Market Consolidation of Electronic Distributors as Heavyweights Tech Data and SYNNEX Merge

A merger has taken place to create a new market leader amongst electronic distributors; the firms are SYNNEX and Tech Data, who agreed in principle to merge in March 2021. The combined firepower of these two firms is expected to displace Ingram Micro from its market leadership position. The merger of these two firms (subject to a vote amongst SYNNEX shareholders and regulatory approval) is expected to lead to a combined firm with revenues expected to be well above US$50 billion per annum, while pro forma revenues are expected to be close to US$57 billion. This consolidation comes amidst an industry trend of taking electronic distributors private: Tech Data went private in 2019, with Ingram Micro following suit in 2020. This merger is the most significant news since the wave of privatization. The global footprint of the combined entity is significant, as Synnex-Tech Data concentrated in the North American, Latin American, and the European market, as well as the Asia-Pacific region. The two firms view this merger as important because enterprise customers of both Tech Data and SYNNEX seek to embark on digital transformation projects, namely in the IoT, AI/ML, and 5G domains.

Tech Data and SYNNEX expect their IT consulting arms to synergize, at least in terms of costs, if not revenues, too. In many aspects, the two businesses are complementary and so, there is less concern of revenue cannibalization. For example, Tech Data focuses on large enterprises while SYNNEX targets SMEs (small and medium enterprises). Also, there is geographic complementarity with Tech Data focused on the European market, and SYNNEX having a strong presence in Japan and Latin America.

Nevertheless, there is some geographic overlap as both have a strong presence in the North American region, where the two firms have competed for market share. The combined company may, however, have more bargaining power over suppliers (hardware OEMs and software vendors). This power over suppliers may be more evident in North America where these two former competitors can save costs by negotiating with suppliers as a combined entity, demanding a lower wholesale price than when the two were competing against each other and paying a premium to stock their shelves.

Mergers among established players and the entrance of private equity firms illustrates that the market remains mature, with robust cashflows and profits re-enforcing this trend. While single-digit revenue growth prevents this industry from entering into decline, it also shows investors to expect little disruption from new entrants, given the high barriers to entry. Some potential for growth remains, especially for the merged entity to capitalize on growth in the IoT market, which ABI forecasts to grow by a CAGR of 27.17% in terms of number of IoT connections from 2020 to 2024, according to the IoT market tracker (MD-IOTMWW-108). Other players in the industry will be keeping a close eye on this merger of Tech Data and SYNNEX, especially if there are signs that revenue cannibalization outweighs cost synergies. Given the trimming down of overlapping partnership networks and geographic overlap in North America, there may be significant headwinds for the success of this merger.

Other industry players also face similar headwinds, as these challenges are in their role as system integrators (SIs) who build an enterprise customer’s IoT solution. These firms do have some upside potential to grow, directly by being SIs and building IoT solutions. However, this brings exposure to downside risks, as substitute services, an alternative way to build IoT solutions without system integrators, can threaten these revenue streams. According to ABI Research’s IoT forecasts (AN-2643), the CAGR (10.43%) of SIs such as Tech Data and SYNNEX is surpassed by the CAGR of solutions by a specific industry vertical (22.99%) and solutions by IoT Platform suppliers (43.27%) from 2020 to 2024. ABI Research forecasts that SIs are expected to share in the upside and benefit from the overall growth in the IoT industry, but face a downside as their market share declines, being outpaced by rivals who supply IoT platform services and rivals who cater to specific industry verticals. This is because enterprises seek to budget their IoT expenditure in smaller increments to manage their CAPEX investments, rather than the multimillion-dollar IT consulting projects which the electronic distributors specialize in. So, the electronic distributors are unlikely to dominate the IoT solutions market just like they dominated the electronics distribution business given that suppliers by industry vertical such as healthcare, manufacturing, and transport are better positioned. They provide niche solutions rather than mass market solution by the system integration service of electronic distributors. Nevertheless, the merger is expected to lower costs for Sis, which may be passed on to the enterprise customer in the form of lower prices—this could make the SIs model competitive again, in which case other firms may also seek to merge and consolidate.

Inorganic growth through acquisitions remains a distinct possibility for other electronic distributors too, especially as rivals to TechData/SYNNEX, such as AvNet, expand their product portfolios, having acquired several companies, including Premier Farnell, Hackster.io, and Dragon Innovatio. In 2016, Premier Farnell (the main global supplier of the Raspberry Pi microcontroller) was acquired for £691 million. This inorganic growth is driven by a forecast of rapid industry growth in IoT, as electronic distributors essentially seek to enhance their capabilities for building IoT solutions.

Nonetheless, other players should watch closely to see if this merger can prove itself worthy of the optimism that investors and the companies themselves have expressed. Potentially becoming a blueprint for the future strategic direction of other industry heavyweights—should the upsides materialize. For now, it appears that the best approach for other players is to ‘wait and see’ if this merger will walk the talk and see if reality matches expectation.