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Avnet's Acquisition of USI

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Avnet, Inc. (AVT), a world-leading supplier of electronic components and computer products, recently came up with an acquisition agreement to purchase Universal Semiconductor, Inc. (USI Electronics). The acquisition is expected to close within 30 days of the announcement.

Based in Fort Lauderdale, Florida, USI Electronics is primarily engaged in supplying discrete semiconductor, passive and electromechanical machinery in the field of military and aerospace. The company’s revenue was nearly $70 million in 2011.

With the acquisition, the company’s operating unit Avnet Electronics Marketing, Americas, will be conflated with USI Electronics. While we await further details on the agreement, we assume that this latest acquisition would stimulate Avnet’s earnings stream moving ahead; and may even facilitate the company to achieve its return on capital (ROC) target of 12.5% in two years’ time.

Moreover, management expects that this acquisition will seamlessly strengthen Avnet’s foothold in the defense and aerospace market moving ahead. Avnet along with USI Electronics will be involved in augmenting its electronic components service offerings.

Avnet, on its part, has retained a keen eye for making profitable acquisitions for its market expansion and technological upgradation. During fiscal 2012, the company completed acquisitions of as many as eleven businesses with total annualized revenues of $900 million. These acquisitions are expected to enhance the company’s performances quite comprehensively and augment its product profile going forward.

Avnet’s domestic and foreign operations are subject to significant competitive pressures. It faces stiff competition from Arrow Electronics Inc. (ARW), which remains a fiercely formidable rival. Arrow’s recent acquisition of ALTIMATE Group, Global Link Technology and Redemtech can turn out to be highly profitable, thereby posing a serious threat to the future of Avnet. In addition, big players to keep an eye out for in this regard include Anixter International Inc. (AXE), and Richardson Electronics Ltd. (RELL).

The current Zacks Consensus Estimates for Avnet are 83 cents and $3.13 for the second quarter of fiscal 2013 and for fiscal 2013, respectively. The estimates represent a year-over-year growth of (27.7%) for the second quarter and (22.9%) for fiscal 2013. The company currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also maintain a long-term ‘Underperform’ recommendation on the stock.

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