Avnet Divests Itself of the End-User Trade

Avnet this week spun off Avnet Enterprise Solutions, its last significant U.S. end-user business, to form a $300 million network VAR, in partnership with Calence, a nationwide solution provider.

The new company, Calence LLC—combined from AES, Avnet's network lifecycle management division and Calence—instantly becomes the single largest network VAR in the land, with $300 million in revenue and 400 employees in 20 offices coast to coast.

Avnet's AES resources will merge with Calence's, and the management team of the former Calence will oversee operations, under a board of directors filled with members from both parties.

Terms of the sale were not disclosed, but sources said the partnership would not be 50-50.

The spin-off comes just 24 hours after Avnet sold its $100 million Hewlett-Packard Corporation end-user business to Logicalis Inc.

The only U.S. end-user business Avnet possesses now is a small practice to serve IBM ISVs.

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But Avnet officials avoided characterizing the move as a departure from the end-user business in the U.S. market, instead calling it a refocusing on its core competency—two-tier distribution through resellers.

"Avnet looks to make sure we are the highest value we can be and that means any route to market that can add that value and makes sense," said Steve Tepedino, president of Avnet Technology Solutions – Americas.

"From our standpoint, the two-tier model gives us access to thousands of resellers who can carry the sale the proverbial last mile. It has the opportunity to add value in many different ways, in many different models and many different geographies… But we maintain the opportunity to take either route."

Click here to read more about Avnet's decision to sell its U.S. HP end-user practice.

In both deals, Avnet executives said the former Avnet divisions would be better suited to reach customers and "add value" in the new incarnations.

As part of the Logicalis agreement, Avnet became the sole source of product for the VAR's HP and IBM practices.

Avnet's recommitment to two-tier distribution is a return to its core competency, said Tim Curran, chief executive officer of the Global Technology Distributor Council.

"It's their bread and butter," he said. "They're a strong company, with strong partnerships, that knows how to leverage those to their best to support high-end, detailed configurations for some big customers."

Brian Alexander, an IT distribution analyst at Raymond James, a financial research firm, praised the divestiture as a wise trend to follow.

"We believe this transaction lends credibility to our thesis that a hybrid model cannot exist longer term," said Alexander, senior vice president of equity research-technology distribution at Raymond James.

Alexander said it is likely Agilysys, the only other distributor to maintain a one-tier track, would consider the same path as Avnet, although more cautiously.

Agilysys relies on direct sales for about one-third of its revenue, he said. Agilysys could not be reached for comment.

Calence will not be one of those partners, officials said. The network VAR will source products from Cisco, the VARs primary vendor, directly through the manufacturer.

"It's important that the new company be as independent from Avnet as possible," Tepedino said.

Calence, with the public sector practice of AES and its own private sector business, now becomes a "soup to nuts" network VAR, said Mike Fong, chairman and chief executive officer of Calence LLC.

"This is a domination company," Fong said, "not only in size and coverage, but in functional skill. The assets being combined here are greater than the sum of the combining parts. We can now handle everything—from a high-end roadmap all the way through to tactical design and full [network] outsourcing. Customers want to deal with one source, so that can mean a lot."

"We expect to drive organic growth by taking the combined resources and selling to the respective customer bases of both entities," said Rob Pinkham, Calence's executive vice president.

"But with the greater number of geographies and the broader set of offerings to move on, it's much more to go on."

Calence management hopes to grow the business in the public and private sectors and eventually take the company public.

Additionally, Avnet and Calence LLC have entered into a five-year network BPO (business process outsource) agreement for Avnet's data and voice networks, and telecommunications expense management support.

As part of the agreement, Avnet's Networking Services team will also become part of the new organization and support the new company's growth in network BPO.