Insight Bite

The engineering software sector is seeing a wave of M&A – and it’s set to stay this way as the industry races to keep up with innovation. There’s been a flurry of deals of late as companies are keen to bolster existing offerings and provide solutions in new areas.

“Engineering software companies operate in a rapidly changing market and can’t rely on R&D to stay relevant,” says Andy Lister, Partner at Acuity Advisors. “Smaller companies with strong positions in on-trend niches will continue to attract strong interest from these large, well-funded companies.”

Industrials and engineering is a broad slice of the technology market, but the common thread is that acquisition is proving vital to remaining at the cutting edge.

“Unless they take action, the big engineering software players are going to continue finding it hard to stay in the lead because the market is changing so rapidly,” says Lister.

Industrial IoT leads the way

The headline deal of the summer so far is the $1bn investment by Rockwell Automation in PTC. It’s a showcase of the importance of industrial IoT: the partnership is intended to enable customers of both companies to digitally boost their physical operations and deliver better productivity, plant efficiency, reduced operational risk, and better system interoperability. “This strategic alliance will provide the industry with the broadest integrated suite of best-in-class technology, backed by PTC, the leader in IoT and augmented reality, and Rockwell Automation, the leader in industrial automation and information.” Jim Heppelmann, CEO of PTC, said in a statement.

IoT – the Internet of Things – is a common theme in recent engineering M&A. Michigan-based Altair acquired Candi Controls in an effort to integrate the target’s modern platform for enabling communication between IoT devices. Nine-year-old Candi already works with IoT market leaders such as Google, Microsoft, and Intel. “We believe this acquisition is important to help our customers’ digital transformation and enable their products to thrive in today’s rapidly emerging connected ecosystems of smart devices,” James Scapa, CEO at Altair, said in a statement. Altair has also snapped up FluiDyna, a specialist in computational fluid dynamics and numerical simulation technologies that solves large-scale aerodynamics problems without needing to resort to traditional, complex models. The result is new possibilities for simulation-driven design, alongside significant cost savings.

Deal volume speaks to a sense of urgency

The big players will continue to acquire businesses to enhance their propositions and bolster presence in strategic areas. Innovation is happening across the sector – in addition to industrial IoT there’s also been a volley of deals taking place with the intent to gain expertise within additive manufacturing, artificial intelligence, and autonomous vehicles. We’re seeing that several of the big engineering software companies have each made a number of deals over the past year, suggesting a sense of time being of the essence.

Engineering simulation software expert Ansys has thrown its hat in the ring with two deals of late: Optis, a provider of software for simulation of light, human vision and physics-based visualisation that plays right into the autonomous vehicle space, and 3DSIM, a leader in additive manufacturing simulation technology. “Additive manufacturing is changing the way companies are bringing products to market,” Shane Emswiler, general manager of Ansys, said in a statement. “[This deal] will spark innovation, speed time to market and reduce manufacturing costs.”

Neither of the two companies that Ansys targeted were working on speculative technology – Optis already works with a who’s-who of the automotive industry, and 3DSIM has clients among aerospace and automotive OEMs as well as leading research labs. This points to how the major engineering players want to bring innovative solutions in-house, but they prefer those that have been around long enough to prove themselves.

Acquisitions at the cutting, yet proven, edge ahead

Siemens has not been letting the competition get ahead, having also completed two deals: a startup called Austemper Design Systems which makes smart auto-correction and simulation technology, and Solido Design Automation, a machine learning expert that will fit in with Siemens’ efforts in integrated circuit design and verification technology. Hexagon CEO Ola Rollen said that “manufacturing must be ‘smart’ if it’s to produce the next generation of products at reduced costs” as his company announced the acquisition of Spring Technologies, a specialist in machine tool simulation that fits into the “smart” manufacturing trend.

This was only weeks after Hexagon revealed it had acquired AutonomouStuff, a pioneer in robotics for automotive development. Rollen had his eyes on the big picture also during that announcement: “We’re particularly interested in technologies that are the most disruptive – those capable of leveraging the vast potential of data being generated by connected things, integrating AI, edge-cloud orchestration, mobility, and data visualisation into autonomous connected ecosystems.”

In conclusion, we’re seeing strong, determined and continuing interest from the big engineering software companies to add capabilities in the most innovative segments of their industry. There’s a sense of not wanting to waste time, but at the same time, the best deals are happening where the target company has proven that its idea works, ideally with established contact with big names. In this sense, the key deals in the engineering space right now are a means for sellers to see their ideas flourish, aided by the deep pockets and wide-ranging connections of the leaders.

“The key question for owners of smaller engineering software businesses will be one of exit timing,” says Lister. “Should you sell now while strategic appetite is high? Or should you continue to invest and exit for a potentially much higher valuation in 2-3 years’ time, but with the risk that the big players will have found an alternative solution?”

The answer will depend on individual circumstances coupled with an assessment of ability to achieve growth and maintain competitive differentiation in the medium term, while the big players continue to invest significant sums in R&D and M&A.