PTC embeds MKS

Last week PTC announced its intention to acquire MKS, Inc. of Waterloo, Ontario, a supplier of tools to manage the lifecycle of embedded mechatronics software, for CDN$26.20/share or CDN$292.5 million in total (about $304 million at current exchange rates). PTC will pay cash for the acquisition, drawing on an existing credit facility for $250 million and using cash on hand for the remainder. The acquisition is expected to close in early June, assuming it meets all regulatory and shareholder conditions. PTC says the acquisition is expected to be neutral to its non-GAAP financial results in fiscal 2011 and have a slight positive impact in fiscal 2012.

According to Thomson Reuters, analysts were expecting MKS to report $75 million in revenue for the current fiscal year ended April 30, which makes the purchase price a revenue multiple of about 4 — a bit steep — but MKS’ revenue more than doubled from fiscal 2003 to fiscal 2010 and is poised to grow by 19% for fiscal 2011, so PTC is clearly paying for forward-looking growth. One Canadian investment analyst who follows MKS said that he thought the price was fair and did not see a competing bid forthcoming.

MKS has 385 employees around the world including 190 in Waterloo. Local media cites current CEO Michael Harris saying that he intends to remain with the company and will continue to run operations out of Waterloo.

MKS’ main product is MKS Integrity, which manages “all activities and artifacts” in the software development cycle from requirements definition to coding and test. According to the companies, adding MKS’ solutions to PTC’s PLM solutions “will enable manufacturers to better align the management of a product’s hardware components and related software.”

PTC CEO Jim Heppelmann said, “At PTC … we have long believed that the development of product hardware and software should be managed as a unified process. With the acquisition of MKS, we are adding a best-of-breed ALM [Application Lifecycle Management — yet another TLA] solution to our product portfolio, and extending how our PLM solution manages the development of software-intensive products.”

Many manufacturers find it incredibly difficult to coordinate hardware models with generations of embedded software. Every major iPhone iOS update, for example, seems to require a flash memory upgrade — that’s when your phone turns off then on again during the update. Multiply the number of operating system releases by the number of products (iPhones, iPods, iPads) by the number of models (AT&T, Verizon, 3G and so on) and you start to understand the number of combinations. We all expect our toys to simply work, which is our right as consumers; the developers have the daunting task of making it all transparent.

Uniting the management of software versions and hardware releases makes a great deal of sense. Done well, it will lead to improved product quality, lower warranty exposure, and improve the customer’s perceived value and satisfaction. PTC is not, of course, the only PLM supplier to have made this connection. Siemens PLM and Dassault Systemes have also targeted mechatronics in recent years, with acquisitions and internal product development.

MKS reports having about 1,000 active customers while PTC has around 25,000 — it’s probable that many of MKS’ customers already use Pro/E, but there is obvious potential to bring MKS’ solutions to many new PTC accounts and the potential to take the joint offering to a much wider audience. It will be interesting to watch how MKS grows, and whether a joint, tightly-coupled offering accelerates that growth.