Anthem Electronics, Inc.
Anthem Electronics, Inc.
Wholly Owned Subsidiary of Arrow Electronics, Inc.
Sales: $618 million
Stock Exchanges: New York
SIC: 3674 Semiconductors & Related Devices
Anthem Electronics, Inc. is one of the most successful and one of the largest semiconductor distributors in the United States. The company specializes in highly advanced, sophisticated technology products such as computer subsystems and other computer accessories, including RAMs (random access memory units), ROMs (read-only memory units), PROMs (programmable random access memory units), video display terminals, disk-drive controls, and various switching component supplies. Anthem’s products are used by such diverse industries as telecommunications, electronic data processing, the aerospace industry, and the U.S. Department of Defense. In the mid-1990s, the company was concentrating on advanced electronic storage devices.
Founded in 1968 by a group of electronic experts and businessmen, Anthem initially focused on providing semiconductors for both the burgeoning computer systems industry and the consumer electronic component parts industry. The company contracted to distribute semiconductors to a number of companies on the west coast of the United States, and in doing so developed an extensive network throughout the region. Contracts with the U.S. Department of Defense and NASA (National Aeronautical and Space Administration) provided the company with a stable source of income and enough funds to expand its distributor network.
Throughout the 1970s, Anthem continued to provide semiconductors to an ever-wider range of industries. At the same time, management decided to increase its market share of military semiconductors and programmable logic devices. Yet, despite increasing revenues, Anthem remained a regional firm, expanding up and down the California coastline, but keeping the development of its distributor network primarily within the western region of the United States.
It wasn’t until the mid-1980s that Anthem burst onto the national scene. Management at Anthem decided to acquire Lionex Corporation, a privately owned and operated semiconductor and computer subsystems distributor located in Wilmington, Massachusetts. For approximately $17 million, Anthem purchased the east coast distributor which reported sales of over $50 million in 1985. The acquisition was a watershed for Anthem.
With this single purchase, Anthem immediately expanded its distribution network throughout the northeastern region of the United States. Besides a formidable presence in the semiconductor industry, Lionex possessed a line of electromechanical products. Most importantly, however, Lionex operated six branches in New York, Connecticut, Maryland, Pennsylvania, New Jersey, and Massachusetts.
Within a few months of the acquisition, Anthem implemented a complete reorganization of Lionex. The owner and founder of Lionex, Leonard Schley, retired soon after the purchase was finalized, and Anthem brought in a new management team to smooth the process of incorporating the distribution network of the newly acquired company. Anthem management decided to retain the Lionex name, due to its high profile and reputation in the northeastern region, in order to focus on satisfying the customers and suppliers already within the Lionex network.
In early 1986, Anthem expanded its distribution network to include the Midwest. The company opened new distribution offices in Chicago, Milwaukee, and Minneapolis in order to fill the gap between its home base on the West Coast and its expansion into the northeastern part of the United States. In 1986, Anthem reported an impressive sales figure of $798 million in its western region, almost a 40 percent share of the total U.S. market for distribution. The acquisition of Lionex provided an additional $573 million, which added up to sales of $1.3 billion, or an astounding 65 percent share of the entire distribution market. By expanding into the Midwest, Anthem projected that it would grab another $135 million in market sales, increasing its share of the distribution market to approximately 75 percent.
Yet management did not expect this expansion strategy to encompass a national distribution network. Anthem was content to focus on regional markets, thereby avoiding the possibility of a downturn in the national distribution market. During this time, the company began to focus on providing products such as data storage systems for the commercial market, and also to develop new products for the new Winchester disk drives and 32-bit microprocessors that had just been introduced. In the military market, Anthem began to establish itself as the premier supplier of military-grade semiconductors. With a market in excess of $350 million, the company used Lionex’s well-established military support organization and distribution network to sell advanced technological equipment.
By 1988, Anthem was the sixth largest distributor of semiconductors in the United States, and boasted a customer base of over 6,500 companies, including huge original equipment manufacturers and small engineering firms. With 16 distribution locations in the western, midwestern, and eastern parts of the United States, the company reported a 32 percent increase in sales from 1987 to 1988. The semiconductor industry was developing products for computer-related equipment, and Anthem received more and more orders destined for desktop work stations, desktop publishing systems, and microcomputers with large memories. With a yearly percentage of sales increasing more than any company in the industry, Anthem reported that its revenues had grown from $119.5 million in 1984 to over $196 million by the end of fiscal 1987.
