Arrow Electronics CFO: Integration Is Key to Success

January 10, 2014, 1:06 AM ET

Arrow Electronics CFO: Integration Is Key to Success

By Paul Reilly, Executive Vice President, Finance & Operations, and CFO, Arrow Electronics

In the 100-plus acquisitions I’ve been involved in at Arrow since 1991, successful integration is a critical difference between success and failure, between accretive to earnings and goodwill writedowns.Integration is something we think about early in due diligence, not late in the game. There are three main questions, but we try to answer them simultaneously. How does the company fit in to our strategy? How compatible are our cultures? Who are the key players and how do we retain, train and integrate them?

I’ll say up front, we’ve had a few failures and we learned some very important lessons. One of the things we’ve learned is to be careful not to catch deal fever. The momentum and enthusiasm can build quickly.

One of the proudest moments for me was a transaction we didn’t do because the target needed too much support in IT, operations and finance. We had other demands for those services elsewhere in the organization. And it is often the CFO’s job to stand up in front of senior management and say, “Here is why we shouldn’t do this.”

For us, M&A is not required, it is more an accelerator to our strategy, either geographic, product or capabilities. We are always mindful of the fact that it needs to overlap with some part of our current business.

When we look generally at M&A that has failed, in the vast majority of cases it wasn’t a strategic fit due to a lack of overlap on the current business.

We start with the question: How does this fit into our 3-5 year strategy?

For example, when we bought Computerlinks last year, we saw it as furthering our strategy of having a strong presence selling to data centers in Europe. We recognized 2 ½ years ago that we were weaker in Germany than in other large economies and realized we needed to have a better platform there.

The second thing we looked at was the software part of the market we sell into – security and networking are also an expansion of data centers. There was a nice overlap for us in what we do in other parts of the world. Computerlinks was No. 1 in that area and we were not. We were expanding our product in a critical economy. It improved the size and scale of our footprint.

Yes, this was a German company, but we look for company cultures that are similar. They don’t need to be exact. When we think about cultures similar to ours, we look for companies that are focused on operational excellence, collaboration, and they should be strong in developing people and teams. We want to make sure there are things in common about how you manage your company’s innovation and do they have high ethical behaviors.

Those are things people have to evaluate honestly. If cultures are different, it is hard to integrate.

Knowing the cultures takes time. Many of our best acquisitions are the result of three to five years of relationship-building with management teams, not banker-led acquisitions.

Management-led acquisitions mean you can have a dialogue with multiple levels of leadership. We’ve done banker-led opportunities, but so often when there is an auction, there is a significant drain on management of the target. They are having multiple dialogues with multiple buyers.

Some bankers say it is important to have an auction to maximize the price, but it is better to take the seller to the best buyer and create an opportunity for that potential buyer to have a dialogue. We think the deal will be fully priced if we can come up with a better way of integrating the company, and that takes a good amount of time with management to understand the underlying economics and strengths and weaknesses, as opposed to a banker’s auction when we would have a short time period to be involved. It can disintegrate from a big auction into a smaller auction, there are potential leaks; it can be an incredible distraction and the company loses momentum. The employees get nervous and some might start looking around for alternative employment, and the customers are not sure there’s not going to be a disruption. The value the enterprise had begins to fade.

Retaining talent is a critical dimension. When we have overlap with an acquisition in a region, we create a leadership team from both companies, and together we work hard to get the best of the best. It’s not just all Arrow people, it’s the best of both organizations.  The same goes for culture and processes.  We can always do better, so we adopt the best of the best in these areas, also.  Finally, it is critical to overcommunicate with employees, customers, and suppliers.

Even if the company is overseas, many markets are very similar to the U.S. when it comes to compliance.  Understanding all areas of compliance is a very important early part of integration.