Dassault finds the One...MatrixOne that is...

Another day, another software acquisition. Today, long-suffering PLM vendor MatrixOne [MONE] was acquired by Dassault Systems [DASTY]. Dassault will acquire MatrixOne for $7.25 per share in cash, for a total purchase price of $408 million [$309 million ex-MONE's cash].

The offer represents a 21% premium over the prior day's closing price; which was already a 52-week high. Dassault is paying slightly more than 2x EV; well within the range we've seen in software M&A over the last 24 months. On an earnings basis, MONE hasn't been profitable on a GAAP perspective for four years, and the merger will likely be neutral to dilutive at least in the first 12 months.

MatrixOne's Rationale:

MONE has been struggling as a stand alone company for years, and has allegedly been on the market for some time. On today's conference call, Dassault CFO Thibault de Tersant acknowledged that it was a competitive bid..."It was an organized process, yes, with other bidders obviously."

Note: UGS acknowledged after the acquisition that it was approached as a suitor but ultimately decided to pass [credit to WorldCAD Access blog].

MatrixOne's license revenues have in a downtrend for the last five years. MONE generated $78.3mm of license revenues in FY01, and had failed to break the $50mm mark in any subsequent fiscal year. The company appeared to be turning int he right direction in FY05 [ended June '05], as license revenues grew 22% YOY [$47.3mm], but the last two quarters showed a dramatic reversal of fortune.

• Q1'06 -- $6.3mm [Down 43% YOY]
• Q2'06 -- $11.4mm [Down 32% YOY]

Furthermore, the company was embroiled in accounting issues and restatements, something the company finally worked through late last year. By coming into the DASTY fold, MONE will no longer be burdened by defending a bloated capital structure and the need to meet quarterly estimates in a business that's inherently lumpy.

Dassault's Rationale:

There are plenty of reasons for DASTY to make this move. In no particular order:

• To re-invigorate the IBM relationship -- IBM has long been Dassault's main channel partner for PLM sales. Over the last few years, IBM has been more vocal in their support of alternative PLM solutions. Most notably, IBM and Parametric Tech [PTC] announced a new cooperative marketing agreement whereby IBM would re-sell PTC WindChill in China and in certain key verticals. While Dassault may contend otherwise, there's sound logic behind the notion that buying MatrixOne was, in part, to re-establish Tier 1 status with Big Blue [because Dassault's Enovia wasn't necessarily up to snuff competitively].
• Acquiring market share -- MatrixOne has 850+ customers and more than $120mm in revenues, more than doubling Dassault's PLM business post acquisition. As importantly, MatrixOne has strength in key verticals [semiconductor being a big one] that Dassault hasn't historically dominated.
• Modernizing the PLM technology footprint -- MatrixOne for its many faults as a public company has a relatively well designed product, that utilizes component architecture. While Dassault defends its Enovia suite vigorously [and did so on the call announcing this deal], long-term I believe the rationale for the MONE purchase has as much to do with the future product roadmap of Dassault's PLM business as anything. For now, Dassault will maintain Enovia, SmarTeam and MatrixOne; but in order to maximize the value of this acquisition [and keep customers happy], they will need to aggressively map out a technology plan that brings these three suites together. In my view, that roadmap largely involves turning MatrixOne into Enovia 2.0 [but again, Dassault would likely disagree, at least publicly].

At the end of the day, Dassault's stepped outside of its normal M&A parameters in acquiring MatrixOne. MONE, while having a well positioned product suite, has a history of operating losses, has struggled to grow the top line, and is large enough that integration between the two won't be quick or pain free. Given the takeout premium and the fact it was a competitive bid, one has to wonder whether this was as much a defensive maneuver as anything else. Time will tell but as I've reminded people many times, merger synergies are not always easy to come by.

Implications to the broader PLM space...

• Agile Software [AGIL] -- And then there was one...AGIL is the last remaining public stand-alone PLM vendor. Predictably, AGIL shares have been bid up following the MONE acquisition as speculators now see AGIL as the "last M&A target." However, it's not always a good thing to be the last man standing. To those who think it's "only a matter of time" before Agile gets acquired, I ask you to come up with a viable short-list of logical acquirers.
• Parametric Tech [PMTC] -- Parametric Tech is very much a "show me" stock and has been for some time. But with IBM paying them lip service and Dassault engaged in the MatrixOne transaction, it would seem PTC has the most to gain near-term. Whether they can capitalize on the open window remains to be seen, but it's worth watching.
• UGS -- UGS was critical of the MONE acquisition, and claims it passed on the company. UGS will remain the largest PLM vendor in terms of annual revenue, and like PTC, probably feels comfortable in its ability to leverage any near-term integration disruptions. Anecdotally, I've heard that UGS has struggled to generate near-term revenue growth, but I don't have formal confirmation of that [if anyone else does, please drop me an email]. Update: UGS reports quarterly results because of publicly traded bonds, and as it turns out, they appear to be growing quite nicely.

Note: At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain equity positions [long or short] in AGIL, DASTY, IBM, MONE or PMTC.

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Comments

[Jason Wood]

Bill,

Thanks for the comment. I'm certainly not dismissing the notion that Agile may still get sold, but I don't see it as a near-term eventuality and the stand alone prospects don't compel me currently.

Congrats on the solid performance, by the way.

Jason

[Bill Burnham]

In terms of AGIL, apparently there is at least one left-over bidder from MONE and it sounds like more than 1. All you need is two to get a decent sale. Given that I put them in my web portfolio a few months ago, I sure hope so :-)