Hexagon goes big, spends $1.2 billion on ETQ, maker of quality & compliance solutions

Hexagon just announced its intention to acquire ETQ, makers of SaaS-based quality (QMS), environment, health and safety (EHS), and compliance management software. I am most familiar with the ETQ solution, Reliance, which manufacturers use to automatically collect and serve out manufacturing quality control data, including non-conformances. Why? To move quality from a contentious “it’s not my job” realm and elevate it to an enterprise level, of “it’s everyone’s problem”. What I didn’t realize is that ETQ has added machine learning and artificial intelligence to its data management capabilities, which Hexagon says, “make quality data fully actionable and available further upstream. Not only does this reduce defects, scrap, rework, and recalls, but it also enables an autonomous feedback loop, digital information trail and virtuous cycle of continuous improvement.” [Who doesn’t love a virtuous cycle?]

Ola Rollén, Hexagon CEO, said that this acquisition will add to Hexagon’s existing “quality data capture and smart digital realities … The acquisition brings a mix of talent and deep quality expertise across extensive industry verticals, targeting the rapidly widening gap between quality data creation and leverage. Integrating data from our metrology systems with Reliance leads to increasing levels of autonomy that improve a customer’s ability to put quality and process data to work. ETQ also enables connectivity of quality data and processes across supply chains, bringing suppliers and customers into one system.”

Mr. Rollén added, “[w]ith our global footprint, vertical synergies and good customer fit, which includes our recently acquired EAM business, ETQ is poised for rapid growth. We’re proud to welcome ETQ to the family as we continue to accelerate our journey to the cloud and build the world’s leading quality stack from shop floor to top floor.”

This is a very big deal: Hexagon will pay $1,200 million for ETQ on a cash and debt-free basis. Hexagon expects ETQ to generate revenue of around $75 million in 2022 (making this a 16x revenue multiple deal — yowza) with an adjusted operating margin of over 35%. The robust deal value is likely due to that nice operating margin and ETQ’s SaaS business model — the press release says that “ETQ has been driving its customer base to SaaS, which is expected to account for half of bookings in 2022 and has been growing at a trailing 3-year Compound Annual Growth Rate (CAGR) of 60%”.

In all, Hexagon expects ETQ to “generate sales synergies of over $40 million, with very strong incremental margins, by 2026”.

Hexagon and ETQ first partnered years ago –I met ETQ team members at a Hexagon user event in Las Vegas at some point, but don’t ask me when; they all merge together– and made it official last year when Hexagon’s Manufacturing Intelligence division and ETQ announced a plan to connect Hexagon’s inspection and measurement solutions with ETQ’s QMS to automate quality control and assurance processes that typically been manual.

Last, FWIW, ETQ’s CEO is Rob Gremley, whom you may remember from PTC.

Hexagon expects to complete the acquisition early in the second quarter of 2022.

Also: World events. While you’re not here to read what I think what’s going on in the bigger world, these events are on my mind. As Ralf Steck wrote yesterday, a dark cloth we had all thought/hoped was behind us has fallen again. I hope for the safety of the people of Ukraine.