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Synopsys acquires Ansys for $35 billion


Vice President: Aaron Cohen 

Analysts: Benedict Walton-McBain, Sahaj Shandilya (Scholaride), Siddharth Banerjee  (Scholaride) 


Deal Overview 


Synopsys (NASDAQ:SNPS) on January 16th announced its decision to acquire Ansys in a  cash and stock deal of about $35 billion. The deal is recognised as a stepping stone transaction marking a  strategic union of the technological industry and aims to strengthen Synopsys’ hold on semiconductor design  and simulation. 


The acquiree, Synopsys, has agreed to pay roughly $390 per Ansys share which is split into $197 per share in  cash and about a third of Synopsys share per Ansys share. The deal aims at diversification of Synopsys’  product portfolio and despite initial market fluctuation, Synopsys has witnessed a 3% rise in stock price post  official announcement. It shows the investor confidence imbibed upon the rationale behind the merger.  


Sassine Ghazi, CEO of Synopsys, has highlighted the fortune opportunities lying beyond integration of  Ansys’s Multiphysics and engineering simulation tools with Synopsys’ design solutions and claims that the  merger would reap off of the emerging AI trends, silicon proliferation and software-defined systems while  providing more relevant design solutions to industrial challenges. 


Synopsys foresees a 1.5x expansion of its Total Addressable Market (TAM) to approximately $28 billion with  a CAGR of around 11%. The merger anticipates to deliver margin improvements, with projected expansions  of approximately 125 basis points in non-GAAP operating margins and 75 basis points in unlevered free cash  flow margins within the first full year post-closing. 


A certain cultural difference might lead to interoperability but either of the companies are poised to leverage  their experience in execution of successful acquisitions. Synopsys’ long history of realizing synergies out of  acquisitions bodes well to this deal. Because of its strategic emphasis on innovation and customer-centricity,  Synopsys is well-positioned to handle the challenges of operational mergers and provide value to all parties  involved. 


Business Overview 


Synopsys 


Founded by Aart de Geus, David Gregory and Bill Krieger in 1986, Synopsys is an American company  focussing on silicon design, verification and innovation, providing tools and services assisting silicon IC  environment development, both in hardware and design-debugging-simulation software domains. It also  provides intensive software security products and services to industries interoperable with other third-party services. Holding its stand in both Nasdaq-100 and S&P-500 indices as of today, Synopsys has been leading  the globe in EDA (Electronic Design Automation) and semiconductor IP since a long time now.  


The company focusses its business into 3 major product groups namely, silicon design automation, design IP  and software integrity. It saw a quarterly revenue of $1.599 billion in the last quarter of 2023, witnessing a  growth of 25% since last year and a fiscal-year revenue of $5.843 billion in 2023, up approximately 15% year  over year.



The company is no stranger to past M&A restructures owing to intellect identification and the passion to  provide innovative EDA and security solutions relevant to industrial standards and beyond. Some of its more  recent deals include the acquisition of WhiteHat security, a premium cybersecurity company owing to its  extensive experience in AppSec (Application Security) and related domains, in 2022 valuing it at $330 mil  followed by the acquisition of PikeTec, an automotive software solutions giant, in 2023 to expand and  strengthen its stretch in the realm of SDV (Software Defined Vehicles) electronics and software design-testing  solutions. 


Ansys 


It is an American multinational, founded in 1970 by John Swanson, specializing in Multiphysics engineering  solutions and product design with a global customer base. It develops and markets engineering simulation  software for industrial use across the product cycle. It went public on NASDAQ in 1996 and has made a name  for itself in FEA (finite element analysis) line, exploiting its essentiality as a complex environment solver  software.  Holding a workforce of 6200 employees and total assets valuating at $7.32 billion as of 2023, Ansys had a  revenue of $2.27 billion (ttm) with 9.90% growth year-over-year with a net income of -500. Revenue in the quarter ending December 31, 2023, was $805.11M with 15.99% year-over-year growth. It witnessed a  stagnancy in net income since 2019 averaging at about $446 million. 