In 1989, Anthem scored another major coup when it arranged to become the sole distributor for Seeq Technology. Seeq Technology, a manufacturer of EEpROMs and flash EEpROMs with sales of $55 million in 1988, reached an exclusive agreement with Anthem for the latter firm to function as its sole nationwide distributor. Anthem’s distribution network was highly efficient in the West, Midwest, and Northeast, and provided Seeq with the opportunity to significantly increase its sales in those regions.
Although sales of electronic components slowed drastically during the year, Anthem remained almost untouched by the industry downturn. Sales rose over 20 percent, or about $319 million, and profits rose even more, increasing by 33 percent to over $15 million. In an industry with extremely thin profit margins, Anthem recorded the widest of any major distributor—an impressive 4.9 percent. One reason for this success was due to the formation of a Technology Systems Division which sold disk drives and tape drives by telephone. With almost no overhead, or burdensome service expenses, the division doubled its sales figures in 1989. Another highly innovative, and extremely lucrative unit, was the Turnkey Division. This division accepted a customer’s product list, purchased the items, built all the component parts, tested its effectiveness and reliability, and then delivered a completed system to the company ready for use.
In 1993, one of the largest manufacturers of semiconductors in the world, Intel Corporation, reached an agreement with Anthem to distribute its entire line of semiconductor products. By franchising Anthem to distribute its semiconductor items in locations throughout the United States, Anthem was given the opportunity to develop into one of the largest semiconductor suppliers in the Northern Hemisphere. Working out the details of a franchise relationship took nearly eight years, but Intel was satisfied with Anthem’s operations and distribution network, and estimated that sales for its products would increase significantly. International Business Machines Corporation (IBM), which had seriously considered making a similar franchising agreement with Anthem, was forced to drop the company from its list of potential candidates.
As Anthem continued to develop its distribution network, and provide semiconductor equipment to a growing list of customers, the company was approached by Arrow Electronics, Inc. Arrow Electronics, one of the largest distribution companies in the United States with sales near the $3 billion mark, was looking to expand its distribution network in certain niche areas within particular industries, and within certain geographical regions. An agreement was worked out and Arrow purchased Anthem in late 1994 for an approximate price of $370 million.
The acquisition of Anthem by Arrow was mutually beneficial for both companies, but Arrow was the immediate and most noticeable beneficiary. Arrow grabbed the number one position in distributor sales away from Avnet Inc., another large American distributor of semiconductor equipment and data storage systems. The acquisition was projected to increase Arrow’s worldwide sales to over $4.5 billion, with over $3 billion in sales coming from the United States alone. Arrow was also fortunate in gaining between $40 to $50 million in cash which Anthem had squirreled away to meet the contingencies of the marketplace.
With the acquisition of Anthem, Arrow had created the largest distributor network in the world, far ahead of all its competition, and the company also became the largest supplier of semiconductor equipment and computer-related subsystems. In early 1994, before the acquisition, Avnet was approximately $80 million ahead of Arrow, also nearing the $3 billion mark in distributor sales. Other large companies within the industry included Pioneer-Standard, with $950 million in sales, Marshall, with over $750 million in sales, Future at $650 million in sales, Anthem at $610 million in sales, Wyle, with sales of $525 million, Premier at $502 million, Bell Industries at $286 million, and TTI at $208 million. With sales estimated at over $15 billion in the industry, Arrow seized the largest share of the market with its new acquisition. Most of Arrow’s sales had previously come from outside the United States. The purchase of Anthem was intended to strengthen the company’s position within the domestic market.
Anthem was fortunate to be purchased by Arrow. During the early 1990s, the company’s revenues had declined, and the acquisition provided Anthem with the financial stability and resources to continue to expand its distributor network within certain regions of the United States. Anthem had been in the midst of a limited expansion program when acquired by Arrow. But the industry was volatile, and Anthem’s extremely thin profit margin was beginning to grow even thinner. After the merger, it was believed that if Arrow used Anthem’s distributor network wisely, the two companies would have a very promising future together.
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