Automation systems powerhouse Siemens AG today announced that it would acquire product lifecycle management (PLM) vendor UGS Corp., a definitive step toward making Siemens a one-stop source for companies looking to capitalize on the "digital factory" concept.
The news of the $3.5 billion deal caught many by surprise, as it was the first major move by an automation company to add PLM technology to its stable. The consensus among analysts today was that the UGS purchase will be a feather in Siemens' strategic cap — if the German-based company can conform to a new set of rules around integration, culture, and co-opetition.
The deal, which is subject to regulatory approval, will fold UGS of Plano, TX, under the Siemens Automation and Drives umbrella.
While the analyst community had expected an acquisition of UGS — a former subsidiary of EDS, which sold it to private investors in mid-2004 — the more likely buyer was Oracle, some said.
"I'm not shocked," said Dick Slansky, an analyst with ARC Advisory Group, "but I'm a little surprised." Overall, he said, it is a brilliant strategy centered around the digital factory concept, and the UGS buy puts Siemens at the forefront of that market.
The big question is how Siemens will integrate the UGS technology with Siemens' SIMATIC IT business unit, which is built around a manufacturing execution system (MES) and manufacturing intelligence strategy.
UGS adds design, simulation, and PLM tools, which could be strong complements to Siemens' MES offerings. UGS, however, also has its own production management product called Teamcenter, which includes MES technology that came via UGS's acquisition of Tecnomatix. Siemens will need to rationalize not just a sizable technology portfolio but also a new customer landscape, as many Siemens customers may already have bought into an engineering or PLM package from a UGS competitor.
"This has the potential to be a very good fit, depending on how [they] bring it together," said Ken Amann, director of research for PLM consulting firm CIMdata Inc. "The fact that they can link together across a broader range of the design lifecycle and more tightly tie front-end design to manufacturing creates a better feedback loop from the production floor into the design and planning process."
Bradley Holtz, president and CEO of Cyon Research Corp., an engineering consulting firm, noted in an interview with Managing Automation that Siemens is paying $3.5 billion for UGS, a company that reports about $1 billion in annual revenue and still holds some debt. Therefore, Holtz said, this deal is a strategic buy for Siemens to build an end-to-end engineering and factory automation solution. "I believe it could potentially be a game-changer," he said.
Siemens, however, may have to adjust its own business model to accommodate UGS in order for the deal to be successful. Siemens is very centrally organized — everything goes through Munich, noted ARC's Slansky. "If that's what they want to do with UGS they will shoot themselves in the foot," he said. "They will have to leave these guys alone for at least a year." Slansky said the best way for Siemens to execute the integration would be "slowly, thoughtfully, and precisely."
Indeed, one of the challenges will be for UGS to be able to operate effectively as a division in such a big company. The vendor wasn't able to do so when owned by EDS Corp., experts said. "UGS was buried under EDS — they couldn't execute under a big umbrella," said Mike Burkett, vice president of AMR Research Inc.
Under the din of acquisition-related news, Siemens also announced results for the first quarter of its fiscal 2007, which closed on December 31. Revenues for the company increased 6% year over year to €19 billion. And while net income slid 16% to €788 million from €939 million in the prior-year period due in part to a €423 million fine levied by the EU for price fixing, the Automation and Drives unit — the putative home of UGS — had a strong three months, with revenue up 14% year over year to €3.3 billion. The A&D unit also reported a 25% increase in profit over the year prior, from €359 million in 2006 to €450 million in the recently closed period.
Siemens remains under investigation in a probe by the Munich Department of Public Prosecution into alleged bribes that were made to foreign officials to win telecommunications contracts.
"While it's disappointing to see our net income growth reversed by an impact from events in the past, we are moving on with our operations tremendously improved year over year," CEO Klaus Kleinfeld said in a company statement.
Additional reporting by contributing editor Beth Stackpole.