Vice Presidents: Chirag Agarwal, Devansh Jain, Deepansh Kalra
Analysts: Aditya Biswas, Atharva Deshmukh, Aryan Bang, Hiya Jain, Medha Aggarwal
Associate: Amal Tharik
Deal Overview
Acquirer: Siemens AG
Acquiree: Altair Engineering Inc
Deal Size: $10.6 billion
Buy Side Advisors: Latham & Watkins LLP, Gleiss Lutz Hootz Hirsch
Sell Side Advisors: Citi, J.P. Morgan Securities LLC, Davis Polk & Wardwell LLP, Lowenstein Sandler LLP
Introduction
On Oct 30, 2024, Siemens AG announced its agreement to acquire Altair Engineering Inc. for a deal value of $10.6 billion. Altair shareholders are to receive $113 per share, which represents a premium of 19% over Altair’s unaffected closing price on Oct 21. Siemens, a leading technology company focused on industry, infrastructure, transport, and healthcare, expects to strengthen its leadership in industrial software and AI with this acquisition of Altair, a global leader in computational science and AI software. “The addition of Altair’s capabilities in simulation, high performance computing, data science, and artificial intelligence together with Siemens Xcelerator will create the world's most complete AI-powered design and simulation portfolio.” said Roland Busch, President and CEO of Siemens AG. They currently expect the deal to close within the second half of 2025 and become EPS accretive by the second year post closing.
Company Overview
Siemens
Siemens AG is a leading technology company operating across continents with its headquarters in Germany, in the industry, infrastructure, transport and healthcare segments. It is the largest industrial manufacturing company in Europe and has a market cap of €147.81 billion. A few of its major competitors are General Electric, Honeywell, Schneider Electric, etc. In fiscal 2023, which ended on September 30, 2023, the Siemens Group generated revenue of €77.8 billion, net income of €8.5 billion, and a 7% increase in orders.
The increases in revenue, cost of sales and research and development expenses were most evident at Digital Industries. This segment provides automation systems and software for use in industries, providing solution to optimize entire value chains. Revenue was driven primarily by factory automation and the process automation businesses. Another segment is Smart Infrastructure which consists of buildings, electrification, and electrical products, serving infrastructure developers, construction companies, owners, operators and tenants of public and commercial buildings. The third major sector is Mobility, which provides rail passenger and rail freight transportation to public and state-owned companies in the transportation and logistics sectors.
Siemens also holds 75% shares of Siemens Healthineers AG, Germany, which is a global provider of healthcare products, solutions and services. Further, it owns Siemens Financial Services which provides financing solutions for Siemens’ customers as well as other companies in leasing, working capital, equipment and project financing. Another segment is portfolio companies which has market-specific offerings for diverse verticals. It operates in 3 broad divisions: Large Drives Applications (electric motors, converters and mining solutions), Siemens Logistics (sorting technology and solutions focused on handling baggage and cargo in airports) and Siemens Energy Assets (gas and power).
Altair
Altair Engineering Inc., headquartered in Troy, Michigan, is a global leader in computational intelligence and innovative technology solutions. Since its founding in 1985, Altair has been at the forefront of delivering advanced software and cloud-based solutions for simulation, IoT, high-performance computing (HPC), data analytics, and artificial intelligence (AI). The company operates on a subscription-based business model, which provides a stable recurring revenue stream while fostering strong, long-term customer relationships. In addition to subscriptions, Altair generates revenue from professional services, licensing fees, and maintenance contracts. Demonstrating exceptional financial strength, Altair reported over $1.3 billion in revenue in 2023 and achieved a market capitalization exceeding $10.6 billion by 2024, driven by its commitment to innovation, strategic acquisitions, and organic growth.
Altair's diverse product portfolio includes HyperWorks, a suite of simulation tools covering structural analysis, fluid dynamics, electromagnetics, and optimization; Altair Activate, a platform for data analytics, machine learning, and AI; PBS Professional, a workload management solution for HPC environments; and SimSolid, a rapid simulation tool for solid mechanics. Serving a global customer base of over 16,000 companies, Altair's technologies have transformed industries such as automotive, aerospace, manufacturing, energy, and healthcare. From enabling the design of autonomous vehicles to optimizing manufacturing processes and enhancing energy and healthcare systems, Altair’s solutions empower organizations to tackle complex challenges and drive innovation. With ongoing investments in AI, machine learning, and high-performance computing, Altair is strategically positioned to capitalize on emerging trends and sustain its growth trajectory in an increasingly data-driven and technology-focused global economy.
