Software Investments—Looking Beyond the Surface

Software Investments—Looking Beyond the Surface

Rockwell Automation through Blake Moret, chairman and CEO, invested $1 billion in PTC with Moret gaining a seat on the board. The public reason was really to get early information about ThinkWorx, the IIoT product.

The investment valued PTC, a company with $1 billion in sales, at approximately $17 billion. On the surface, we all pondered why.

Speeding up the time, I was able to spend a couple of hours with several people from PTC at last week’s Automation Fair event. This really opened my eyes to the depth and breadth of the ThingWorx offering. There is much technology and usefulness under the hood. This is powerful software.

Now, I understand. Beyond a relationship and most likely some preferential access to ThingWorx and other PTC technologies, I’m surmising that Rockwell Automation can also drop some visualization projects, cut development costs, and utilize the full value of the PTC software. That alone would be a good return on the investment.

Therefore, the most prominent branding at Automation Fair–Powered by PTC.

Revealing more of Rockwell’s piece-at-a-time partnering strategy, it is not using PTC’s CAD and PLM offerings for its digital twin development, but instead it is partnering with ANSYS.

Like I noted in my initial report on Automation Fair, partnering was the centerpiece of news from the event. Looks like it is also the centerpiece of product development. That is most likely financially prudent.

Software Investments—Looking Beyond the Surface

PwC’s Q3 M&A Analysis of the Manufacturing Sector

I have received news of PwC’s Industrial Manufacturing Deals Outlook. I guess you have your good news and your bad news.

From the report’s summary: While disruptive factors are prevailing and point to an economic downturn, many of the positive factors we have highlighted in our previous publications are still relevant in Q3 2019. As stated in PwC’s publication “Winning through M&A in the next recession,” the M&A environment is cyclical and has historically followed economic downturns, as capital available for deals typically decreases; however, the next recession will be different. We believe the downturn will be unlike historical downturns as disruptive economic factors are partially offset by a few positive factors, leading buyers to continue to pursue M&A activity.

Positive factors impacting the deal-making landscape in 2019:

  • Record levels of dry powder from private equity funds and healthy corporate balance sheets coupled with the repatriation of cash for US-based multinationals indicate sufficient levels of capital to pursue acquisitions, which will prevent deal activity from dropping too low.
  • High valuations have been a factor for the decline in deal volume from YTD 2018 to YTD 2019. However, as the economic outlook declines, valuations will likely fall, which will provide opportunities for buyers with high levels of capital. If buyers are aggressive during the downturn, M&A demand should be higher than historical downturns.
  • The prominence of megadeals is reflecting a decoupling of the megadeals segment of the M&A market from the lower-growth global economic environment.

Disruptive factors likely to create a pause in deal making in 2019:

  • The Chinese and US economies are pointing to economic slowdowns. Chinese GDP growth in 2019 is expected to be between 6.2%–6.4%, a decrease from approx. 6.7%–6.8% in 2018. The US GDP annualized growth in 2019 is expected to be between 1.8%–2.3%, a decrease from approx. 3%–3.5% in 2018.
  • Uncertainties as it relates to length of economic slowdowns around the globe, Brexit, and the continued struggles to negotiate trade agreements and tariff concessions between the US and China, remain on the minds of deal makers.
  • The PMI index has dropped to 47.8 at the end of Q3 2019, which is the lowest it has been since 2009.

PwC also captured some quick highlights below:

  • Scale Transactions will Continue to be the Focus for the Industrial Manufacturing Sector
  • Macroeconomic factors – the trade war, slow GDP growth and high valuations – continue to affect the M&A environment across the industrial manufacturing industry.  The latest September numbers from the Institute for Supply Management also showcase the struggle the sector is experiencing with the U.S. manufacturing purchasing managers’ index coming in at 47.8%, marking the second consecutive month of contraction and was the lowest reading in more than 10 years.
  • So far in 2019, M&A activity in the industrial manufacturing industry has been driven by scale transactions, which is primarily focused on product, customer and geographic expansion. We believe this trend will continue into next quarter and 2020. Here’s a breakdown of Q3 2019 M&A analysis of the industrial manufacturing sector:
  • Total deal value declined by 32% to $18.1 billion when compared to Q2 2019. For YTD 2019, the deal value also declined by 16% to $64.5 billion vis-à-vis YTD 2018.
  • Deal volume in Q3 2019 and YTD 2019 declined by 10% and 11% over Q2 2019 and YTD 2018, respectively.
  • There was no megadeal in Q3 2019.
  • All the categories within the sector saw a decline in deal value during the third quarter except the Electronic and Electrical Equipment and Rubber and Plastic Products. However, the Industrial Machinery drove M&A activity with 40% and 35% in value and volume respectively.
  • North America’s deal value significantly declined by 55% in the third quarter compared to the previous quarter, but the region was the most active acquirer with 36% of deal volume, followed by Asia and Oceania.
  • Although there are factors that point to an economic downturn in the near future, we believe the next recession will be different as it pertains to the M&A environment and could potentially lead buyers to continue to pursue deals.

