November 19, 2007
PTC Acquires CoCreate
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Jeff Rowe - Managing Editor

by Jeff Rowe - Contributing Editor
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PTC announced that it has entered into a definitive agreement to acquire CoCreate Software GmbH, a provider of PLM and CAD modeling solutions for approximately $250 million. CoCreate, based in Sindelfingen, Germany, is privately held, has 280 employees and more than 5,000 customers globally including Agilent, Canon, Fisher Controls, Fujitsu, HP, Liebherr, Matsushita Electric, NEC, Olympus, Phoenix Contact and Seiko Epson.

With the acquisition of CoCreate, PTC will broaden its portfolio and offer support for the most comprehensive range of modeling techniques in the MCAD industry. PTC plans to integrate the CoCreate modeling solutions with the PTC Product Development System (PDS) in order to offer CoCreate customers additional product development capabilities including engineering calculations, dynamic publishing, visualization, high-speed machining, and enterprise content and process management, and ultimately, the option of using their modeling solutions also as part of the PTC PDS.

With revenue of approximately $80 million and substantial non-GAAP operating margins in the last twelve months, PTC expects the acquisition will be accretive to non-GAAP earnings and operating margins in the second quarter of fiscal 2008. Due to the lower level of deferred maintenance revenue that PTC will be permitted to record under purchase accounting as compared to the level of deferred maintenance revenue recorded by CoCreate, PTC expects that the acquisition will be dilutive to GAAP EPS in 2008, but accretive to GAAP EPS in 2009 and beyond. The acquisition is expected to close in December 2007, subject to customary conditions including regulatory approval.

"PTC is dedicated to providing product development organizations with the solutions that they need to be successful in an incredibly competitive global marketplace," said C. Richard Harrison, president and CEO of PTC. "As experts in product development, we are constantly evaluating technologies that address the business challenges of our customers. This acquisition is compelling as it enhances PTC's product portfolio while also contributing in a meaningful way to earnings and operating margin. The satisfaction of CoCreate's customers will be a major focus for PTC. We are committed to protecting and enhancing the investment that these customers have made in CoCreate solutions and we plan
to also offer additional complementary PTC solutions in order to bring them even more value."

With this acquisition, PTC embraces all the accepted approaches to modeling - parametric, explicit, derived and 2D. Any of these modeling techniques combined with the PTC PDS offers customers a competitive advantage unmatched by any other vendor in the industry.

"The combination of PTC and CoCreate products will enable PTC to offer the manufacturing industry the flexibility to select the most appropriate modeling software for their business requirements from a financially secure, trusted worldwide product development technology leader," said Jim Heppelmann, executive vice president and chief product officer of PTC. "Each modeling approach has its own advantages, and only PTC will have an objective view that allows us to map the appropriate modeling approach to a given customer situation, yet encase that modeling approach in a full product development system. In line with industry trends, we expect the majority of our modeling business will
continue to come from our flagship parametric solution, Pro/ENGINEER. CoCreate customers who prefer explicit modeling will now have a complete product development system as a viable option."

"Offering high quality products that deliver significant customer value has always been a key tenet of CoCreate's business strategy," said William M. Gascoigne, CEO, CoCreate. "PTC's plan to support and further develop CoCreate solutions as well as provide an integration to PTC's product development system will provide our customers with additional technology choices, and even greater opportunities for product development success."

PTC plans to finance the acquisition and related expenses with a combination of $50 million of cash and $210 million of debt from its existing credit facility. Wachovia Securities acted as exclusive financial adviser to PTC in the transaction. CoCreate is a portfolio company affiliated with HBK Capital Management.

Commentary By Jeffrey Rowe, Editor

With this announcement the consolidation of the MCAD industry marches on. Is it a good or bad thing? It depends on how you look at it, and it’s not necessarily one or the other, and will likely prove to be a bit of both.

I find it somewhat ironic that PTC, with its strong legacy in parametrics, would acquire a company whose design philosophy in some respects goes counter to PTC’s, although it does espouse a major trend occurring in the MCAD industry – a non-history-based methodology and direct editing, something that CoCreate calls Dynamic Modeling.

With the acquisition, PTC actually acquired the CoCreate OneSpace suite consisting of the following three modules:

• CoCreate One Space Modeling – the core 3D modeling application

• CoCreate One Space Model Manager – for product data management

• CoCreate One – a Web-based collaborative project workspace

CoCreate also has a number of add-on modules, such as Advanced Design, Cabling, Mold Base, mySAP PLM integration, and eDrawings; as well as add-on products from its partners.

Underlying everything else, however, is CoCreate’s non-history-based modeling approach. History, of course has its place, but a history-based approach to 3D modeling is not for everybody, and CoCreate’s loyal customer base is testimony to this. However, a non-history-based approach is not exactly exclusive to CoCreate OneSpace Modeling – Kubotek’s KeyCreator, UGS’ NX5, and IronCAD also are also proponents. A history-based approach is what most parametric modelers (such as SolidWorks, Autodesk Inventor, and Pro/ENGINEER) employ, but it’s not always the best way to go. History-based systems use a history tree to track and replay 2D profiles and modeling
steps for generating and modifying 3D geometry. The main drawback is that each step in the history is dependent upon the profile and modeling step that came before it.

A non-history based approach can be suited for manufacturers that change a lot of designs late in the design process, so they are not bound by the constraints and complications that a history tree can impose. Also, a non-history-based system can make data import easier, since you don’t have to worry about the overhead and burden of dealing with a history tree from a different system. Neutral file formats, such as IGES and STEP, are for all intents and purposes, native data to CoCreate OneSpace Modeling. This eliminates the cost penalty for legacy data originating from another system.

So, while the non-history-based approach may not be for everybody, it definitely does have its place. However, the opposite is also true.

CoCreate is the latest in a long series of acquisitions that PTC has made over the years that have included Computervision, Mechanica,Arbortext, Mathcad, among many others. This is not what most observers would say is an organic way to grow, and the results of the various acquisitions have varied all over the place – some have been successful and some have been disasters. Among the biggest problems associated with some of the acquisitions is that they were not very well integrated into the PTC product family, so often bore little resemblance to other PTC products with regard to UI look, feel, and behavior.

Another issue to note in all of the acquisition hubbub is the fact that PTC has recently made some considerable staff cuts, including positions in R&D, marketing and tech support, and will probably continue to so until costs come more into line with its revenue goals.

How will CoCreate fare after the acquisition? That’s very difficult to predict at this point. It’s interesting to note that while PTC has a lot of cash in the bank, it chose to put out only $50 million of the $250 million up front for CoCreate and finance the rest. With sales in the neighborhood of $80 million, did PTC make a wise decision? Again, that’s hard to determine. Only time will tell if CoCreate can fit in to the PTC mix and whether the two distinctly different product lines and corporate cultures can coexist. Will the relative incompatibility of the product lines come back to haunt PTC as it has with some of its past acquisitions? It will be interesting to
see which, if either, one ultimately wins – CoCreate’s dynamic, non-history-based modeling; PTC’s explicit (the term that PTC is using for dynamic modeling since the acquisition announcement), parametric technique; or an optional choice between the two. Hey, other companies do it, so why not PTC? As with everything else in the increasingly competitive MCAD marketplace, the market will dictate the direction with what it accepts and purchases. The acquisition will give customers of both product lines options they did not have before, so early on, the deal looks good for both of the parties concerned.

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-- Jeff Rowe, Contributing Editor.


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