CAD Vendor PTC Has Designs on ALM Vendor MKS

May 9, 2011 Timothy Prickett Morgan

Here’s an acquisition deal you probably didn’t see coming, that might seem a bit odd at first, but then makes perfect sense once you think about it for a few seconds. Computer-aided design (CAD) software maker Parametric Technology, which has expanded through a slew of acquisitions since 1998, has added one more: application lifecycle management (ALM) software maker MKS.

Last month, PTC said it would pay $292.5 million (that’s in Loonies, or Canadian dollars) to take over MKS, which is a publicly held company that is traded on the Toronto Stock Exchange. PTC is traded on the NASDAQ National Market and is actually a slightly younger company, being founded in 1985 at the dawn of the workstation era when CAD/CAM software moved off mainframes and onto Unix and proprietary minis and workstations and went more mainstream.

MKS was founded in 1984 as a consulting company named Mortice Kern Systems by four students at the University of Waterloo: Randall Howard, Steve Izma, Trevor Thompson, and Alex White. It is not entirely clear why they chose this name, but a mortice is the square hole in a structure that is meant to hold a tenon and thereby make a joint, while kern is either a lout, a foot soldier from the Scottish or Irish medieval armies, or the space adjustment between letters in a typeface. But it is probably a joke that made sense to these four, who might have been punning about the space that happens when you try to put a round peg in a square hole. Whatever the joke was, Mortice Kern Systems created scripting tools that spanned Unix, Windows, and eventually Linux platforms (MKS Toolkit) as well as version control systems for software development (initially called MKS RCS and eventually renamed MKS Source Integrity). The company moved into the OS/400 arena through the acquisition of the Implementer product from Silvon Systems in 1998, and dabbled in Web content management. In June 2001, the company launched MKS Integrity, its Java-based software change management tool, and it is this product that has evolved beyond version control to a full-on ALM tool.

PTC gets its name, parametric, from the CAD solid modeling technique that it commercialized with its Pro/Engineer software. The basic idea is that you can describe a solid with a number of parameters and if you are smart, you can easily modify that design and see the effect the design changes on simulated physical properties of the object. PTC went public in 1989, and within six years was among the Fortune 500 and one of the largest software companies in the world. By 1999, thanks to acquisition of various companies–including InPart, Computervision, Division Group, Windchill, and Nitidus–PTC had put its CAD software on steroids and turned it into product lifecycle management (PLM) products. IBM‘s long-time RS/6000 partner Dassault Systemes made a popular CAD program call CATIA, and this software was the reason why people bought AIX machines back in the late 1980s and 1990s. And like PTC, Dassault has undergone the same evolution from CAD to PLM.

With the MKS buy, PLM is going to be able to go one further. As we all know, so many products today have an electronic component, and that means software in a lot of cases. By integrating its Creo and CADD5 design programs, Arbortext document management software, and Windchill product analytics and quality control tools with the Integrity ALM suite, PTC can manage the whole enchilada–a product and its related software–as a single whole.

This may not sound like a big deal, but according to the people I spoke with at MKS, no one does this yet.

“At PTC, we recognize that software is an essential component of nearly every manufactured product,” explained Jim Heppelmann, president and chief executive officer, in a statement announcing the acquisition. “That’s why we have long believed that the development of product hardware and software should be managed as a unified process. With the acquisition of MKS, we are adding a best-of-breed ALM solution to our product portfolio, and extending how our PLM solution manages the development of software-intensive products.”

PTC is much larger than MKS. It has over 5,000 employees, a vast 25,000-strong customer base, and over $1 billion in sales for fiscal 2010 (ended last September). Not all of those customers who use PTC tools to design products and integrate with their manufacturing systems and supply chains have software embedded in their products, but plenty of the ones in high tech, consumer, medical equipment, aerospace, defense, automotive, and industrial manufacturing do.

MKS has about 350 employees, and an unknown number of customers. MKS just ended its fiscal 2011 year on April 29 and has not reported its financials yet, but said in late March that it expected revenues to be in the order of $25 million to $28 million (in U.S. dollars), with license revenues on the order of $13 million to $16 million. For the prior 12 months, that would put MKS sales at $78.7 million for the year. At the Looney-to-Greenback exchange rate when the deal was announced, that $292.5 million Canadian translates into around $304 million U.S. So to one way of looking at it, PTC is paying nearly four times annual revenue to get its hands on an ALM stack. Based on the closing price of MKS stock ahead of the deal, PTC is, with its $26.60 (Canadian) offer paying a 38.3 percent premium to acquire MKS. PTC is using $54 million in cash and $254 million in a revolving credit facility.

PTC says that it expects the MKS acquisition to close in early June. MKS shareholders will be having a vote on the acquisition at the end of May and the boards of director for both companies have unanimously approved of the deal. Executives and key shareholders in MKS who represent 25 percent of the outstanding shares in MKS have already said they are in favor of the PTC offer, which needs a 66.7 percent approval to go ahead.

It is not clear how the MKS product roadmaps will be meshed with those of PTC, or how the MKS people will move over to their new owners, but we will follow up once the companies are out of their quiet periods and the deal is done and let you know.