Executive summary

Worldwide cross-sector deal value decreased 13% from YTD 2018 to YTD 2019, while deal volume remained flat at a 1% increase during the same period. Consistent with cross-sector worldwide, Industrial Manufacturing value has decreased 16% from YTD 2018 to YTD 2019. The primary driver of value decline is related to the 11% decrease in deal volume during this period, which is reflective of some of the lowest quarterly activity since Q1 2014.

Consistent with the trend noted in our Q2 2019 publication, year-to-date activity has been driven by scale transactions, which are primarily focused on product, customer, and geographic expansion. The decrease in deal volume is a result of macroeconomic factors such as the lingering trade war, anemic GDP growth around the world, and high valuations. While overall deal value has seen a decline, the aggregate value of the top ten deals year-to-date has remained stable at $30.3 billion YTD 2018 and $31.4 billion YTD 2019. As such, these macroeconomic factors have not deterred deal makers from turning to M&A to meet their strategic objectives.

Trends and highlights

  • In Q3 2019, the total deal value declined by 32% to $18.1 billion when compared to Q2 2019. For YTD 2019, the deal value also declined by 16% to $64.5 billion vis-à-vis YTD 2018.
  • Similar trend can be seen in terms of total deal volume. Deal volume in Q3 2019 and YTD 2019 declined by 10% and 11% over Q2 2019 and YTD 2018, respectively.
  • Average deal size declined by 15% to $83.6 million in Q3 2019 compared to Q2 2019. The average deal size also declined by a mere 2% to $93.7 million in YTD 2019 vs. YTD 2018.
  • Out of the top ten deals in YTD 2019, four deals took place in Q3 2019. These four totaled up to ~$9.3 billion, and accounted for more than 50% of the total deal value for the quarter.
Software Investments—Looking Beyond the Surface

RSS and Information and Blogs

I get much of my news through RSS feed. That may sound archaic, but it works. Originally I used Google Reader some 20 years ago or so. But that was detracting from Google’s business model, so they killed it. And I went with NetNewsWire. It was great. They sold it. Like almost all cool little startups now part of big companies, the product languished. I switched to Feedly, which I am still using.

The cool thing about RSS is that you get the news feed with just an option of going to the Website. With some feeds, you can see the entire article. With others, you scan and then go to the Website if you want more. I have a few subscriptions, such as The New York Times, where I have access. Many of my feeds are blogs that have no paywall.

The thriving blogosphere of the early 2000s (my blog began in 2003, I’m approaching 16 years) has lost some fervor, but it’s still around.

I started first in the control and automation space. Walt Boyes followed, but soon took it under the cover of Putman Media. The way all the blogs grew in the early years was through linking with each other. I would see a post and link to it with my take. They would link back. But when companies got involved, they didn’t want links to “competitors”. So much for growth for either of us.

Jim Cahill was next with his Emerson Process Experts blog. In the early days we would also cross link, but like everything that faded with marketing. His blog is still going and is still the best example of a corporate blog building a community. I tell people about it on all my trips.

The Apple computer community supports many independent bloggers and podcasters. They cross link and even appear on each other’s podcasts. The net result is that the entire community grows and thrives. So far, I have not found another independent blogger / influencer / analyst to interact with.

I bring this up while listening to The Talk Show with John Gruber of the Daring Fireball blog. He and his guest Brent Simmons (developer of NetNewsWire) are discussing the state of RSS, blogging, podcasting, and media. Brent worked at Userland and its blogging platform Radio which I used from 2003 to about 2007 when I switched to SquareSpace. In 2013 I switched to WordPress.

While commiserating about the state of trying to read articles on the Web, they miss the point of the business. Media is run by sales people. Salespeople think that long term thinking is 60 days out. They really don’t care about user experience. They look for one more idea that will sell one more piece of screen real estate and that maybe is obnoxious and the reader mistakenly clicks the ad instead of the close button and they sell a click. I’m not being cynical about that. It is the natural order of things when sales people (and I was one once) are scrambling to increase income through any non-illegal method they can find.

