Part 1 of this interview is being provided free exclusively to readers of NAW Smartbrief. This interview was originally published in the Oct. 10, 2012, issue of MDM Premium, Modern Distribution Management’s twice-monthly subscription newsletter for wholesale distribution executives. Learn more about MDM.
In November, Roy Vallee, executive chairman of electronics distributor Avnet (NYSE: AVT), will retire after 35 years with the company. He served as president and COO from 1992 until 1998, when he was promoted to CEO – a position he held until July 2011. During his tenure, Vallee saw Avnet grow from a $2 billion company to a $26 billion company. Vallee recently spoke with Associate Editor Jenel Stelton-Holtmeier about his career at Avnet and the role acquisitions played in the success of the distributor.
In part 2, in the Oct. 25, 2012, issue of MDM Premium, Vallee discusses how the industry has changed over the past 35 years, where he thinks it’s heading and provides advice for the next generation entering the industry.
MDM: Avnet’s growth is in large part attributed to its acquisition strategy. But integration can sometimes be a challenge – finding a balance between maintaining the culture and what attracted Avnet to the company while at the same time making the acquired company a part of Avnet. How did Avnet achieve success with this? And how can other companies make it a smoother process?
Roy Vallee: We did our first large-scale integration back in 1993. And we had to figure out then the best way to deal with it. But one of the first things we decided was that we’d document the process that we used so that with our next acquisition, we could pull out that documentation and use it as a framework.
Then we updated it based on what we learned in that integration. The more integrations we did, the more robust and capable our documentation became. In other words, we learned. We got older and wiser instead of just getting older.
In terms of some more specific advice or a framework, we approached it by forming teams. The way we looked at our integration, we broke it down around functions such as logistics, IT, HR, sales, marketing, etc. And we formed teams around those functions. What we did that I think a lot of companies don’t necessarily do is, we put members from both companies on those teams. So we were getting a 360-degree view of the areas that needed attention, the decision points.
Those teams made recommendations to management on how to proceed with the integration of their area. And then management, of course, provided oversight, and that’s how we rolled out the integrations.
The other thing I would say is if you don’t think you’re over-communicating, you’re not communicating enough. We hit employees with town hall meetings, with email communications, with video conferences, with hotlines where they can pose questions, with FAQs, with answers. We communicated substantially, and the bigger the transaction, the more we communicated. I think that’s very important in terms of galvanizing the new team.
The last one I’ll mention in terms of big things is the importance of speed. During the integration process, a lot of folks on both sides – the acquirer and the acquiree – will be unsettled to some extent. They’re not sure what their role will be, who their boss is going to be, how the strategy might change, what’s going to happen to the culture, etc. The sooner they know the answers to all of that, the sooner they can settle down and get back to work.
Somebody gave me a very vivid mental picture a while back. When a company is focused on its internal issues, and everyone is looking inside, what part of our anatomy do you think our trading partners are seeing? The key is to get all the inside stuff resolved as quickly as possible so that our teams can focus on the outside – facing our trading partners and dealing with their issues and opportunities as opposed to ours. So speed of execution is very critical in terms of successful integrations.
MDM: What does Avnet look for in companies it wants to acquire?
Vallee: Acquiring the right business in the right way is the starting point. No matter how good the integration strategy is, if you bought the wrong business, or you bought a company under the wrong circumstances, the integration’s not going to be able to fix that.
Way back in the early ‘90s as we started doing more M&A, we came up with three magic words that must all be present before we’ll pull the trigger on a deal. The first one is culture. You know the old story about one bad apple. You don’t want to take a successful company and introduce a corrupt culture – but I don’t mean that to be just legally corrupt. If the company you’re acquiring doesn’t share your values, your morals, then I think it’s a business you should stay away from.
The second piece is strategy. It seems to me that the statistics on successful M&A are fairly bleak, quite honestly. I think one of the big problems is that often times, the companies don’t actually figure out the integration strategy until after the acquisition is completed. We won’t approve an acquisition at Avnet without a go-forward projection of what the business is going to look like and how we’re going to integrate it.
In almost all cases, we discussed that strategy with the company we’re thinking about acquiring because we want to find out, first of all, do they think it makes sense? And, secondly, can they support it? If they don’t agree, then we either need to change the strategy or not do the deal.
Then given the right culture and an agreeable strategy, the third piece is the economics, and for us this includes value-based management. It’s not just about “Is this accretive to sales or profit margins or earnings per share?” The question is, “Is there an appropriate return on the capital that we’re going to employ here when we get all done with the integration?” If not, then we should not do the deal.
We look for those three things in every acquisition we do, and then we work hard on the integration.
