Commentary: MCAD Industry View - A March 2007 Update


MCAD Industry View - A March 2007 Update

by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates

In the first MCAD Industry Commentary published May 2003 in, then-recent yearly and quarterly financial performances of a selected group of public Mechanical Computer Aided Design (MCAD) companies were analyzed and compared. Expectations of future financial performances of these same MCAD entities were documented. The May 2003 MCAD Commentary was followed by fifteen quarterly updates in, one for each subsequent calendar quarter. URL's on all past articles are available. The entities covered were ANSYS, Autodesk, Dassault Syst mes, UGS PLM, ESI Group, Moldflow, MSC.Software, PTC and Tecnomatix.

As a result of the acquisition of Tecnomatix by UGS that closed April 1, 2005, Tecnomatix was eliminated from coverage thereafter as a separate entity.

Accordingly, this sixteenth article in the sequel recounts the financial performances of the remaining group-of-eight (G8) MCAD/PLM entities for the nominal fourth quarter of 2006.

Recent MCAD & PLM News Highlights, & Some Commentary on same

On January 25, 2007 Siemens Automation and Drives (A&D), Nuremberg, Germany, moved to expand its industrial software portfolio through a definitive agreement to acquire a leading MCAD/PLM firm UGS. The agreement was made between Siemens and the current UGS owners Bain Capital, Silver Lake Partners and Warburg Pincus. The planned purchase price amounts to US $3.5 billion, including assumption of existing debt. The activities of UGS are to be assigned to the Siemens Automation and Drives Group (A&D). According to a spokesman, Siemens A&D will become the first supplier to manufacturing industries to provide an end-to-end software and hardware portfolio encompassing the complete lifecycle of products and production facilities. The Siemens/UGS transaction is subject to the approval by the relevant German and US authorities.

Industrial products offered by Siemens A&D include standard products for manufacturing and process industries and for the electrical installation industry, as well as system solutions, for example for machine tools, and solutions for whole industries such as the automation of entire automobile factories or chemical plants. Supplementing this range of products and services, A&D also offers software for linking production and management (horizontal and vertical IT integration) and for optimizing production processes. Siemens A&D says it employs 70,528 people worldwide and in fiscal year 2006 (to September 30) earned a group profit of �1.572 billion on sales of �12.848 billion (and orders of �14.108 billion).

Table 1 below describes the approximate UGS' market position:

Siemens said that in 2005, the PLM market was about $5.2 billion and is projected to grow to an estimated $8.6 billion in 2011. Siemens said that UGS currently has 47,000 customers worldwide, 4.3 million licensed seats, a workforce of over 7,000 and 13 consecutive quarters of profitable year-over-year growth. A&D expects the UGS acquisition to be accretive from FY2008 onward.

Klaus Kleinfeld, President and CEO of Siemens AG, said, “With the acquisition of UGS, we combine its competence in the sector of digital factories with our leading know-how in industrial automation. This combination makes our customers' processes faster, better and more cost efficient. With the unique combination, we underscore our position as a trendsetter in automation systems and bring this business into a new dimension.”

It seems only a brief while ago, on March 14, 2004, that the private equity group of Bain Capital, Silver Lake Partners and Warburg Pincus announced that they had reached an agreement to purchase UGS PLM Solutions for $2.05 billion in cash from EDS. This was a leveraged buyout where the investors put up a certain amount of cash and then used the assets of the company to arrange for loans. The interest on the loans was to be paid by UGS. In 2003, UGS PLM Solutions had generated $897 million in revenue and $104 million in net income. The March 2004 investors clearly intended to obtain their ROI by subsequently selling UGS.

At the time, the UGS LBO reportedly represented the largest private equity investment ever made. The question of the moment was, if UGS were to be sold later, who would buy? Since the UGS deal was the biggest private equity investment ever made, it was doubtful that the buyer would be another private equity investor. So who else? One could arguably perceive benefits accruing to UGS competitors (e.g. Dassault Systemes, PTC, or Autodesk) to acquire UGS. It would give Autodesk an entre into high-end PLM. It would deliver GM, Ford and other major customers to Dassault or to PTC. But the price tag for UGS would likely be greater than the market valuation of these MCAD firms themselves. Would the stock price of such an acquirer essentially double to maintain shareholder value? Also, UGS customers would rightly demand continued support for existing UGS products. The MCAD acquirer could not realistically forecast that it could migrate the UGS users to their own product lines, such as to CATIA and Enovia for Dassault, or to Pro/Engineer and Windchill for PTC, could they?

In the MCAD Industry, as in others, acquistions are a way of life. Recall that historically, PTC had acquired ComputerVision, who had itself acquired Calma. Dassault had acquired CADAM, SolidWorks and more recently Abacus and MatrixOne. UGS had acquired Applicon and also merged with SDRC. In the cases of the acquisitions of Calma, CADAM and Applicon, one could argue that these were declining firms with large installed customer bases attractive to the then-industry-leaders. While not always smoothly, the acquirers were able over a period of time to migrate most of these existing customers over to the acquiring company's product lines.

However, if PTC, Dassault or Autodesk were to acquire UGS now, the large UGS customers would almost certainly demand that UGS software products continue to be supported. Recall that the UGS/SDRC merger (consummated September 4, 2001) was a merger of near equals. Major SDRC customers such as Ford immediately demanded that UGS continue to support most of the SDRC products despite considerable functional overlap with UGS products. It took a massive effort by UGS/SDRC over several years to get the best of both worlds into a single integrated product line.

The market capitalizations of Autodesk, Dassault and PTC were recently $9.4 billion, $5.88 billion and $2.24 billion, respectively. Assuming that an acquisition by another MCAD/PLM vendor would have to be mostly stock, is it likely that the stock prices of any of these three firms would rise on the news of a UGS acquisition sufficiently to make the its stockholders whole?

Large end-user firms in aerospace and automotive industries had either originated CAD systems (Lockheed - CADAM, Dassault Aviation-CATIA, Toyota-Caellum), or acquired (McDonnell Douglas - UGS, GM/EDS-UGS) and/or developed internal CAD systems (Ford-PDGS, Boeing-Tiger). However, this is a distant memory. None of these firms have shown any public interest in getting back into commercial CAD or PLM.

So who would buy UGS? Now of course we know: Siemens A&D. Going forward the question will be: How much independence will Siemens give UGS and how much synergy can be obtained between the two firms?

Moreover, as Brad Holtz of Cyon Research opined on January 24, 2007, it's likely that UGS' MCAD competitors will like the Siemens/UGS acquisition as well.

For more on the Siemens/UGS deal, you may wish to check out MCAD Weekly editor Jeff Rowe's two articles from February 5 and February 12, 2007:

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