I’ve been working on a mid-year update of my market numbers for CAE (which show better than expected growth to date in 2011) and am stunned by the rapid pace of acquisitions we’ve seen this year. It’s one thing to note them as they happen, but when you line them all up and try to assess their impact, the full magnitude becomes visible. Most years see a deal or two but we’ve had at least 6 outright acquisitions in the CAE space —Altair acquired Acusim; Autodesk, Blue RIdge Numerics; MSC Software, FFT; ANSYS, Apache; ESI, IC.IDO; SGI, OpenCFD– and at least one majority investment, as LMS acquired 60% of SAMTECH.
(This list doesn’t even include the bigger PLM picture, where Siemens acquired Active SA; PTC, 4CS and MKS; SAP, Right Hemisphere; Trimble, Tekla; Bentley, SACS; Dassault Systèmes, Intercim; Autodesk, Instructables and others …. I’m sure I’ve missed some, but you get the idea: lots of deals.)
It’s been a busy year. And we’re not even 3/4 of the way through it.
One or two acquisitions show that companies are trying to fill gaps in their offering, expand into new markets or geographies, or in some other way address specific problems. But the engineering software domain has seen such a rapid pace with these deals that it’s worth reexamining the bigger implications for vendors and users.
The economic downturn clearly plays a part in precipitating the consolidation. Smaller companies may not have the cash flow or access to credit necessary to withstand a longterm delay in new orders or renewals by key customers, and may suffer disproportionately from license model decisions made in better economic times. As I written about before, new software companies often start with a perpetual/maintenance revenue model since that yields larger larger influxes of cash at the outset but then a smaller maintenance revenue stream ever after. Those that started out with a lease model may have been better suited to making it through the downturn because of a more modest but steadier cash flow, but even they were vulnerable if enough customers pulled the plug.
Cash flow aside, running a software business nowadays is not easy. The pace of tech evolution has sped up to the point where most companies have to partner to survive — they can concentrate on their core technology (a solver or post-processor, for example) while someone else worries about cloud computing, HPC, various tablets, security … all important to the ultimate buyer but having nothing whatsoever to do with the problem that the inventor originally set out to address.
Finally, the big CAE companies are constantly looking at make vs. buy. Is it better/cheaper/faster to expand the current offering themselves or to integrate a third party offering into the existing line-up? If it’s a third party, is a partnership or acquisition mode desirable? Only one vendor (that I’m aware of) made a “make” bet on a new technology area and is willing to take the time and resources to bring to the market a new product that they believe will beat what is commercially available now, and what was available to them as an acquisition. Most of their competitors are acquiring or partnering to expand their reach.
Why are companies even looking at expanding? Because they have to. ANSYS has to keep delivering growth to Wall Street or its share price will go down. MSC Software is reinventing itself and needs to show growth and movement in its target verticals, so FFT made sense. Altair wants to expand its multiphysics capabilities and saw Acusolve as a key part of that puzzle. And Autodesk wants to be taken seriously as a provider of engineering and design tools to major enterprises — and these customers need CAE.
But acquisitions are risky for the companies involved and many don’t live up to their expectations — the products don’t ever really integrate or interoperate, the company cultures are so different that key people depart, or the acquirer changes some key aspect that alienates formerly loyal customers. The first few years after an acquisition are critical because that’s when the cracks would appear, if they are going to.
Consolidation also typically means that consumers have fewer choices, if not in the number of products then in the number of vendors from which to buy. If this creates pricing pressures and enough large companies complain, there could be regulatory action. But that’s rare. It’s more likely that the product pricing models will be aligned with those of the acquirer, which could be good or bad depending upon each situation. Too, many buyers prefer to work with a smaller number of vendors (bigger deals, better pricing, less paperwork), so this may be to their advantage.
The best news in all of this: consolidation creates a clear path for inventors and entrepreneurs. Got an idea? Go for it! You stand a decent chance of being acquired if your product is good enough. Even with all of this consolidation, my list of independent CAE suppliers keeps expanding (over 200 now), so there is lots of innovation still driving this market.