MDM: The electronics distribution market, particularly in North America, is consolidated. How are you finding more companies to acquire?
Vallee: What is highly consolidated, you could describe as our core business. We have two operating groups, but the core businesses are the ones that we’ve been in for a long, long time. So, yes, there are diminishing targets out there and not a lot of acquisition opportunity left. We’re in the eighth inning – using a baseball analogy.
However, as we think about new markets that we can expand into, these could be products and services that we could sell to our existing customers or it could be new customers that have not, historically, purchased from us. We look at acquisitions that expand our served market and leverage our capabilities or core competencies.
In the markets where we have high market share in our core and there’s not a lot of consolidation left to do, we’re looking at market expansion and a lot of that is taking us in the direction of services in addition to just new products.
We’re still doing deals in IT in Europe and electronic components in Japan, but not a lot of core acquisitions are left here in North America.
MDM: Between the time you took on your role as president and COO of Avnet and today, the company has seen immense growth. What would you attribute the success to?
Vallee: Well, I have to start by telling you that I never imagined the company would be this big. We didn’t have a timeline or a Gantt chart on a greaseboard that said, “Here’s the path from $2 billion to $26 billion.” In fact, had we said those things out loud, I think people would have probably thought about putting me in a straitjacket and escorting me out the door.
What did happen is, first and foremost, we focused a lot on execution. Way back in the 90s, that was described as total quality management. Today, we simply describe it as operational excellence, trying to make sure that every customer and every supplier that interacts with us has a positive experience. And, of course, we never achieve a 100 percent, but to the extent we can increase that percentage, we retain more. And then we keep our activities going to add new ones, and we grow the business.
The second thing is, I mentioned earlier this focus on return on capital as opposed to just sales or margins. One of the byproducts of that is that our cash flow from operations has improved dramatically. You’re talking about our revenue growth here, but if you looked at our cash flow performance, you’d see a similar chart. Why is that important? Because with that capital, we had the choice of returning it to our shareholders or using it for strategic growth. So the strong execution and the focus on returns created resources that were not previously available and that allowed us to not only do M&A, but to actually, over time, accelerate the amount of M&A that we were doing. It became not exponential, but sort of logarithmic, if you will.
We’ve done a lot in the category of organizational development, which we’ve already touched on – the people issues and our culture. That’s driven down our turnover rates, and it has substantially improved our employee engagement. The distribution industry is all about local customer and supplier relationships as well as corporate-level customer and supplier relationships, so the people issues are very important.
I’ll mention two more things. One is we have an expression at Avnet: “Do the right things consistently over time.” That frankly means being willing to lose the battle from time to time, but stay focused on our values. Stay focused on our vision, and keep doing the right things consistently over a long period of time. That has built the brand. And without the full support of our customers and suppliers, there’s no way we could have grown from $2 billion to $26 billion.
And this may go without saying, but it helps that we were in the technology business. It’s nice to have a growing industry to serve.
MDM: So as you mentioned a few times, one of the trends we’ve seen is globalization and a lot of companies moving into other countries. Avnet has been successful with that. What are some of the drivers behind the globalization trend?
Vallee: Around 1990, when I was president of the company and we were based in New York, we were having this strategic dialogue: “We’re a North American distribution company, and we want to grow. Should we go into other distribution businesses and stay here in North America, or should we take our electronics distribution business and move it international, starting with Europe?” At the same time, we had several key suppliers that were strongly encouraging us to move to Europe and to become more global. So the conclusion we came to is obvious. We decided that we would take the electronics, and then later the IT distribution business global.
Part of that was offense, just the desire to continue to grow as a company, but part of it was defense because it seemed to me, even back then, that our customers and suppliers were increasingly becoming global. If we didn’t, we run the risk of another company being global, developing scale and scope, and, actually, attacking our core business right here domestically.
I guess you could say it was part greed and part fear that took us to go global.
Today, if you ask the question, “What’s driving this?” It’s the fact that, number one, like it or not – agree or not – we are moving more and more into a global economy. What happens in Europe, matters to the U.S. What happens in North America, matters to China. As a result of that, most of our customers and suppliers are finding ways to do business globally themselves. If we as the distributor want to stay relevant to them, we better figure out how to become global ourselves.
As this world becomes global, on the one hand, it’s very exciting because think of all this new market opportunity that we haven’t been a part of. And that’s just wonderful, and you can see sugarplums and dollar signs in your eyes. On the other hand, there’s the stark reality that now you have to compete with the best companies in the world for business even in your own domestic marketplace. If you’re not global, if you haven’t built scale and scope, if you haven’t migrated up the value chain into a suite of value-added indispensable or can’t-live-without services, then you’re vulnerable.