Industry Overview
The software industry is a fundamental pillar of the digital age, reshaping how we live, work, and communicate. It spans a wide range of products and services, from operating systems and productivity tools to complex enterprise software and cloud-based solutions. In 2022, the global software market was valued at over $600 billion, and it is projected to grow at a Compound Annual Growth Rate (CAGR) of approximately 12% over the next decade. This rapid growth is driven by increasing digitalization, technological advancements, and a rising demand for innovative software solutions, which are revolutionizing industries worldwide.
Several key factors are contributing to the industry’s expansion. Cloud Computing has played a pivotal role, accelerating the adoption of scalable and flexible software solutions across businesses. The global cloud software market was valued at $440 billion in 2023, and it is expected to grow at a CAGR of 16% over the next five years. Artificial Intelligence (AI)-powered software is transforming sectors like healthcare, finance, and retail by enhancing efficiency, automating processes, and creating new opportunities. The global AI software market, valued at $50 billion in 2023, is expected to grow at a CAGR of 28% over the next five years. The Internet of Things (IoT) has also driven demand for software solutions capable of managing and analyzing the vast amounts of data generated by connected devices, contributing to the global IoT software market, which is projected to reach $60 billion by 2026. Additionally, as cyber threats continue to evolve, the cybersecurity software market has experienced significant growth, with a projected market value of $400 billion by 2027, growing at a CAGR of 10%.
Enterprise software, a major segment of the market, includes solutions like Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), and Supply Chain Management (SCM). These tools help businesses streamline operations, improve decision-making, and enhance customer experiences. The global enterprise software market was valued at $250 billion in 2023 and is expected to grow at a CAGR of 10% over the next five years. In comparison, the application software market, which includes productivity tools, gaming, and mobile applications, is projected to generate $350 billion in 2023 and grow at a CAGR of 13% over the next five years. Leading companies such as Microsoft, Oracle, Adobe, SAP, and Salesforce play a central role in the industry, investing billions in research and development to create innovative solutions. For instance, Microsoft’s Azure cloud platform and Office 365 suite have transformed business operations globally. The United States remains the dominant player in the software industry, with Silicon Valley serving as a hub for innovation, while emerging markets such as India, China, and Israel are driving growth and technological advancements, shaping the industry’s future trajectory.
Financial Analysis
Precedent Transactions
From the precedent transactions analysis, we see that acquisitions are carried out at an average premium of 34.9% and a median of 39.8%. The industry often sees consolidation, where larger firms acquire niche players to integrate their products and enter new markets. In competitive bidding scenarios, this drives up premiums in this industry. The Siemens-Altair transaction also saw an 18% premium over the stock price.
Comparable Company Analysis
Although the company has struggled with profitability, the latest Q3 results showed a huge turnaround in its operating margins. Considering this, the FCF will increase steadily throughout the projected years. Targets for 2033 revenue growth and operating margins are taken from the average industry rates and projected from the latest fiscal year. A cost of capital of 7% makes it highly sensitive to growth rates, as seen in the sensitivity table, and vice versa. Altair has a low cost of capital at 9%, making it easier to finance future projects. Even with the projected cash flow growth, we got a fair value of 39$ per share in the base case and 50$ per share for an optimistic scenario, which is much lower than the current market price, indicating that the company is overvalued.
For a detailed understanding of the valuation, check out the Excel here: Altair Valuation
Accretion / Dilution
The acquisition is slightly accretive from the outset, with Pro Forma EPS exceeding Siemens’s standalone EPS. This trend continues throughout the forecast period, however, the extent of accretion remains modest due to Altair’s relatively small net income compared to Siemens’s robust earnings base. The deal's all-cash structure, with no new shares issued, ensures no dilution to Siemens’s existing shareholders.
Synergies
Revenue Synergies:
Expansion of Product Offering: Through the Siemens-Altair merger, Siemens is able to improve its product offerings in industries like healthcare, aerospace, and automotive by leveraging Altair's software solutions. By utilizing Siemens' current clientele, this integration may produce notable synergies.
Opportunities for Cross-Selling: Cross-selling can help Siemens and Altair realize their full revenue potential. Increased sales for both companies can result from Siemens introducing its clients to Altair's AI and simulation capabilities and Altair promoting Siemens' products.