It has practiced extensive acquisitions over time, keeping up with a competitive industrial design and  simulation market. It acquired Zemax, specializing in imagineering systems, in 2021 over a $411 million deal. 


Industry Analysis 


The simulation software industry has emerged as an essential resource across various sectors, enabling  companies to model and analyse the performance of products and processes before actual implementation.  This technology is particularly crucial in industries where physical testing is impractical or impossible, such  as construction, pharmaceuticals, semiconductors, aerospace, and many others. Advanced computer programs  in this field can accurately simulate a wide range of scenarios, including power system behaviors, weather  conditions, electronic circuits, chemical reactions, and mechatronics. Additionally, these tools can model heat  pumps, feedback control systems, atomic reactions, and even intricate biological processes, providing valuable  insights and fostering innovation without the need for physical prototypes.



This expansion is largely fuelled by the engineering software sector, which is expected to see substantial  growth due to increased demands on manufacturers to reduce both the cost and time of product development.  Additionally, rising investments in the aerospace and military sectors, coupled with the growing need for  simulation in healthcare for the efficient development and distribution of vaccines, particularly for diseases  like COVID-19, are set to drive market growth in the forthcoming years.


The simulation software industry is somewhat fragmented, reflecting the diverse and specialized simulation  needs across various sectors, each with little overlap. However, there has been a trend toward consolidation  as companies merge resources to develop more sophisticated and powerful software. This collaboration aims  to enhance the accuracy of simulations, enabling the modeling of an increasingly complex array of variables  and scenarios. Continuous improvements in algorithms, computational capabilities, and integration with  emerging technologies contribute to the dynamic nature of innovation in this market. 



The simulation software industry is predominantly concentrated in developed countries, which allocate  substantial funds to research and development. However, developing countries are rapidly advancing in this  field, narrowing the gap with their increased focus and investment in technological capabilities.



Deal Rationale 


1. Complementary offerings in a market where demand is increasing 


Companies such as NVIDIA and Intel have recently been designing increasingly complex chips that utilise a  wide range of pieces as well as designing the massive computing systems that house the chips. 


Synopsys's acquisition of Ansys allows the firm to take advantage of this fact, by combining their  complementary offerings. Synopsys specialises in providing tools for designing individual chips, while Ansys  focuses on software for evaluating larger electronic systems that incorporate these chips. Both companies  serve different parts of the semiconductor and electronics design process. By combining forces, they can offer  a more comprehensive suite of solutions to their customers, covering both chip design and system evaluation,  thereby enhancing their value proposition.  


As the chips develop, and become more sophisticated, there will be a growing demand for the advanced design  and evaluation tools that Synopsys and Ansys offer to support these developments. The acquisition of Ansys  by Synopsys positions them well to address this demand by offering integrated solutions that cater to the  evolving needs of semiconductor and electronics companies. By merging, the two companies can pool their  resources, expertise and technologies, potentially strengthening their competitive position relative to larger  players in the market, hence taking advantage of this increasing demand.  


Furthermore, from Synopsys’s point of view, the acquisition presents an opportunity to expand into upcoming  markets, before demand spikes hence gaining a competitive advantage over competitors. Ansys has significant investments in sustainable cars, heat pumps, solar panels, batteries, and other zero-emission technology.  Whilst current demand is steady for these products, this technology will likely drive the physics simulation  market in the near future as well, showing that this acquisition is forward-thinking from Synopsys’s point of  view.  


2. Significant revenue and cost synergies 


By acquiring Ansys, Synopsys can take advantage of huge potential cost and revenue synergies between the  two firms, both in the short-term and the long-term.   In terms of cost synergies, the two firms' combined operations are expected to save (approximately) $400  million annually, for three years after the closing date of the deal. They can achieve this significant savings  total, through utilisation of improved economies of scale, streamlining operations, pooling of R+D expenses,  and a reduction in redundant expenses.  


Leading on from this, there are additional revenues generated as a result of the acquisition that wouldn't have  been achievable independently. The combined company expects to achieve approximately $400 million in  additional annual revenue by the fourth year after closing, from exploiting complementary products, increased  market share, faster R&D innovations and enhanced product offerings.  


