CS.llc OPINION: Although we have not seen a formal announcement, several indicators show that independent ITAD operator and electronics recycler U.S. Micro has been formally acquired by Arrow Electronics on January 2, 2014.
The news is not a surprise; it only confirms the momentum of more consolidation in the electronics recycling space, the fast disappearance of what I consider tier-1 pure-play ITAD companies and the emergence of Arrow as a key player in the space.
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For U.S. Micro, it is probably about a deal its owners could not reject. It has become a more concentrated market where the outlook appears uncertain. The uncertainty about the outlook concerns the broad IT consumption landscape and economic conditions in which ITAD companies are operating, with the biggest risks being the dropping ASPs and price points in the secondary and commodity markets, and the transition from classic IT equipment to a much more complex ecosystem of next generation IT products and services. Running a classic ITAD company in such a fast changing landscape is indeed a big bet.
From a competitive standpoint, the ongoing reorganization of the sector, characterized by the fast entry of the likes of Arrow, Avnet, Ingram Micro, but also SIMS, Waste Management and others, put pure ITAD companies in a difficult position. Joining these giants as subsidiaries or fully absorbed may be seen by U.S. Micro owners and owners of other companies as the best option to remain competitive and relevant in a world of giants.
For Arrow, this is another acquisition in a series that began in November 2010 when it announced a final agreement to acquire Intechra. From there, it went on a buying spree, purchasing TechTurn, Converge, Redemtech, and other similar assets that expand its footprint not only in terms of geography and customer accounts, but also in terms of expanding services and solutions portfolios to cover enterprise IT asset disposition and refurbishment, enterprise mobility disposition, datacenter decommissioning, and leasing solutions.
Although no details are available on the purchase price, Arrow may have gotten a good deal, one that achieves several possible goals:
- Firstly, it reaches new customers that have trusted U.S. Micro for their IT equipment disposition needs from the US heartland to Alaska. Some of these customers are very large financial institutions; some are even the same that Arrow may already service.
- Although less relevant given Arrow’s existing geographical footprint, U.S. Micro offers very well run facilities in Las Vegas, Dallas, Atlanta, and Toronto. The geographical location issue is probably less of a concern for Arrow strategists, but I have had the chance to visit U.S. Micro sites and I can confirm they were some of the best run facilities in the nation. Arrow certainly can benefit from some of the operational practices that U.S. Micro brings relative to site management, human resources management, etc.
- But for general observers, these are not sufficient value propositions to fully justify such acquisition. It is therefore our speculation that, in addition to the price, and unlike previous acquisitions, Arrow will allow U.S. Micro to operate somewhat as an autonomous entity, similar to what Ingram Micro did with CloudBlue. Such autonomy was not necessarily part of Arrow’s earlier strategy, which was all about bringing IT Asset Disposition services and entities under one roof. What may (or may have) trigger this stance is eventually both customer reaction to the perceived risk in high business concentration, and perhaps the difficulty in integrating so many small entities into a big one. Where does U.S. Micro fit in Arrow Value Recovery structure remains to be seen?
- But in an upcoming report to be released next week, titled “The ITAD Competitive Landscape: The Fast Disappearance of the Pure-Play ITAD Industry,” we argue that Arrow’s acquisitions bring competitively the company very close to the giants involved in the IT market in terms of asset origination and customer reach. In our study, we show that thanks to an aggressive acquisition strategy, Arrow’s rate of large enterprise account penetration moved from low single digit pre-acquisitions, to double-digits in post acquisitions. Its penetration rate of large US corporate accounts is still not as formidable as that of Dell, HP or IBM, but it is clearly closing the gap by acquiring all these companies.
As the above strategy becomes more evident, we are likely to see new efforts from various players to acquire the still active independent ITAD firms. There are probably about a dozen such companies, some even with decent penetration rates of large customer accounts that may be currently negotiating their acquisition.
What’s Ahead?
If you are involved in the electronics recycling space, the sector is by no means ready to stabilize. As Arrow continues to secure sources of assets and customers via its acquisitions, it is making its competitors and others from EMS/contract manufacturers, reverse logistics firms, and even retailers and OEMs, etc nervous. The purchase of U.S. Micro per se and by itself is not sufficient to have such an impact, but the net sum of these acquisitions is enough to get competition to react. So expect more M&A, perhaps affecting up to four firms this year.
If you are and end-user company using ITAD services, 2014 will be another transitional year. Some of you would welcome consolidation as a sign of maturity, others will be nervous at the prospect of shrinking competition. Either way, the current profile and structure of the electronic recycling industry today will not remain frozen over time. The competitive landscape, morphing consumer behavior and plain economics are likely to force new developments in the industry. Among them eventually will be the possible emergence of a bigger pure play ITAD player. After all the key acquisitions are completed, the ones that are left in pure ITAD are likely to focus their efforts on merging their capabilities, and that could bring new dynamics in the marketplace.[/membersonly]