Tech Data's Long Road To The Avnet Acquisition – From Not For Sale To Value Added Distribution Game Changer

Bob Dutkowsky approached Rick Hamada last summer at an HP event in Kohler, Wisconsin with a question: Was Hamada open to selling his $9.65 billion Technology Solutions (TS) business?

The Tech Data CEO and then-CEO of Avnet had known each other for a quarter century, but Hamada's response was chilly. "No. TS is not for sale," Hamada told Dutkowsky flatly.

Dutkowsky wasn't deterred. Tech Data spent the past year intently studying what the distributor of the future would look like, and Dutkowsky was convinced that buying Avnet's technology division would enable Clearwater, Florida-based Tech Data to get bigger in the data center and achieve a stronger geographic balance.

[RELATED: 10 Things You Don't Know About The Tech Data-Avnet Technology Solutions Deal]

"At the end of the day, everything is for sale," Dutkowsky told CRN last week. "It's just got to be the right timing, the right price, and the right terms and conditions."

So Dutkowsky got to work trying to convince Hamada that bringing Tech Data and Avnet TS together would be a win for Avnet, its shareholders and the channel at large. The two CEOs spoke roughly once a month, and Hamada kept reiterating to Dutkowsky that Avnet needed more time to consider its alternatives.

"We were patient, but we were pushing them, because we wanted to get on with our strategy," Dutkowsky recalled. "We kept telling Avnet: 'Look, you've got to make a decision, because we're going to move on if not.'"

Finally, after six months, Hamada signaled to Dutkowsky that Avnet would consider selling its TS business to Tech Data.

For Tech Data, though, the process had begun nearly 18 months earlier. In the summer of 2014, Dutkowsky said he brought together outside consultants, Tech Data's best and brightest and the research and strategy departments of the company's most critical vendors to determine a strategy for where Tech Data wanted to be in a decade.

The process resulted in three recommendations to Tech Data's Board of Directors: get much larger around the data center and digital technologies; find a way into the Asia-Pacific region; and reduce the company's dependence on Europe, which currently accounts for roughly 60 percent of its business.

Tech Data's board tasked its management team with figuring out how to solve those three objectives, and Dutkowsky said two divergent paths quickly emerged. The first is what Dutkowsky coined the "string of pearls" approach, which he said would be a series of several small acquisitions that would accomplish the three goals.

The second approach was to find a single big acquisition that would tick off several requirements. And Dutkowsky said Tech Data's team quickly realized that buying Avnet's TS business would do just that: TS was bigger in the Americas, already had a presence in the Asia-Pacific region, and was fully committed to the data center and next-generation architectures.

Tech Data determined that integrating one large opportunity would be somewhat more efficient than having to integrate six or seven smaller opportunities as part of the "string of pearls" approach, said Rich Hume, who joined the distributor in March in the newly-created chief operating officer role. Convincing Avnet TS to make a deal very quickly became Tech Data's top priority, Dutkowsky said.

"TS was really the piece that we wanted," Dutkowsky said. "It was the perfect strategic fit for what we were trying to accomplish. We looked at other opportunities, but TS was the one that really rang the register for us."

Avnet partners see the deal taking their value added relationship into the stratosphere.

Dan Sytsma, vice president and general manager at Melillo Consulting, New York, expects Tech Data's operational efficiency and track record around procuring inventory to make Avnet more cost competitive. "Getting acquired made Avnet stronger, not weaker," Sytsma told CRN.

Once Avnet agreed to consider a deal with Tech Data, one of the first challenges was figuring out a way to extract the TS infrastructure without disrupting Avnet's Electronics Marketing (EM) division, which will remain part of Avnet.

Avnet's EM and TS divisions currently share the same IT system and corporate headquarters in Phoenix, and Dutkowsky said Avnet didn't want to lose its corporate structure around accounting, finance and legal as part of the deal. Conversely, Tech Data wanted some of the pieces to come over to them to ensure operations continued smoothly.

"You have to figure out how you're going to split the Siamese twins," Dutkowsky said. "It's not as simple as it sounds."

Obtaining the funding necessary for the $2.6 billion acquisition, though, proved to be much easier. Hume said Tech Data has traditionally been a fiscally conservative company with little to no debt on its balance sheet, and actually had the financial analyst community inquiring as to when Tech Data planned to leverage debt to grow the company.

"Our banking partners were lined up before we actually went to Avnet with an offer," Dutkowsky said. "We had to know that we could get the financing."

Tech Data also needed to grow its internal infrastructure to handle the potential absorption of more some 6,200 TS employees. That process began in September 2015, when Tech Data hired Beth Simonetti - who spent a dozen years at healthcare giant Cardinal Health - as its first-ever chief human resources officer.

"Big, robust distribution company-type problems don't bother Beth at all," Dutkowsky said. "She's been there and done that kind of thing."

And Hume joined Tech Data as COO in March after spending 32 years at IBM, during which time he was in charge of IBM's Tech Data relationship for four years. He also knows Avnet's senior management from his years in charge of IBM's global partner business, with Dutkowsky praising Hume's understanding of complex channel strategies, the conceptual buildout of the data center and value-added services.

"We never would have had the confidence to do this Avnet transaction without Rich and Beth on the team," Dutkowsky said. "They gave us tremendous management strength to be able to take on a project of this magnitude."