In the longer term, the expected revenue synergies are even more impressive. The revenue synergies are  expected to grow to more than approximately $1 billion annually in the longer term. This indicates that as  Synopsys and Ansys integrate further and exploit more opportunities, they anticipate even greater revenue  growth beyond the initial years. 


3. Increasing market share, giving the combined force an advantage over competitors 


This transaction is the largest acquisition in the technology sector since chipmaker Broadcom (AVGO.O),  took over software maker VMware last November in a $69 billion deal. This is significant, as it broadcasts to  competitors, Synopsys’s intentions to gain monopoly power over the market.  


Prior to the deal, the EDA industry was highly consolidated between Synopsys and Cadence, both of which  have similar market capitalisations as of February 2024. By acquiring Ansys, Synopsys will increase its market  share and strengthen their combined competitive position. Through utilising their complementary offer,  Synopsys will be able to persuade key customers such as NVIDIA to purchase their products, rather than  competitors. 

 

Synopsys was previously very similar in terms of size to its largest competitor, Cadence Design Systems,  whose market cap grew from $20 billion in early 2020 to about $75.5 billion today. Ansys also competes with  Dassault Systems with a market cap of €61.16 billion ($66.46 billion). However, the fact that Synopsys and  Ansys currently have a combined market cap of $106 billion showcases how significant the acquisition will  be in the short term and in the long term.


In the second full year following the deal’s closure, Synopsys expects the acquisition will increase its adjusted  earnings per share. Synopsys’ total addressable market is estimated to grow to $28B, a 50% growth. 


Risks 


1. Regulatory Scrutiny and Global Implications 


Synopsys' $35 billion acquisition of Ansys faces significant challenges, particularly navigating regulatory  hurdles. With both companies potentially operating in similar markets, regulators could perceive the deal as  consolidating market power excessively, triggering antitrust concerns and complicating the approval process. 


The deal is expected to be finalised in the early stages of 2025, however, there are worries of tough regulatory  measures, especially from key target markets such as China and the EU. This comes at a time when approval  times have become increasingly difficult to predict. This presents further risks for Synopsys as if the deal is  called off under specific circumstances, including antitrust hurdles, Synopsys will have to pay Ansys a  termination fee of $1.5 billion.

 

2. The debt load may potentially be too great for Synopsys 


Another crucial aspect to consider is the significant debt burden resulting from the acquisition. This raises  concerns about Synopsys' future financial robustness and its level of indebtedness. The stability of its financial  capacity will greatly impact its ability to innovate and remain agile in an industry characterized by rapid  technological advancements. 


Synopsys revealed its plan to compensate Ansys shareholders through a mix of stock and $19 billion in cash.  To finance the cash component, Synopsys intends to utilize $16 billion in short-term bank loans initially, with  plans to refinance this amount through the bond and loan markets at a later stage. 


3. Integration Challenges in Merged Technologies and Customer Segments 


Additionally, the acquisition brings together two entities with historically distinct technologies and product  offerings, potentially leading to uncertainties in customer confidence and shifts in customer segments.  Addressing this challenge necessitates the establishment of robust internal cohesion, the integration of  disparate technology infrastructures, and the creation of a cohesive corporate culture. These endeavours  represent precarious undertakings, requiring planning and execution to mitigate risks effectively.


Financial Analysis 


WACC Calculation



DCF Analysis 


Considering the historical operational efficiency and anticipated future growth, the company's prospects  appear promising, as reflected in the valuation provided below.



Under the base case scenario, the valuation appears largely consistent with prevailing market pricing and  expectations. These other scenarios below suggest a potential for both upside and downside, implying  opportunities for undervaluation and overvaluation, respectively.



Our outlook remains optimistic on Ansys, with a valuation set at 3% below the current market price (subject  to verification of the latest market price).