I still like RSS feeds. I no longer trust Google to uncover the Websites I want. And I’ve never liked the idea of having a list of Websites to methodically go visit just in case something new was added.

Entrepreneurial Thinking From The Masters

Many entrepreneurs or people with entrepreneurial thinking within companies read this blog. Many more of you should be–entrepreneurs, that is.

I picked up this bit of wisdom of Elon Musk from the Abundance Newsletter of Peter Diamandis (Singularity University). Check out “Deconstructing Elon Musk.” Diamandis distilled three key parts of Musk’s genius. I recommend going to the Website and checking out the article in its entirety as well as subscribing to the newsletter. I hope this stirs some passion.

The three parts are

  • Deep-rooted passion
  • A crystal-clear massively transformative purpose
  • First-principles thinking

A brief description of each to whet your appetite.

Deep-rooted passion: “I didn’t go into the rocket business, the car business, or the solar business thinking, ‘This is a great opportunity.’ I just thought, in order to make a difference, something needed to be done. I wanted to create something substantially better than what came before.” – Elon Musk

After selling PayPal, with $165M in his pocket, Musk set out to pursue three Moonshots, and subsequently built three multibillion-dollar companies: SolarCity, Tesla and SpaceX. Ultimately, it was his passion, refusal to give up, and grit/drive that allowed him to ultimately succeed and begin to impact the world at a significant scale.

A Crystal-clear massively transformative purpose: Musk’s MTP for Tesla and SolarCity is to accelerate the world’s transition to sustainable energy. To this end, every product Tesla brings to market is focused on this vision and backed by a Master Plan Musk wrote over 10 years ago. Elon’s MTP for SpaceX is to backup the biosphere by making humanity a multiplanet species.

“I think fundamentally the future is vastly more exciting and interesting if we’re a spacefaring civilization and a multiplanet species than if we’re or not. You want to be inspired by things. You want to wake up in the morning and think the future is going to be great. And that’s what being a spacefaring civilization is all about.” – Elon Musk

First-principles thinking: (from an interview with Kevin Rose–who has a podcast you should subscribe to) “First principles is kind of a physics way of looking at the world. You boil things down to the most fundamental truths and say, “What are we sure is true?” … and then reason up from there. Somebody could say, “Battery packs are really expensive and that’s just the way they will always be… Historically, it has cost $600 per kilowatt hour. It’s not going to be much better than that in the future.” With first principles, you say, “What are the material constituents of the batteries? What is the stock market value of the material constituents?”

It’s got cobalt, nickel, aluminum, carbon, some polymers for separation and a sealed can. Break that down on a material basis and say, “If we bought that on the London Metal Exchange what would each of those things cost?” It’s like $80 per kilowatt hour. So clearly you just need to think of clever ways to take those materials and combine them into the shape of a battery cell and you can have batteries that are much, much cheaper than anyone realizes.”

 

The Future of Work — Drug Epidemic Contracting Workforce

The Future of Work — Drug Epidemic Contracting Workforce

The drug epidemic now impacts the workforce shrinking the available pool of potential workers. My new favorite news site is Axios. The site is growing rapidly and offers skilled reporting, short bites with links (often to “competitors”), and a smart context. It includes not only political news but also specialized reporting on media, the future of work, energy, and more.

Steve LeVine writes a weekly Future of Work newsletter.  He wrote something a week or two ago to which I responded with some local observations. Most of these national reporters, and LeVine also works for a Think Tank in Washington, look at aggregate statistics and have little knowledge of life east of the Appalachians. So I told him that out here in the boondocks of Ohio there are many available jobs but that they cannot be filled because the remaining applicants can’t pass the first important test–the drug test.

Turns out there exist statistics for this phenomenon. Check out the link for more.

Important point: We all need to be finding ways to entice millennials and the following generation (whatever marketers call it) into manufacturing, engineering, and industry. But in our local communities, what can we do outside of work to help people in need to reach programs to get off drugs? This is a crucial society need.

LeVine also spotted a trend–American working class people are no longer mobile. People in this country have moved from place-to-place for jobs since the beginning. Several trends are converging to slow that mobility.

Important point: If you are planning new facilities, keep in mind that there may be an available workforce in many locations you may not have expected.