Hume spent his first two months at Tech Data learning more about the business and reached the conclusion that the distributor was strong from both an operational and execution standpoint. At that point, Hume turned his attention to strategy, specifically around how the distributor could most effectively beef up its skills around social, mobile, analytics, cloud and security.

Once Tech Data and Avnet reached a broad agreement on price in mid-July, the two distributors each designated a representative to spearhead the due diligence process. Hume took the reins on the Tech Data side, Dutkowsky said, while Technology Solutions President Patrick Zammit handled matters for Avnet.

At that point, Dutkowsky said the number of Tech Data employees privy to the talks with Avnet expanded from just a few select company leaders to a couple of dozen functional heads in areas such as accounting, finance, human resources, legal, logistics, sales and vendor management.

"We had to bring them in because they're the ones that understood the questions that we needed to have answered," Dutkowsky said.

Each functional area of Tech Data wanted to get details on their counterpart functional area within TS, but Dutkowsky said Avnet wasn't able to go into too much detail around its vendor relationships, customers or the skill level of its people since the two distributors compete against one another today.

"All of those things we wanted to know, they didn't want to tell us," Dutkowsky said. "It wasn't that they were holding back; it's just the way the process works."

Since the two competitors were legally prohibited from sharing proprietary information about their organizations with one another, Dutkowsky said all of the information about each company was put into "clean rooms" which only the lawyers could access.

When Tech Data asked Avnet's lawyers a set of questions about the company, Dutkowsky said the lawyers would go into the clean room, analyze the data and report back a very "antiseptic" answer. Dutkowsky praised Hume's ability to navigate through the communication roadblocks during the six-week due diligence process.

"They put the data in, but we only got to see very, very summarized views of it," Dutkowsky said. "But it gave us enough comfort to know that what we thought TS was, it really was.

Dutkowsky said that he and Bill Amelio - who took over for Rick Hamada as Avnet's CEO in July - would communicate only around whether or not things were on track, leaving it up to Hume and Zammit to get things back on track if some matters had gone awry.

Hume said the final decisions stemming from the negotiations carried out by Zammit and himself were ultimately left up to the two CEOs. For one such issue with a particular sense of urgency, Dutkowsky said he flew to Phoenix on a moment's notice, had dinner with Amelio, reached an agreement, and promptly got right back on a plane and flew home to Tampa.

"It was far too important of an issue to talk about over the phone," Dutkowsky said. "It needed to be done face to face."

During the due diligence process, Hume said he and Zammit had interim checkpoints where they would come together in New York City and conduct weekend meetings to help keep things moving forward. The periodic in-person meetings were planned as part of an overall project management calendar, Hume said.

"The collaboration between the two teams was nothing short of excellent," Hume said.

Once the due diligence process was complete, Dutkowsky said the lawyers had to take the conceptual framework of the deal and convert it into an actual written document covering hundreds of pages of terms and conditions.

Hume said Zammit and himself were with their respective teammates in New York City in the week leading up to the announcement, and came to a verbal agreement on everything very late in the week. The two executives departed New York at that time, leaving it to the lawyers to write the contracts on Friday Sept. 16 and Saturday Sept. 17 and helping to resolve issues on which the lawyers disagreed.

"The last couple of days were an intense back and forth with the lawyers and the business executives," Dutkowsky said.

The final weekend was also very intense for Tech Data's communications team, Dutkowsky said, with the team putting together press releases, PR documents and working with an outside consulting firm to ensure major media outlets got the news as soon as it was announced at 7 a.m. ET Monday Sept. 19.

The team also stood up a dedicated internal website with documents and communications explaining what was announced to Tech Data employees in more than 20 countries, Dutkowsky said. Tech Data also set up a schedule to call top customers and vendor contacts ranging from CEOs to country-level managers once the news went public Monday morning, Dutkowsky said.

Some Tech Data teams literally worked around-the-clock in the days leading up to the announcement, Dutkowsky said, with employees not even going home. At the same time, the company tried to ensure news of the acquisition didn't leak out until the official announcement was made.

"Part of the reason we did it [the announcement] Monday was that all of that [last-minute preparation] stuff was going on Saturday and Sunday when no one was around," Dutkowsky said.

Tech Data's board of directors met the afternoon on Sunday Sept. 18 and unanimously approved the deal, Dutkowsky said, while Avnet's board of directors did the same the evening of Sept. 18. Once both boards approved the deal, Dutkowsky said the distributors had a legal responsibility to announce the acquisition in short order.

Dutkowsky had a call with Tech Data's managers shortly before 7 a.m. ET Monday Sept. 19 to ensure key leaders were up to speed on the news – particularly the people in Europe, where it was already midday – and were well-positioned to deliver a consistent message.

"What we said in Paris had to be the same thing that we said in Peoria," Dutkowsky said. "It had to be consistent."

Tech Data's board of directors sent bouquets home with some of the managers involved in the deal to thank them for their efforts. Dutkowsky said he had never before heard of that happening in his 35-year career, and he considered it to be a classy move.

"This is the biggest thing that's happened in the channel in probably 15 years," Dutkowsky said. "I can't think of something that has the breadth and far-reaching ramifications of this that's happened in a long, long time."

But the work is far from over. Hume said he and Zammit are also in charge of integrating the two companies and coming up with a unified organizational design, go-to-market strategy and staffing and leadership structure. The acquisition is expected to be completed in the first half of 2017.

"Ultimately," Hume said, "we'll break open the bottle of champagne on the closure of the deal and the first day we turn the lights on."