WPG/Yosun merger may challenge Arrow as world’s No. 1 distributor

EL SEGUNDO, USA: The approval of the board of directors for the merger of WPG Holdings Ltd and Yosun Industrial Corp. sets the stage for the creation of what could become the world’s largest electronics distributor, according to iSuppli Corp.

“With the merger of these two Taiwanese firms, not only will WPG continue to strengthen its leadership role in Asia, but it now also has the opportunity to replace Arrow Electronics Inc. as the world’s largest electronics component distributor,” said Horse Liu, manager for China Research at iSuppli.

The total revenue of the combined WPG/Yosun entity was approximately $9.6 billion in 2009, compared to Arrow’s electronic component sales of approximately $9.8 billion. Another leading distributor, Avnet Inc., generated $9.2 billion in the electronics component distribution market.

“WPG’s goal is to become a stronger competitor and to expand market share,” Liu added. “iSuppli believes this will help the merged company with attaining greater cooperation and promoting reforms—which will be the principal trends in the electronics components distribution industry.”

WPG will not implement an aggressive integration strategy following this merger, and instead will take a more limited approach. In the past, WPG achieved its overall strategic objectives but has encountered challenges in achieving synergy when attempting to integrate acquired companies during the past 10 years.

The table presents the analysis of synergies and strategic benefits achieved by WPG.Source: iSuppli, April 2010

In order to maintain customer and supplier resources, WPG’s sub-companies have been operating independently to avoid the challenge of integrating their distinct customer lists, business models and corporate cultures. Despite the differences, WPG matched distributors’ long-term development strategies while pursuing the continuous sales growth at a stable level of profit margin.

Mature market presents new challenges
China’s semiconductor market is become more mature—which means that growth is slowing. At present, gross profit margins for major distributors in the country are between 2 percent and 7 percent.

Given the difficulty on the part of distributors to generate high growth solely by using their own capital resources, mergers and acquisitions instead have become the strategy of choice for leading distributors to grow quickly. And because they are now encountering developmental choke points, some distributors have become more amenable to accepting the otherwise difficult challenge of making acquisitions.

WPG will continue its merger and acquisition strategy within the China’s electronics component distribution market. However, the company will need to diversify its business models because its basic order fulfillment services are under threat from suppliers’ direct sales forces.