Tech Data’s exit from the Middle East last month has taken the market by surprise and not just because the denouement itself was much swift. Seen from the outside, It is quite intriguing as to why a company such as Tech Data that had invested so much time and capital in setting up operations in the regionally finally threw in the towel instead of getting more aggressive and committed to the market.
It suffices to say that there is more to it than meets the eye but the essential details are more or less understood. If we recall, Tech Data’s European operations have been embattled over the past year or so and the Middle East operations must have become a drag since the revenues the region contributed but an insignificant percentage to Tech data’s global kitty. While Tech Data Middle East had reported revenues of $330 million last year, it was 1.5 per cent of the company's global revenues of $21.4 billion. In a filing made to the Securities and Exchange Commission, Tech Data mentioned it expects to see a loss of up to $7m for the first half of fiscal 2008 because of the decision to withdraw from the Middle East.
The exit was in short almost inevitable since Tech Data was unwilling to make the incremental investments needed in the region. There were larger systemic reasons at work as well and which restrained Tech Data. In its report to the Securities and Exchange Commission, the company had cited "increasingly difficult" regional market conditions for the decision to withdraw.
Hanspeter Eiselt, Managing Director of Tech Data Middle East says, “In today’s environment, you require a lot more investment to be successful and in-country presence is critical. And when we mention in-country presence, it just doesn’t mean one person sitting in an office. It would mean a sales office, marketing office and the works. With all the investment priorities that the corporation has, they came to the conclusion that this wasn’t their priority anymore.”
In retrospect, Tech Data’s Middle East operations which seemed hunky dory from the outside, was actually grappling with quite a few challenges. Among them, some of the outstanding pressures must have been to match local bred distributors in their go to market strategies. As a US corporation bound by quite a few guidelines, there was that much it could go and no further, following which it pulled the plug.
Shahood Khan, Sales Director at Tech Data and now head of TDME’s components division says, “Tech Data Middle East had been struggling legally in terms of establishing in country operations in some of the countries of the region because as a US corporation, we cannot have offices in regions where there is no Free Zone. So I would see this as a great opportunity to establish that in country reach in the regional market.”
He adds, “We had a plan to do that but could not move forward fast enough because of the legal issues. Tech Data was registered in DIC as well. We could not establish entities with local partners.”
Eiselt now has the unenviable task of overseeing the winding down of the distributor’s operations here. The situation could not have changed more drastically in Tech Data’s case as it sought to consolidate though some new staff appointments.
Eiselt says, “When we reviewed the market last time around, we identified many growth areas. However, these areas required more investment than Tech Data was willing to make. We also took into consideration some of the recent swings in the market conditions and in addition some of the local rules and regulations. So when Aptec approached us with an interesting offer a couple of week ago, our corporation accepted and signed it.”
To complete the story, Tech Data’s loss has become Aptec’s win. Aptec swiftly swooped in for the kill and grabbed the most lucrative components of the successful portfolio that Tech Data had built over the past few years.
Dr. A Ali Baghdadi, Chairman and CEO of Aptec Holdings and his team found the zeal rarely seen in the region to buyout operations from a larger player. As inheritor of Tech Data’s legacy, the newly formed entity TDME will add muscle to Aptec’s growth. In fact the distributor may see this as a stepping stone for its growing global ambitions. Aptec Holdings is already set to double the size of its operations after absorbing the businesses from Tech Data. Aptec is now ambitious of touching the $1 billion mark in revenues soon.
Dr. Baghdadi said, "Aptec has shown how it is possible to succeed even in this most challenging of markets. We are ideally positioned to take on Tech Data's business in the Middle East and provide continuity to the benefit of customers, suppliers and staff. We can see tremendous opportunities for growing this business and broadening Aptec's footprint across the Middle East and beyond."
The questions will be if Aptec will succeed with the same platform on which Tech Data disappointed. It is big step for Aptec which now gets into the volatile components business and also into broadline distribution of high end enterprise products.
The buyout
Through the agreement, Aptec Holdings assumed responsibility for up to 14 franchises and distribution agreements formerly held by Tech Data. The latter’s enterprise and components business throughout the region are inherited by the new entity, TD M.E. which is a wholly-owned subsidiary of Aptec Holdings. The period of transition is expected to be smooth. Any employees of Tech Data have been retained but some have been made redundant.
Eiselt says, “The majority of them will be transferred to the new entity. A small group will work on the winding down of the operations and a few were made redundant but offered outplacement services. The Dubai job market is a buoyant one and going by that it should not be difficult for these people to get good jobs. Our staff has always been sought after and many vendors have hired from our staff, which also in fact created difficulties for us.”
Responding to the query as to if Tech Data has made a decision in haste, Eiselt responds, “There is a never good time or a bad time. It was a business decision. It will also help consolidate the infrastructure operations for Tech Data in Europe. So you don’t have to shift from Europe to the Logistics centre here and from here to Bahrain or Jordan.”
Aptec's TD M.E. business will operate from the current Tech Data office location in Dubai, retaining existing telephone numbers to further enhance business continuity. Tech Data Europe and Aptec also plan to form a strategic alliance that will allow TD M.E. to leverage Tech Data's central supply organisation in Europe.
According to Eiselt, "Aptec has a strong corporate culture, an in-depth understanding of local markets and of the industry as a whole, factors, that will undoubtedly ensure a smooth transition, providing seamless continuity. We would like to thank our customers and vendor partners, for their support in the past and wish them all continued success with TD M.E."
Aptec plans to keep TD M.E. running separately from its existing distribution business. TD M.E. will immediately incorporate offices along side existing Aptec branches in Saudi Arabia, Kuwait, Lebanon, Turkey and Egypt. "We see TD M.E. going from strength to strength over the next few years, and contributing significantly to the group's success, further enhancing our position as the region's leading distribution group" Baghdadi explained.
In the final analysis, it is unfortunate that the Middle East has lost the services of Tech Data. That could also mean that even if a distributor like Ingram Micro were looking to enter this market, it may think twice. As for Aptec, things never looked better and there are possibilities that it may travel further on the acquisitions path.