A Closer Look at 2007's Top Story

9 Jan, 2008 By: Jeffrey Rowe

Siemens' acquisition of UGS was last year's biggest MCAD news.

In the last issue of MCAD Tech News, I discussed what I considered the biggest news and events affecting the MCAD community for 2007 -- issues ranging from new technology launches to business deals, and several things in between. As significant as these were, the biggest news for 2007 occurred relatively early in the year: the Siemens acquisition of UGS.

The $3.5 billion acquisition let Siemens expand its industrial software portfolio by assigning the UGS PLM software operation to Siemens Automation and Drives Group (A&D). The deal surprised a lot of people, including myself, my peers, and most UGS employees. With the acquisition, another big PLM player is now European based. Whether or not this is particularly significant remains to be seen.

As a company, UGS has seen a lot of activity the past few years, and the acquisition by Siemens seems to be the final chapter, at least for the foreseeable future. As it turns out, UGS and Siemens are not exactly strangers, having been joint business partners since 2003.

Although the acquisition was the final chapter, at least for now, let’s step back a few years and consider what led ultimately to the Siemens deal.

In October 2003, EDS (then UGS’s parent company) said it planned an initial public offering (IPO) or a sale of a minority stake of its UGS PLM Solutions unit, a software unit that had outperformed EDS’ main business -- outsourcing. Things had been looking up for UGS' PLM business. Sales have risen to $894 million in 2003 from $879 million in 2002. But after posting deep quarterly losses and forecasting earnings that were only half of analysts' estimates for 2004, EDS said it would not rule out selling the entire subsidiary, which the company said could be worth as much as $1.8 billion at the time.

In early 2004, the business was valued at 1.5 times annual sales, or about $1.2 billion. However, it became widely known that the company would not accept an offer for less than two times 2003 sales, or approximately $1.8 billion. The possibility of the transaction remained a quiet issue until the actual acquisition announcement was made.

It was clear from the beginning that a direct competitor probably would not acquired UGS PLM because of the difficulty in merging technologies and corporate cultures. When things started to heat up and get serious, I didn't expect that acquisition to drag out for as long as it did. Too much was at stake for EDS, customers, and possible suitors. EDS needed the cash that a sale would bring and chose the best route for acquisition -- three equal partners, private equity firms -- Bain Capital, Silver Lake Partners, and Warburg Pincus, which bought UGS from EDS in March 2004 for just over $2.05 billion. The buyout firms, which took equal stakes in UGS, at the time called the deal the largest private equity investment made in a technology company.

Less than three years after that acquisition, along came Siemens, who offered $3.5 billion, or $1.5 billion more than the partners paid -- in most people's books a good return on an investment less than three years old.

When the acquisition was first publicly discussed, Siemens said the purchase of UGS would add industrial software for planning, design, and simulation to the automation-technology portfolio of its factory-automation unit, A&D. Siemens saw value in UGS because it can sell its software to automakers and other UGS software customers that are also Siemens hardware (machines, controllers, etc.) customers. Based on its history, the company had an obvious interest in PLM software and its market potential. The acquisition seemed like a good opportunity because it made Siemens the biggest PLM software and hardware vendor.

While details were lacking in the first weeks and months following the acquisition, at least outwardly the deal today looks like a positive move. The UGS product family appears stable, as do employee and management levels (there has not been a mass exodus). In other words, the management team (including the president, Tony Affuso) is staying in place and the UGS PLM NX product line is continuing to be developed and supported with minimal disruption.

A UGS employee I spoke with who wishes to remain anonymous said that the acquisition has accelerated R&D. With the software engineers at Siemens plus the 3,000 at UGS, the A&D organization now brings the power of 7,000 software engineers together who are focused on delivering an end-to-end software and hardware portfolio encompassing the entire product lifecycle.

UGS’s largest customer is General Motors, and I’ve seen statements from GM that say it views both UGS and Siemens as strong companies and has not experienced and does not expect any negative impact on its business resulting from the acquisition. This is very important because approximately 20,000 GM designers and engineers use NX for product design/development, and nearly 50,000 use Teamcenter for collaboration.

Although less than a full year into it, the acquisition looks like a good decision for all parties concerned -- Siemens, UGS, and their respective and combined customers. It’s still a bit early in the game to call, but so far it’s been win-win-win proposition. Again, just the sheer magnitude of this acquisition and its implications are huge. Exactly how they will ultimately play out provides a great opportunity to study the dynamics of the MCAD community that never stands still.

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