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Wednesday, August 17, 2016

Mergers and Acquisitions in Manufacturing Automation H1, 2016 Update


With 2016 now underway, Mirus reaffirms its optimism about opportunities for mergers and acquisitions for 2016.  With M&A running at about the same pace as 2015, we see no reason not to finish the year strong and match 2015’s volume of transactions. But, what isn’t apparent from the base volume numbers is the overall value and diverse nature of the acquisitions.  Since we started tracking the industry, never have we seen such a diverse range of companies being acquired and so few companies making acquisitions.  What this means to us is, by and large, companies are making fewer pre-planned “strategic” and more “tuck in” or opportunistic purchases.  When combined with the significant decrease in overall transaction value in the mid-market, we are becoming a bit cautious about M&A activity beyond 2016 and into 2017.  Yes, the stock market issues of Q1 slowed acquisition rates, but Q2 was even softer, with only moderate recovery in the US Software sector.  Brexit, depressed oil prices, lack of Chinese growth, the Presidential election, and international security are causing uncertainty in the markets and are not likely to be resolved quickly.

Anecdotally, raising capital is becoming more difficult as well.  Plus, for five straight quarters in the Software sector in general, the amount spent by financial buyers has been lower than in any of the previous four quarters.  In general, buyers are becoming harder to come by and, while we are still seeing substantial valuations for the right company/technology, lower total transaction value often translates directly into lower multiples.

In Manufacturing Automation specifically, Mirus identified 23 acquisitions (in tracked companies) in H1, 2016 as compared to 22 in H1, 2015 and 31 in H1, 2014.  Not great, but in line with 2015.  PLM, despite an overall reduction in volume, was still the most acquisitive of the sectors with the other three sectors at relatively comparable levels.   Overall, this means a decrease in activity from PLM and SI’s and an increase from SCM companies, indicative of the growth trends we have noted in prior blogs.  Accenture, Synopsis and Salesforce all made multiple acquisitions to fortify their current positions, while M&A heavyweights Autodesk, Dassault Systems, Descartes and Oracle largely stood aside, at least in Manufacturing Automation.  We don’t expect these giants to stay on the side lines for long however, given their significant cash war chests and need to increase levels of innovation and differentiation.

M&A H1, 2016

Having said all this, there is obviously still substantial activity in the market, and we see no reason why 2016 shouldn’t finish at 2015 levels, at least by volume. Still we expect  buyers will become increasingly difficult to find and laser focused on acquiring technology and domain expertise that accelerate their existing business strategies.

Manufacturing Automation Observations and Tends

Given the above analysis, combined with our recent experience around the industry consulting and selling to a number of these organizations, we have come across what we believe to be the current hot buttons in the industry:

  • Internet of Things remains real. While there was a notable absence of significant IoT transactions in companies covered for H1, 2016 (except the PTC Kepware deal), there is still a plethora of activity in the market.  At the end of Q2, Mirus client, Eutecus, an IoT Video Analytics company sold to Sensity Solutions.  Sensity in turn services large partners like Cisco and Acuity, providing lighting related applications for “Smart Cities.”  This is just one example of the dozens of smaller IoT technology companies that will transact a sale or raise capital in 2016, proving this market is still “red hot” and speeding up not slowing down.  More specifically, Intel announced the acquisitions of ItSeez Inc and Yogitech to bolster its ADAS (Automotive IoT) portfolio.  Similarly, two large megavendors placed IOT platform bets, with Microsoft acquiring Italy-based Solair and Cisco acquiring California start-up Jasper for $1.4 billion dollars. With the rampant amount of activity in this area stay tuned as Mirus will soon begin delivering a regular series of reports focused specifically on M&A in IOT.
  • Hard core technology companies stick to their knitting. As mentioned multiple times before, once a geek always a geek, and this is especially evident when times start to slow down and companies look to do more of what they do well.  All three major acquirers for this half year bought into their own domains.  Accenture – services, Sales force – their own CRM and Synopsis – their analysis capabilities.
  • Technology cross-pollination; SCM and ERP. We first spoke of this at the end of 2015 and are now more than ever convinced that SCM and CRM are ultimately going to come into conflict with ERP companies.  System integrators are hedging their bets supporting both SCM and ERP as SCM companies become large enough to support a dedicate practice area and ERP companies have added their own SCM modules. But the real shift will come from supply chain managers in manufacturing recognizing that the BOM must be a shared resource, distributed across the entire supply chain, driving integrated design and global manufacturing ultimately integrating OEMS and manufacturers to new levels (probably via the cloud, be it private or public).

H1, 2016 Summary and Future Projections

One word summing up the first half of 2016 is: Uninspiring.  Lack of substantial volume and innovative moves, coupled with overall trends and economic uncertainty; leave us cautious about the next year.  Overall, we remain optimistic that 2016’s volume will come in around that of 2015, but at lower valuations.  We are also bullish about the opportunities to sell innovative technology (such as IOT), as good opportunities are scarce and there is always a market for proven innovative technology and domain expertise.

On the sell side, we anticipate that there may be technology available for sale as capital becomes more difficult to come by in this uncertain time.  If you believe your company is ready for market or if you would like an independent opinion on your readiness and market timing, it may be worth a discussion on how you can take advantage of the current trends in M&A for PLM.  For more discussion on the information contained in this report and other topics critical to selling your software company, download the complete report on Mergers and Acquisitions in Manufacturing Automation for H1, 2016, or feel free to drop me a note at boes@merger.com.

 

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