Distribution model is alive and well

The proposed takeover of Tech Data by private equity firm Apollo Global Management was intriguing enough without the added spice of a rival bid. Even more exciting was the news that the counter offer came from one of the finance world’s heaviest hitters, Warren Buffett.

The story of how Buffett came to make his bid was outlined in an interview he gave to the Wall Street Journal. His investment fund, Berkshire Hathaway, was approached by Bank of America about purchasing the distributor. After evaluating the business, Buffett made a bid of $140 a share, trumping Apollo Global Management’s offer of $130 a share.

Apollo Global Management responded with alacrity, upping its bid to $145 a share. That seems to have done the trick as Buffett has declined to make another bid. If no other offers had emerged by 9 December, the deal with Apollo Global Management, which has risen in value from $5.4bn to $6bn, was expected to go ahead.

However, for me, the most fascinating part of the story came in the comments by Buffett as to why he had become involved in a possible takeover bid for Tech Data in the first place. “It was our kind of business,” he told the WSJ. “It’s one you can understand. I may not understand all of the products that they sell and I may not understand what the customers who buy the products do with them, but I do understand the middleman’s role.”

To me, this represents a very strong endorsement of distribution and the channel’s role because it shows very simply what that role is. As Buffett explains, you don’t need to understand what it is that Tech Data sells or what customers do with the products it sells to be able to understand the role that the distributor fulfils.

When you put it in terms of a middleman – or middle woman – it should be very easy for most people to understand. Mind you, it’s not that many years ago that people were talking about the middleman being squeezed out of the process altogether.

It is also worth noting that Apollo Global Management has stated clearly that it has no plans to implement drastic changes to the way Tech Data runs its business if the takeover is successful. CEO Rich Hume will remain in his position and the distributor’s headquarters will stay in Clearwater, Florida.

Taken together, Buffett’s statement about the business and Apollo’s commitment to business as usual can be regarded as a seal of approval for the distribution business model.

A report from the Global Technology Distribution Council, Tech distribution 2025, reinforces that view. Tracing the origins of tech distribution back to the 1930s, it claims there is no sign the distribution model is on the wane. The survey’s main conclusions are:

• Distributors have successfully evolved over the years to meet the IT industry’s changing requirements.
• Distributor core competencies will remain crucial in the future because they cannot easily be replicated, if at all, by any other players in the IT ecosystem.
• Distributor value is on the rise and is expected to gain momentum up to 2025 as business models and portfolios transform.

It appears Buffett and Apollo agree. No matter what the critics have said in the past, distribution truly is stuck in the middle. And it will continue to thrive as long as it stays that way.