By: Sally Marshall, Izer Onadim, Valeriya Shreyber, Max Raso (Imperial College London), Zahra Malik, Devangini Vanalia and Deimante Chailenko (University of Manchester)
Overview of the deal
Acquirer: AVEVA
Target: OSIsoft
Total Transaction Size: $5Bn
Target advisor: Lazard
AVEVA has entered into an agreement to buy a SoftBank-backed US rival, OSIsoft, leading to one of the largest deals struck by a UK technology company. The purchase of OSIsoft will provide full-stack end-to-end solutions and accelerate digital transformational strategies. The integration of OSIsoft’s PI system data management software with AVEVA’s own operations and performance products will create an integrated data foundation that will drive big data insights to help customers. AVEVA and OSIsoft will further deliver on their sustainability goals, driving significant benefits for their customers.
"Combining AVEVA and OSIsoft is yet another significant milestone in our journey to achieving the ambitious growth goals that we have set." - Craig Hayman, CEO of AVEVA
Company Details: AVEVA
AVEVA Group PLC is a British multinational information technology company based in Cambridge, England; it started as the Computer-Aided Design Center. It is listed on the London Stock Exchange and is part of the FTSE 100 Index.
Founded in 1967, headquartered in Cambridge, England
CEO: Craig Hayman
Number of employees: 4600
Market Cap: $8.16B (as of March 2020)
EV: $10.9
LTM Revenue: £833.8 million
LTM EBITDA: £241 million
LTM EV/Revenue: x6.62
LTM EV/EBITDA: x22.9
Company Details: OSIsoft
OSIsoft, LLC is a manufacturer of application software for real-time data management, called the PI System. It is privately held.
Founded in 1980, headquartered in San Leandro, California.
CEO: J. Patrick Kennedy
Number of employees: 1300 (2016)
Market Cap: 1.421B$ (as of 2/09/2020)
Revenue FY19: $488.5 million
LTM EBITDA: $45.1 million
Short-term consequences
There are two beneficial short-term consequences that emerge from AVEVA’s agreement to acquire OSISoft. Firstly, the software portfolios offered by AVEVA and OSIsoft are complementary, with AVEVA providing product options focused on the design, implementation, and control of technical systems whilst OSIsoft offers software to optimise data collection from sensors and make use of collected data. The interoperability of these two offerings is evidenced by the fact that there are many companies that make use of software from both AVEVA and OSIsoft, such as Adani Group.
Secondly, the COVID-19 pandemic has put pressure on many companies that did not have large cash reserves. The acquisition of OSIsoft could put the new, larger AVEVA in better standing since it will combine their respective customer bases and their total assets. In 2019, OSIsoft held $96.3M (£72.6M) in cash and cash equivalents and $1.26B (£0.95B) in total assets, while AVEVA held £127.8M in cash and £2.48B in total assets. The funds and assets of the larger company provide some assurance and security to OSIsoft. In addition, OSIsoft, as a mature business, requires substantial investment in order to expand operations into different market channels and revenue streams. Being acquired by AVEVA allows them to enter a league all on their own where they can leverage their new parent company’s resources in a larger operational and sales network to outperform its competitors.
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.”
Long-term Upsides
Ultimately, this deal sets the way for AVEVA to become a global pioneer in the field of industrial digitalisation. The acquisition will strengthen its position in its current subsectors and add a stronger position in the pharmaceutical, food & beverage, and life sciences markets. The acquisition will enable AVEVA to broaden and deepen its relationships with existing and new customers, generate significant value for shareholders, and bring a more comprehensive product portfolio to the market.
OSIsoft’s software has great potential. It’s currently used by 9 out of 10 of the Global Fortune Top 10 pharmaceutical companies. Its PI System has incredible penetration in the industrial world. Elements of this product are deployed at more than 20,000 sites worldwide and manage data flows from close to 2 billion real-time sensors. This will open up a wide range of streamlining and integration alongside AVEVA’s other products. The deal looks to accelerate the convergence of industrial software applications with real-time operational data flows.
From a financial standpoint, this deal looks to benefit AVEVA greatly in the long run. A big impetus for the transaction is to further diversify AVEVA away from its main market–oil and gas (from 40% to 25% of revenue). Whilst organic revenue has been down in the first half of 2020 (likely due to its ongoing transition to a subscription-based model and the coronavirus pandemic), it is inevitable that this acquisition will aid its growth, with new investment helping to improve operations and assisting the company to continue dominating a sector with excellent gross margins. The acquisition also has the promise of reducing competitive pressures on the combined firm in the long run, decreasing the net change in costs associated with undercutting rivals by the incumbent firm.
Alongside AVEVA, OSIsoft can begin to use its cutting-edge technology and multinational customer base to have a substantial effect on the industrial software market.
Risks and Uncertainties
The $5bn acquisition presents a range of risks and uncertainties, the greatest uncertainty being integration risk. The industrial sector, although a pioneer in exploring new technology, is the last to integrate and use its technology for its resources. If the software stacks of the two companies can be integrated, this could make for a smooth end-to-end customer experience in which AVEVA provides software to be used at all stages of building infrastructure, from design to control to maintenance and optimisation. The data collected and analysed by OSIsoft’s PI software could also be used by AVEVA to improve its other offerings.
Additionally, the acquisition of OSIsoft requires inventive financing. Based on assumptions, AVEVA is unlikely to raise more than £1 billion pounds in debt since enterprise software companies can typically sustain debt representing only about double its EBITDA. To fund the rest of the proposed $5 billion deal, AVEVA considered offering stock, selling new equity, or both.
Schneider Electric, a French industrial company, owns 60% of AVEVA and is unlikely to want to dilute its stake, since software is a key leg of its growth strategy. Therefore, this made offering OSIsoft’s owners stock in the new company less likely than a capital increase, where Schneider could buy new shares.
The deal is likely to be funded by a $3.5 billion rights issue, cash and new debt facilities. Schneider can readily participate in the offer of new equity as it has both €5 billion of cash and the headroom to raise more debt of its own. Furthermore, AVEVA can still offer equity to OSIsoft’s Kennedy to keep him personally invested in the combined firm.
"Joining forces with AVEVA enhances and extends our ability to deliver on our key commitments to our customers, partners, and employees. Together we will be better able to service the largest digital transformation projects in history" - J. Patrick Kennedy, CEO of OSIsoft