As DVT Corp. customers and distributors were descending on Budapest to attend its first annual global business conference and feast on Hungarian hors d'oeuvres, gyrate to gypsy music and learn more about next-generation vision systems, the Duluth, GA company was agreeing to be acquired by archrival Cognex Corp., in a deal valued at $115 million.
The acquisition, announced late yesterday, brings Cognex a line of low-end vision systems products and, most importantly, a worldwide network of 150 technical distributors who sell into the factory automation space. The deal will expand Cognex' own distribution network of 40 primarily U.S.-based resellers created last year to extend the company's vision systems presence beyond OEMs and semiconductor manufacturers into the factories of discrete and process manufacturers across the globe.
DVT's distribution network, Cognex believes, will primarily help the market leader accelerate sales of its In-Sight line of general purpose vision systems and its new Checker product, which is aimed at detecting packaging defects before products are shipped.
"DVT's done a good at finding high-tech distributors," said Dr. Bob Shillman, co-founder and chairman of Cognex, during a conference call with analysts. "Clearly we couldn't grow our sales force fast enough to sell low end (products)."
Nello Zuech, principal at Vision Systems International, an analyst firm in Yardley, PA, said the deal reflects the need for consolidation among vision systems vendors. "There are too many players chasing too few contracts," he said. "The market is under $2 billion."
While Cognex gains an extensive global distribution channel, selling machine vision through distributors is not easy, Zuech noted. "Customers want a solution, not just a product, and distributors are not equipped to sell more than products."
That's one reason why Cognex has acquired DVT, which has taken its time to find and train the right distributors and has an automated infrastructure to manage the process. Previously, "we could not send a rep to Omaha to sell machine vision because it was not cost effective to do to make a $5,000 sale," Shillman said.
The DVT deal is the culmination of a five-year pursuit, according to Shillman, who sees DVT's technology filling the low-end of his company's general purpose vision systems product line -- with some overlap (both companies offer programmable vision systems, for instance). "We've always viewed DVT as a good company," Shillman said. "We prefer not to have so many good competitors like this -- and thank god we don't."
Customer overlap, however, will be minimal, he said, since DVT sold primarily through distributors into many markets Cognex never reached. DVT was successful in the nuts and bolts industries as well as the automotive subassembly and consumer products markets, while Cognex has achieved its greatest fame in the semiconductor and related high-tech markets, Shillman said.
As such, between $15 million to $20 million of DVT's projected calendar 2005 revenue of $30 million could convert directly to Cognex' top line this year, though due to the timing the deal will have minimal impact on second quarter results, the company said. DVT was profitable in 2004, Shillman said. The deal will be earnings neutral this year but is expected to be accretive in 2006 once envisioned synergies are acted upon, Cognex's CFO Dick Morin said. Cognex posted 2004 profits of $38 million on revenues of $202 million, which was up substantially from the $150 recorded the previous year but well below its historical high of $251 million achieved in 2000.
The first known casualty of the deal is DVT CEO Bob Steinke, whom Shillman credited with building a top notch distribution and management infrastructure. Steinke will remain in an advisory capacity, Shillman noted. "We don't need two presidents and CFOs and there are a variety of areas in which we don't need to be spending ..." he said, "so right away the cash savings will be quite substantial."
To further maximize the deal's potential, Cognex will need to rationalize its general purpose vision systems product line. With its Legend system, DVT gained experience in making products that are easier to use. With its In-Sight product, Cognex has more expertise in solving more complex problems due in part to its more advanced machine vision algorithms, analysts said. While DVT did not market a sensor-based product like Checker, it had one under development, he added.
While remaining non-committal to specific product line alterations, Shillman said that changes will be made as quickly as possible. "Distributors do not want to walk [into a prospect] with two overlapping products," he said. "We will rename products and there will be elimination of certain aspect of certain products so distributors will likely go in with one product line and Checker."
The purchase of 90-person DVT is Cognex' largest acquisition to date. The company acquired its way into the surface inspection market a few years ago, a business which last year contributed $30 million in revenues. DVT, meanwhile, closed an acquisition in July of last year when it bought MTI Visions Systems, a Providence, Rhode Island company known for its semiconductor wafer reading algorithm. DVT also has a joint marketing relationship for vision systems with Siemens.
Shillman doesn't expect any major strategic changes to result from the acquisition. "There are no philosophical changes -- we're still a vision company," he said, noting that the deal reinforces the notion that the factory floor market "has the greatest potential for Cognex in the next four or five years."
Managing Editor Greg MacSweeney contributed to this article.