March 22, 2004
EDS Selling UGS PLM Solutions For $2.05 Billion
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Early last week EDS announced that it had reached an agreement to sell its UGS PLM Solutions unit for $2.05 billion in cash to a group of three private equity firms: Bain Capital, Silver Lake Partners, and Warburg Pincus. The transaction, in which each private equity firm is an equal investor, represents the largest private equity investment ever made in a technology company. So let's take a look at this huge transaction that affects EDS, UGS PLM (including Solid Edge) customers, and the MCAD industry as a whole.
EDS Selling UGS PLM Solutions For $2.05 Billion
EDS announced that it has reached a definitive agreement to sell its UGS PLM Solutions unit for $2.05 billion in cash to a group of three private equity firms - Bain Capital, Silver Lake Partners and Warburg Pincus. UGS PLM Solutions provides product data management, collaboration and design software applications and services. The transaction is expected to close within 90 days, pending customary closing conditions.
"The transaction is another tangible step in the strategic plan we laid out for investors in June 2003," said EDS Chairman and CEO Mike Jordan, who was recruited by the EDS board in March 2003 to lead the company. "We said our ongoing focus will be strengthening our core information technology and business process outsourcing operations and our balance sheet. This transaction supports both priorities and further enhances our competitive position."
Upon closing the transaction, EDS expects to be closer to its announced goal of zero net debt (total debt minus cash and marketable securities on hand) by the end of 2004. The decision to divest UGS PLM Solutions through an IPO or private sale was announced in October 2003, after EDS completed a comprehensive assessment of its business portfolio against its strategic plan built on leveraging IT and BPO growth opportunities.
"While UGS PLM Solutions is an excellent business and has been a solid contributor to EDS, its business is clearly outside of our core focus. As a result, we're essentially divesting a non-core, non-strategic operation, while enabling UGS PLM Solutions to further enhance its future growth," said EDS CFO Bob Swan. "The purchase price clearly shows the strength and potential of this business. The private equity group is receiving an excellent operation, while we bolster our competitive position." Swan said the decision to divest the full unit reflected the significant interest the divestiture generated - and the purchase price, which is about 2.3 times annual revenue.
UGS PLM Solutions provides PLM software and related services, with approximately 42,000 clients and more than 2.8 million seats of technology operating in the market worldwide. UGS PLM Solutions has approximately 5,000 employees. In 2003, UGS PLM Solutions reported revenue of US$897 million and net income of US$104 million. In the second half of 2003, the business achieved 14 percent (8 percent in constant currency) year-over-year revenue growth. EDS will provide further detail and updates to its 2004 forecasts on its first quarter earnings call.
Today's UGS PLM Solutions resulted from the integration of the former operations of companies including Structural Dynamics Research Corporation (SDRC), Engineering Animation Inc. (EAI) and UGS, UGS PLM Solutions has created some of the leading design, collaboration and product data management technologies that ultimately formed the foundation of the PLM industry.
"This agreement validates UGS PLM Solutions' strategy and leadership, while positioning the company for continued growth," said Tony Affuso, president and CEO of UGS PLM Solutions. "Most importantly, the transaction further strengthens our industry-leading client care model. We are delighted to have the opportunity to partner with investors who have significant software experience and a growth-oriented long term approach to building value."
"This transaction is part of the strategic plan we outlined last year to focus on our core information technology and business process outsourcing businesses," said EDS Chief Financial Officer Bob Swan. "The divestiture significantly enhances our competitive position while strengthening our balance sheet."
UGS PLM Solutions delivers integrated technology and services supporting the entire lifecycle of a product - from concept and development to distribution and delivery. The global market for PLM software and services is expected to grow by a compound annual growth rate of 8 percent through 2008 to more than US$14.5 billion, according to CIMdata. Through 2008, CIMdata expects the product data management and collaboration segment of the PLM market, which UGS PLM Solutions leads on the strength of its Teamcenter portfolio, to grow 17 percent, compounded annually, to nearly US$5 billion.
"We are excited to partner with Silver Lake and Warburg Pincus to acquire the technology and market leader in the PLM business, and to support a talented team as they further build what is already a successful global enterprise," said Andrew Balson, a Managing Director at Bain Capital. "UGS PLM Solutions has earned its leadership position by developing mission critical software and integrated services for leading companies in design intensive industries. We are committed to investing to grow the business by continually increasing the value that the company's technologies deliver to customers."
"UGS PLM Solutions is the undisputed market share and technology leader in the rapidly expanding PLM industry. We like investing in proven winners and look forward to working with CEO Tony Affuso to grow this outstanding software franchise," said David Roux, founding principal of Silver Lake Partners.
"We look for these types of opportunities -- to invest in market leading businesses that create sustainable value. And, from its established position of global strength in the core design and engineering software market, UGS PLM Solutions is at the forefront of innovative software vendors that are creating real business value," said Joseph P. Landy, co-president of Warburg Pincus.
"When complete, the transaction will enable UGS PLM Solutions to operate optimally as an independent software company," Affuso said. "We look forward to working with our new investment partners and building on our momentum in the PLM space."
A short word on the three investors:
Evercore Partners acted as financial advisor to EDS in this transaction.
Well, after weeks and months of speculation, the suspense is finally over. But first, let's step back in time and see how the deal evolved and transpired.
EDS said in October 2003 that it planned to complete an initial public offering (IPO) or a sale of a minority stake of its UGS PLM Solutions unit, a software unit that had outperformed its main outsourcing business. Things had been looking up for UGS' PLM business - sales rose to $894 million in 2003 from $879 million in 2002. But, after posting a deep quarterly loss and forecasting earnings that were only half of analysts' estimates for 2004, EDS said it would not rule out the chance of selling the whole subsidiary, which the company said could be worth about $1.8 billion.
In February 2004, a Financial Times story said EDS Chief Executive Michael Jordan valued the business at 1.5 times sales, or about $1.2 billion. However, Jeff Baum, director of investor relations, said the company would not accept an offer for less than two times 2003 sales, or $1.8 billion.
On February 9, EDS issued the following brief statement regarding its UGS PLM Solutions subsidiary:
Things regarding a possible transaction (understandably) stayed pretty quiet until last week when the acquisition announcement was made. So, at $2.05 billion, EDS got what it wanted originally, and then some.
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-- Jeff Rowe, MCADCafe.com Contributing Editor.
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