Santa Ana-based Ingram Micro Inc.’s chief executive said the technology products distributor is seeing better than expected returns from its buy of Australia’s Tech Pacific Ltd. a year ago.
An expected loss of business from the acquisition has fallen short of expectations, Ingram said in its third-quarter report.
“It has not been as bad as we thought it could be,” said Chief Executive Greg Spierkel, who headed up the $530 million Tech Pacific buy,Ingram’s largest,as co-president before becoming chief executive in June.
Ingram didn’t give specifics on how much Tech Pacific business it lost as a result of the deal. It did say sales in Asia, Tech Pacific’s market, were $1.2 billion in the third quarter, up 112% from a year earlier and 1% from the prior quarter. Asia is Ingram’s third largest market after North America and Europe and makes up 17% of sales.
The company is keeping a close eye on the acquisition’s results. Asia’s growth rates are enough to make the region the largest for Ingram in coming years, according to Spierkel.
“Its growth characteristics are significantly more interesting than Western Europe or North America,” he said. “The sheer population of India and China dwarf North America in numbers.”
In the third quarter, Ingram had $2.9 billion in North American sales and $2.4 billion in Europe.
The buy gives Ingram an edge in its rivalry with Clearwater, Fla.-based Tech Data Corp., which has little presence in Asia.
“Tech Pacific continues to be a nice acquisition for Ingram,” said Richard Kugele, an analyst with Needham & Co. in Boston, who does not own the stock. “It gives them a competitive advantage.”
The risk was in seeing a falloff in sales from customers who used both Tech Pacific and Ingram. Before the deal, Ingram did sales of about $2.2 billion in the region while Tech Pacific did some $2.5 billion.
The company kept regional managers with the largest operations in place, regardless of whether they were from Ingram or Tech Pacific, Spierkel said. This kept offices throughout Asia happy and eased the transition for customers, he said.
The move brought more cuts to Ingram than Tech Pacific.
India, Australia, New Zealand, Malaysia and Hong Kong went with Tech Pacific. Just two countries, Singapore and Thailand, went to Ingram.
“Ingram appreciated what Tech Pacific was doing right,” Kugele said. “You don’t want to screw up a good thing.”
Spierkel said he estimated $400 million in lost annual revenue from customers that had used both Tech Pacific and Ingram. The company hasn’t seen that, he said.
“The recent Tech Pacific acquisition continues to drive results, and revenue attrition has been less than originally anticipated,” said Robert Anastasi, an analyst with Ray-mond James & Associates Inc. in St. Petersburg, Fla.
Ingram has seen higher profits in a business known for notoriously slim margins. In the past year, the company’s operating profit margin has gone from 1.2% to 1.36%.
Ingram could stumble. Tech Pacific isn’t fully integrated and customers still could jump ship in the next year or so.
“We still may see some,call it some pressure on the top line,over time because of what the vendors may do,” Spierkel said.
Longer term, Asia’s expansion could help Ingram offset a cooling down in other areas of the world, especially Europe.
“As Ingram’s Asian operations become fully integrated with Tech Pacific over the next year or so, we believe the company should further improve profitability in this region, and look for operating margin expansion to continue in the back half of the year,” wrote Steven Fortuna, an analyst with Prudential Equity Group LLC in New York.
Ingram has been taking European customers from Tech Data, which has worked through a restructuring and software system upgrade. Some speculate Ingram’s 10% growth in the region during the September quarter was entirely at the expense of Tech Data.
But Tech Data won’t stay down forever.
“Tech data will solve its problems in Europe,” Kugele said. “This is a management team you don’t count out.”
When that happens, Asia will become that much more important for Ingram to offset more tempered growth numbers in Europe, he said.
“Essentially, we doubled down on the region, knowing it’s important,” Spierkel said of Asia. “The penetration of (tech) is low there.”
