin America, despite the difficult economies and politics, and are taking share from their global competitors.
This trend serves as a warning to those vendors that seem increasingly tempted to focus their distribution efforts solely on global partners. They risk finding themselves being under-penetrated around the world and will miss out on some of the fastest-growing opportunities.
Tech Data is a leader in distribution evolution
Under Hume, Tech Data has strengthened in the last 18 months, with the acquisition of Avnet TS driving a significant shift in its profile, and a continued improvement in global performance. Share price has risen by over 40% in a year (prior to the boost from acquisition rumors). Like all distributors it faces some macro-economic challenges, and growth has been affected by weaker spending in some regions, as well as a deliberate shift in mix. But while the TS integration was complex, it substantially boosted the company's enterprise solutions business, while expanding both its US and APAC footprints.
The business remains broadly split between Advanced Solutions and Endpoint Solutions (Apple remains its largest vendor, followed by HP, although their percentage share of total sales is falling). But its global strategy is underpinned by a 'shift to higher value', supported by four pillars: investing in next generation technologies; strengthening its end-to-end portfolio; transforming digitally; and optimizing its global footprint. This has led Tech Data to exit some low margin vendors and reduce exposure to certain customer segments (such as retail) while prioritizing higher margin, new technologies, and even new solution subscriptions and as-a-service business models. Under private ownership it will be freer to walk away from more unprofitable sales, something which can be punished by shareholders in the short term. Its StreamOne cloud marketplace, already a key strategic priority, is likely to attract greater levels of investment, as will the development of new practices around IoT, security, analytics as well as cloud. Apollo will bring the financial muscle to accelerate Tech Data's plan to make targeted, specialist acquisitions in these areas – which will also be more palatable than pursuing further large scale acquisitions like Avnet TS.
Tech Data could find a jewel in digital innovation
Less well known, but no doubt attractive to Apollo, is Tech Data's strategy of digital innovation. Here Tech Data is already starting to use digital tools (such as analytics, machine learning and automation) to automate more sales and marketing engagements with its 125,000 customers, but even more importantly, to leverage massive amounts of data generated from those customers. That can include using AI to spot purchasing trends, drive automated sales campaigns around higher margin products and create 'personalized marketing at scale'. This is even enabling Tech Data to generate new revenue streams, such as sponsored search using its own website, allowing vendors to 'bid' for priority in search results. Last month (and largely unnoticed) it acquired a small UK developer company called IQBlade, specializing in applying data analytics across huge amounts of customer data points. This gives Tech Data a set of unique tools to develop targeted end-user campaigns, helping its partners drive demand, while giving it access to new pots of end-user marketing funding (rather than just channel marketing) from vendors. Apollo has perhaps recognized that distributors successfully developing these digital opportunities can enhance their financial performance, and start to pull away from the competition.
PE investments reflect strong channel prospects
Private equity ownership in the technology channel, including distribution, is increasing. In 2018, PE firm Permira ploughed around US$1.6 billion into buying a majority stake in privately-held networking and security distributor Exclusive Networks. Last month, networking and cabling distributor Anixter was taken private for US$3.8 billion by PE player Clayton, Dubilier & Rice. A growing number of MSPs and resellers across the globe are also attracting the interest of private equity. Tech Data's purchase is the latest in this trend. This acts as a significant endorsement of the channel model and reflects the importance the investment community sees the channel playing in future. As stock market investors lose their appetite for risk, PE is becoming an increasingly important source of finance to fuel the channel's development over the next few years. Understanding these companies' investment strategies (and exit plans) should be a priority for vendor channel managers, and channel companies alike.
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