Company Comparable Analysis  



Conclusion 


In conclusion, Synopsys-Ansys merger reflects upon a calculated initiative aimed at driving innovation,  expanding market presence and enhancing customer service. Synopsys is in a strong position to take advantage  of the acquisition's transformative potential because to its strong financial case, cooperative opportunities, and  demonstrated performance history. The realisation of synergies and the long-term effects on Synopsys' growth  trajectory and competitive posture in the semiconductor design and simulation market will be closely watched  by stakeholders as the firms proceed with integration and execution. 


References 


  1. Ansys (n.d.). Synopsys to Acquire Ansys, Creating a Leader in Silicon to Systems Design Solutions.  [online] Available at: https://www.ansys.com/news-center/press-releases/1-16-24-synopsys acquires-ansys [Accessed 11 Jun. 2024]. 

  2. Fortune Business Insights (n.d.). Simulation Software Market. [online] Fortune Business Insights.  Available at: https://www.fortunebusinessinsights.com/simulation-software-market-102435  [Accessed 11 Jun. 2024]. 

  3. FT (n.d.). Synopsys to buy Ansys in $35bn design software deal. [online] Available at:  https://www.ft.com/content/725e2c98-4659-4cc9-abf4-cc7ea39fec09 [Accessed 13 Apr. 2024]. 

  4. Goswami, R. (2024, January 16). Synopsys to acquire graphics software maker Ansys in $35 billion  tech deal. CNBC. https://www.cnbc.com/2024/01/16/synopsys-to-acquire-ansys-in-35-billion graphics-software-deal.html [Accessed 11 Jun. 2024]. 

  5. Grand View Research (n.d.). Simulation Software Market & Research Report. [online] Grand View  Research. Available at: https://www.grandviewresearch.com/industry-analysis/simulation-software market [Accessed 11 Jun. 2024]. 

  6. Markets and Markets (n.d.). Simulation Software Market. [online] Markets and Markets. Available  at: https://www.marketsandmarkets.com/Market-Reports/simulation-software-market 263646018.html [Accessed 11 Jun. 2024]. 

  7. Nenni, D. (2024, February 6). Why did Synopsys really acquire Ansys? Semiwiki.  https://semiwiki.com/eda/synopsys/341126-why-did-synopsys-really-acquire-ansys/ [Accessed 11  Jun. 2024]. 

  8. Synopsys. (2024). Synopsys to Acquire Ansys, Creating a Leader in Silicon to Systems Design  Solutions. [online] Available at: https://news.synopsys.com/2024-01-16-Synopsys-to-Acquire Ansys,-Creating-a-Leader-in-Silicon-to-Systems-Design-Solutions [Accessed 13 Apr. 2024]. 

  9. Synopsys confirms $35bn Ansys acquisition. (2024, January 16). DCD.   https://www.datacenterdynamics.com/en/news/synopsys-confirms-35bn-ansys-acquisition/ [Accessed 11 Jun. 2024]. 

  10. Synopsys to acquire Ansys, creating a leader in silicon to systems design solutions. (2024,January  16). Jan 16, 2024. https://news.synopsys.com/2024-01-16-Synopsys-to-Acquire-Ansys,-Creating-a Leader-in-Silicon-to-Systems-Design-Solutions [Accessed 11 Jun. 2024]. 

  11. Vinn, M., Sen, A. and Nellis, S. (2024). Synopsys to buy engineering software firm Ansys in $35  billion deal. [online] Reuters. Available at: https://www.reuters.com/markets/deals/synopsys finalizes-35-bln-deal-buy-engineering-software-vendor-ansys-source-2024-01-16/ [Accessed 13  Apr. 2024].

  12. www.ansys.com. (n.d.). Ansys | Engineering Simulation Software. [online] Available at: http://ansys.com/ [Accessed 29 Jun. 2024].



The opinions expressed in the reports are those of the members of the Junior IB and Scholaride teams and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB and Scholaride teams take no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB and Scholaride teams are not authorized to provide investment advice. The  information, opinions, and estimates presented in the reports reflect the Junior IB and Scholaride teams’ 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 and Scholaride teams have no business relationship with any of the companies mentioned in the reports and do not receive any compensation for their inclusion. 


Copyright © July 2024 | The Junior IB | Scholaride


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