Innovative Solutions Development: By integrating Altair's simulation tools with Siemens' Xcelerator platform, the combined company can develop innovative solutions, creating completely new opportunities and revenue streams.
Market Expansion: The merger may draw in new customers and boost the market for industrial software especially in Asia and Europe. This calculated action will propel overall growth by assisting Siemens and Altair in breaking into unexplored markets.
Cost Synergies:
Operational Simplification: The merger makes it possible to remove unnecessary work from divisions like finance, HR, and administration, which results in more efficient operations and lower overhead expenses.
Software Integration: Siemens can streamline design workflows and cut costs related to software licensing and maintenance by integrating Altair's software throughout its internal operations.
Resource Optimization: By combining resources like R&D facilities, marketing campaigns, and infrastructure, the merged company can attain economies of scale, which will further reduce expenses.
Enhanced Productivity: By streamlining design and manufacturing procedures, the integrated platform can cut down on development time and related expenses. The combined company's profitability could rise dramatically as a result of this efficiency.
Risks
There are significant integration risks associated with Siemens' acquisition of Altair, especially given the disparities in the two businesses' operational cultures and product priorities. Siemens, which is best known for its prowess in industrial software and infrastructure, might find it difficult to completely embrace Altair's simulation-based, innovation-driven, and high-performance computing (HPC)-focused strategy. Siemens may give preference to proprietary components in Altair's platforms, which could limit Altair's customer flexibility and make it difficult to maintain the software ecosystem's openness to third-party integrations. Siemens must also successfully retain Altair's technical expertise in order to maintain its capacity for research and development after the acquisition. Siemens' objective of attaining revenue synergies and anticipated EPS accretion by the second year after closing may be hampered if these integration and operational issues are not resolved.
Conclusion
The Siemens-Altair acquisition aligns with Siemens AG’s broader vision to bolster its leadership in industrial software and AI. The deal leverages Altair’s computational science and simulation tools to complement Siemens’ Xcelerator platform, creating a portfolio that addresses challenges across industries like healthcare, aerospace and automotive. While the deal offers potential synergies, including expanded market reach and streamlined operations, it also poses integration risks due to cultural differences. At present, the deal appears overvalued, given Altair’s low revenues and high premiums in the industry, and makes EPS accretion uncertain without effective risk mitigation. If the integration process is managed effectively, this has the potential to enhance Siemens’ competitive edge, drive innovation, and long-term value to shareholders.
References
Altair (2024) Altair signs definitive agreement with Siemens to be acquired for $10.6 billion. Available at: https://investor.altair.com/news-releases/news-release-details/altair-signs-definitive-agreement-siemens-be-acquired-106 [Accessed 8 Dec. 2024]
Siemens (2024) Siemens to acquire Altair: Press release. Available at: https://newsroom.sw.siemens.com/en-US/siemens-altair/ [Accessed 8 Dec. 2024]
Reuters (2024) Siemens to buy engineering software firm Altair in $10.6 billion deal. Available at: https://www.reuters.com/markets/deals/siemens-buy-engineering-software-firm-altair-106-bln-deal-2024-10-30/ [Accessed 8 Dec. 2024]
Grand View Research (n.d.) Engineering software market size, share & trends. Available at: https://www.grandviewresearch.com/industry-analysis/engineering-software-market#:~:text=Engineering%20Software%20Market%20Size%2C%20Share,%2C%20By%20Application%2C%20By%20End%2D [Accessed 8 Dec. 2024]
Gartner (n.d.) Information technology insights and trends. Available at: https://www.gartner.com.au/en/information-technology [Accessed 8 Dec. 2024]
Wikipedia (n.d.) Altair Engineering. Available at: https://en.wikipedia.org/wiki/Altair_Engineering [Accessed 8 Dec. 2024]
Precedence Research (n.d.) Software market size and growth trends. Available at: https://www.precedenceresearch.com/software-market#:~:text=The%20global%20software%20market%20size,11.8%25%20from%202024%20to%202034. [Accessed 8 Dec. 2024]
Statista (n.d.) IT services worldwide outlook. Available at: https://www.statista.com/outlook/tmo/it-services/worldwide [Accessed 8 Dec. 2024]
Shutterstock. (n.d.). Stock Images - Photos, vectors & illustrations for creative projects. [online] Available at: https://www.shutterstock.com/images.
The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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