More details on AVEVA + OSIsoft — including about that rights offer

We’ve learned a bit more about the proposed combination of AVEVA and OSI since the announcement early last Tuesday. Much more will come out in six weeks or so when the official paperwork is filed but here’s what I learned while listening to the investor and industry analyst calls, as a follow-up to my post from last week:

• AVEVA’s CEO Craig Hayman, Deputy CEO/CFO James Kidd and OSIsoft founder Dr. Pat Kennedy all seem genuinely excited about the potential to work together and to create separate and combines offerings that leapfrog both companies into new markets and customers
• Dr. Kennedy will remain involved in a BIG way — he will become AVEVA’s single largest individual shareholder and take the title of Chairman Emeritus. I had missed that in the original announcement.
• The product set will be additive rather than subtractive — yes, there is a bit of product overlap but nothing is expected to change for customers of PI System or AVEVA Historian. As Mr. Hayman said, it’s extremely unlikely that customers will willingly rip and replace; over time, AVEVA Historian customers may choose PI instead. This is the product map AVEVA shared with investors:
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• A big impetus for the transaction is to further diversify AVEVA away from oil and gas, the former company’s main market. OSIsoft has customers in power (not just generation, but also in transmission and distribution), oil and gas, chemicals, mining, metals and minerals, pulp and paper, and pharmaceutical manufacturing. In nearly all of these industries, PI is used throughout –as in mining, where Mr. Hayman said it is used “from pit to port”. In all, Mr. Kidd estimates, AVEVA’s oil and gas exposure would go from around 40% of revenue to 25% as adding in OSISoft “broadens out our end-market exposure”. He later added, “we see potential in power generation/transmission/distribution, especially with Schneider Electric, as the build-out of power from high voltage, medium voltage to low voltage and distribution. We also see opportunity in buildings, data centers, everywhere where electricity flows, we see opportunity for PI.”
• The other thing, too, of course, will be the opportunity to cross-sell to one another’s customer base and to start selling more offerings into their joint base, as you can see below. They come to their industrial customers from different angles and see lots of opportunity to turn those differences into revenue.
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• The 200 plus “whitelabeled” PI System-based products aren’t expected to be affected by the combination
• The companies are remarkably similar in many metrics –see the image below from the investor slide deck– and seem like a good cultural fit, too:
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All of that leads AVEVA to confidence: 1. that it can get the deal done and 2. that the deal is a positive development for AVEVA, its employees and customers — and for OSISoft’s as well. As Mr. Hayman said, “the combination significantly increases the depth and breadth of the Company’s portfolio brings together various sources of design assets and operational data type in the middle here is the information land, the basis of the process and production, which will be further interest through applications and data from the portfolio”.

Mr. Kidd pointed out that OSI today largely sells perpetual licenses and maintenance agreements, with just a small proportion of revenue coming from subscriptions. He said that “given AVEVA’s track record in the last couple of years [of transitioning customers to subscriptions], this is an area that we believe we can accelerate and help to create new subscription offerings, particularly using AVEVA Flex.” So expect to see (again) the bump in revenue for perpetuals changing to a slower but more consistent growth curve as OSI undergoes the same transition we’ve seen over and over again in this space.

And Mr. Kidd made one thing very clear, for all you OSI employees: “Like the Schneider-AVEVA merger, this deal is much more about future growth than cost-saving. But that said, we do expect there to be some level of cost synergies, mainly through consolidation of offices, combining IT systems, and integrating the back office.” So don’t expect the success of this deal to be judged on cost-cutting.

AVEVA is paying $5 billion for OSIsoft, $4.4 billion in cash, and $0.6 billion in shares issued to Dr. Kennedy. That $4.4 billion in cash will come from a $3.5 billion rights issue and $0.9 billion in cash, on the balance sheet, and via new debt facilities. I wasn’t sure what a rights issue is –thanks to all who helped me learn– but now understand that it’s a legal form in the UK where shares are issued in a way that gives current shareholders first rights of refusal so they can determine if and how their holding might be diluted. Existing shareholders can subscribe to the issue in proportion to their current ownership stake –so when Schneider Electric says it supports the issue, we can presume they’ll buy 60%ish of the new shares. Of course, shareholders don’t have to ante up if they don’t want to; they can sell these rights if they choose to.

We had, months ago, learned that Schneider Electric was interested in acquiring OSISoft. Mr. Kidd explained it this way: “When you’re trying to navigate strategic value, you have to think about what each company does. Schneider Electric engages in projects around industrial solutions or the power or building solutions; it’s around the build-out of those facilities. If you think about where AVEVA is, with a small 10% exception around the Greenfield CapEx in oil and gas, mostly it’s around the operational side running those facilities and providing the tools to operate those facilities. And once you think about that, then you can understand how certain acquisitions make perfect sense for AVEVA and certain acquisitions make sense for other companies, including Schneider. OSIsoft is an operational system. It’s an OpEx model. Its usage is aligned with the consumption model of the customers. And it works with many different industrial firms including Rockwell Automation, Emerson, ABB [all of which compete with Schneider Electric] in many end markets. And so AVEVA is a perfect fit for OSIsoft.” Now we know.

Last thing: AVEVA announced that it was discussing this with OSISoft nearly a month ago. That gave customers plenty of time to weigh in and ask questions. Mr. Hayman said that “customers were unbelievably positive: [we got] ad hoc emails from customers telling us that they were so very excited, that it was a great strategic choice, how it was a great cultural fit, and that PI System is a great product. I remember being on one Zoom call with over a dozen with over a dozen people from all walks of life in this customer who has one thing in common, which is our relationship with them. And when someone asks about myself and PI everyone in the zoom calls, stopped, turned, looked, and gave us great thumbs up and all smiles and that’s a great product. That’s a great choice. Oh, really, that’s a great thing”.

Next up, regulatory filings in many geos and more comprehensive info for shareholders. The deal is still on target to close around the end of 2020.