Arrow Buys French Midrange Distributor

March 10, 2008 Timothy Prickett Morgan

IT hardware and software giant Arrow Electronics continues to benefit from the desire by smaller and often regional IT distributors to get out of peddling basic infrastructure and move up the stack to selling solutions. Last week, Arrow increased its presence in Europe, particularly among small and medium businesses, with the acquisition of the Logix subsidiary of Groupe Open. In doing so, Groupe Open will focus on its IT services businesses and leave the value-added reselling and distribution to others.

The acquisition of the Logix subsidiary of Groupe Open follows two years of acquisitions by Arrow and its remaining chief rival in the value-added distribution of IT products, Avnet There used to be three big IT distributors–the other being Agilysys–but Arrow snapped up the IT distribution business created by Agilysys in January 2007 for $485 million. Avent sold off its end user reseller unit devoted to peddling Hewlett-Packard servers and storage to Logicalis in early 2006 and in November of that year bought the Acess Distribution business from General Electric, which is the dominant supplier of servers and storage made by Sun Microsystems, for $412.5 million. Arrow and Avnet have been making other acquisitions since that time, and both have been keen to build up their distribution channels in Europe. And for good reason, the falling dollar back in the United States helps pump up revenues a bit and the European economies are, generally speaking, exhibiting more growth than the economy back home in America, where the major IT server and storage products that these two companies distribute get their brands.

Groupe Open was founded in 1989 in the Courbevoie suburb of Paris and has been publicly traded on the Euronext exchange since 1998. The Logix subsidiary brings in the largest part of the company’s revenues each year, and is growing faster than the IT market at large. Among other things, Logix is a distributor of IBM‘s System i, System p, and System x servers and their related storage and software. The fact that Logix was growing well might make you wonder why Groupe Open would want to let go of the unit.

In 2007, Groupe Open’s sales came to 680 million euros (just over $1 billion at current exchange rates), up 19 percent and 15 percent of that from organic growth in the European countries where Groupe Open operates. Of this, 493 million euros ($740 million) came from the Logix value-added distribution business, which grew by 16 percent (all of it organically). The company’s services business, which is known as Teamlog, generated 187 million euros in sales in 2007, up 30 percent (with 18 percent of that growth coming through acquisitions during the year). The Logix unit had discontinued unprofitable product sales, re-launched its business in the Nordic region, and began pushing back into Belgium (but not with as much success as Groupe Open had hoped). Only a month ago, when reporting its financial results for the year, Groupe Open said it was aiming to become a major IT player in its home country of France, with the goal of generating 450 million euros in sales and having 5,000 employees in the country by 2010, and that the Logix business was going to give it the financial leverage to get this done.

Clearly, something happened. Because only a month later, when Arrow came a-knocking, Groupe Open decided to cash out of the Logix unit, and has sold the subsidiary, which has 6,500 enterprise customers in Europe, for 120 million euros (about $180 million). The remaining part of Groupe Open will have approximately 2,300 employees, and will presumably use Arrow as its upstream partner for servers, storage, networking gear, and software. The 350 employees of the Logix subsidiary are joining Arrow as are some members of the subsidiary’s management team. Logix had a total of around 500 employees before Arrow took it over, so apparently not everyone will get jobs as the subsidiary is taken over by Arrow.

The something that happened was probably that Groupe Open was not making money even though it was growing fast. The Logix unit had 228.6 million euros in sales in the first half of 2007, but lost 1.7 million euros; the company has not provided profit or loss figures for the second half of 2007, even though it has talked about revenues. (This seems absurd, but it is true.)

But after acquiring Logix and making the personnel cuts, Arrow says the business will be immediately brining 2 cents to 4 cents a share to its bottom line in the first 12 months after the deal passes muster with the European and U.S. regulatory authorities.

“Logix is a natural complement to our existing Enterprise Computing Solutions business with its focus on the fast growing mid-market and its best-in-class portfolio of solutions,” explained William Mitchell, chairman and chief executive officer at Arrow in a statement announcing the deal. “This transaction will expand our pan-European footprint and almost double our line card, as well as strengthen existing relationships with key suppliers. We will gain an experienced management team and 350 highly talented sales, marketing and design professionals, while Logix will obtain access to increased financial and technical resources, and a more comprehensive suite of solutions for its reseller partners.”

In addition to making the announcement of the Logix acquisition, Arrow also said that Michael Long, a 17-year veteran of the company, has been named president and chief operating officer at Arrow, taking over the president position from Mitchell. Long is now in charge of the two engines at Arrow, the Enterprise Computing Solutions unit, which distributes IT gear, and the Global Components unit, which distributes other kinds of electronics gear. Long was already a senior vice president and was most recently president of the components business, which accounts for $12 billion of Arrow’s $16 billion in annual sales. Long is no newbie to the IT sector, though. In 1994, he was put in charge of Gates/Arrow Distributing and in the following year he was made president and chief operating officer at the Arrow North American Computer Products unit, which is now called Enterprise Computing Solutions and which now spans the globe.

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