Oct 21, 2021 | 5 min read

Momenta's Take #39

E-VIVA - Consolidation in Industrial Software Continues

 

For all firms, particularly industrial ones, software is a key asset

Software has become one of the most strategic assets for enterprises of all sizes, and nowhere is this more evident than in the industrial sector. One measure of the growing importance of software has been the steady increase of industrial software M&A in recent years.

Recently, Emerson announced an $11 billion deal. It will buy a majority stake in AspenTech (provider of asset optimization software) and combine its industrial software businesses OSI Inc. and Geological Simulation Software into Aspentech. The deal's structure takes after the playbook for the AVEVA merger with Schneider Electric's industrial software business, where Schneider took a 60% stake in the combined business under AVEVA Group.   

 

M&A Is Rolling Up the Industry

According to Bloomberg, industrial companies have publicly announced 38 software acquisitions so far in 2021, representing nearly 5% of all transactions for the sector and on pace to be the highest percentage for any year since at least 1998. Last year nearly 20% of the money industrial companies spent on deals went to software acquisitions. Recently there have been more and more relevant acquisitions. In June, Rockwell Automation announced a deal to acquire Plex Systems for $2.22 billion. Fortive Corp. announced a deal to buy facilities-maintenance software company ServiceChannel for $1.2 billion. Last year Honeywell International paid $1.3 billion to acquire Sparta Systems, which focuses on the life-sciences industry.  Emerson's AspenTech deal follows the $1.6 billion purchase of power-grid automation software company Open Systems International Inc. last year.

 

About the Deal

The Emerson/AspenTech deal is one of the largest in the space to date. The deal will create a "new" AspenTech with 3,700 employees, expected to generate $1.1bn in annual revenues in FY22 (which values the deal at 10X forward sales). New AspenTech will have an attractive, predictable business model with 86% of pro forma revenues coming from software and 14% from services.

 

Historically, AspenTech has made a number of acquisitions in data analytics to build out its industrial monitoring and asset optimization offerings. The combination of Emerson's OSI, which is a provider of connectivity and middleware software for industrial customers, and Geological Simulation Software with AspenTech's core portfolio is expected to extend the company's footprint in oil & gas, chemicals, and additionally green energy markets such as biofuels, hydrogen, and carbon capture.

 

AspenTech

Source: Emerson

 

Momenta’s Take - 

Why Does the Emerson Approach Make Sense?

Emerson structured its deal so that its key software assets will be folded into a pure software company – AspenTech, which will retain the brand and operate independently. This looks to be a savvy approach to avoid the inherent risks involved with large software acquisitions – particularly the potential for culture and business model differences to create disruption and derail the strategy. While the robust software gross margins can be attractive to hardware-centric businesses, there can be a lot of downsides if integrations go awry. Software acquisitions are also risky, particularly the larger they are or if there are critical differences between acquirer and target (such as different sales models, organizational structure, technology stack, etc.) By that measure, the structure makes a lot of sense. Scale is also a major advantage in an industry where technological "stickiness" – and account control – provide a runway for upselling and cross-selling additional products within the installed base. From a strategic perspective, the merger is about extending the product portfolio in order to address the complete asset lifecycle.

 

Expect more acquisitions to come. One of the stated goals of the New AspenTech is to create a platform for future M&A. In many respects, the increased breadth of the offerings does make it easier to source and integrate tuck-in acquisitions. Valuations are not cheap these days for anything, but with stock as currency, the New AspenTech will have plenty of dry powder to continue consolidating the industry.

 

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