As in other industrial sectors, the past 30 years have seen substantial consolidation among suppliers serving the process automation marketplace. Indeed, the last burst of entrepreneurial spirit seemed to have left the market when the late 1990s dot-com bubble burst. Today, of the top 25 suppliers to the U.S. market that Control magazine identified in 1990, a full two thirds of that “old guard” no longer exist as independent entities, with much of the global market presence accruing to a relative handful of primary platform providers.
Keith Larson, editor of Control magazine and ControlGlobal.com, explores today’s process automation mergers and acquisitions (M&A) landscape with Gene Bazemore, managing director in the Dallas office of Founders Advisors.
Transcript
Keith Larson: As in other industrial sectors, the past 30 years have seen substantial consolidation among suppliers. Indeed, the last burst of entrepreneurial spirit seems to have left the market when, in the late 1990s, the dot-com bubble burst. Today, of the Top 25 suppliers to the U.S. market that Control identified back in 1990, about two thirds of that old guard no longer exists as independent entities, with much of the global market presence now recurring to a relative handful of primary platform providers. But as the process automation center of gravity has continued to shift from hardware to software along with a growing focus on the promise of digital transformation and smart device connectivity these past half dozen or so years, a new generation of digital ventures and startups have emerged to serve the industry's automation needs. Bottom line, things are happening once again on the mergers and acquisitions (M&A) front, and software company acquisitions make up an increasingly large percentage of M&A activity across the industrial landscape.
Hello, my name is Keith Larson, editor of Control magazine and ControlGlobal.com, and welcome to this episode of our Control Amplified podcast. Joining me to help explore today's process automation M&A landscape is the uniquely qualified, Gene Bazemore, Managing Director in the Dallas Office of Founders Advisors.
Welcome, Gene, and thanks so much for joining us today. Really appreciate you taking the time.
Gene Bazemore: Thank you, Keith. Thank you for having me today.
Keith: You bet. As I said in your introduction, you're uniquely qualified to lead this discussion, in part because you're a chemical engineer undergrad, as I recall, and you started your career as a process controls engineer. So, very close to home. But by way of introduction, perhaps you can tell us a little bit more about what you do today with Founders Advisors, and just how you came to be the middle market deal maker in the industrial technology space.
Gene: That's right, Keith. I certainly wore a hardhat and boots at one point in time, and I've worked in all kinds of plants around the world. So, I've been fortunate to do that earlier in my career, and I made a shift into investment banking many, many years ago, and I've been very blessed and fortunate to have done so. In regards to where I am today, Founders Advisors, just a little bit about our current firm is that we're a southern-based investment bank. We specialize in advising founder-owned and founder-built small and medium-sized companies, and we're really advise companies in a variety of areas in the really long-term relationships from our perspective. And it's mainly though in the M&A and capital-raising transactions. So, those kind of pivotal moments in a company's history when they may be exiting, maybe they're growing and they want to acquire a company, or maybe [they] need to raise funding for growth and for other ventures.
And we're very focused on industry verticals. That's important to us. We look at industry experience and expertise as being super important, and as part of that, industrial technology is one of our verticals, and I lead industrial technology practice for Founders. As you mentioned, my start in my career in process controls and ever since coming into investment banking in early 2000s, I focused on industrial technologies. I did kind of have the fortune in banking to see, early in my career at UBS, large industrial conglomerates and be part of those teams that covered those large industrials. And then at Houlihan Lokey, I was on those teams in the middle market and focused on private equity, private equity transactions and middle-sized deals, middle market being half a billion to a billion, billion-and-a-half.
And then, finally, I'm doing really something I love very much at Founders, where we focus on the small, medium-sized founders and companies. And I've got to tell you, it is very exciting, all the things happening in industrial tech, automation and control, instrumentation, test and measurement, having seen that over the last couple of decades and those changes, even as an engineer to today as an investment banker working with some of those smaller and medium-sized companies.
Keith: Yeah. This niche has gotten sexy again all of a sudden. So, it's kind of fun.
Gene: Yes, indeed. Yes, indeed. And what I always like to say is that, at some point, today's industrial technology company eventually becomes tomorrow's industrial company. So, it kind of changes over the years, but you always have those kind of leading edge technologies in industrials and, I think they continue to penetrate and that trend continues as we see it.
Keith: Yeah, it seems in the '90s and 2000s M&A in our space was driven more by consolidation, really, suppliers really seeking greater profitability through rented portfolio, increase scale, global reach, than really by innovation. Do you have the same recollection of that period over the last couple decades?
Gene: Absolutely, Keith. I think for a portion of the '90s, I was working in those facilities, implementing systems and components that eventually were consolidating to larger firms. So, it even had a personal touch for me as I kind of saw some of the consolidation. So, great examples when you think of the '90s, you had Siebe's acquisition of Foxboro, what a great long-standing automation brand. Rockwell expanded into motion with Reliance Electric in '94. Emerson enhanced their HMI capabilities in 1996. ABB really established themselves in pulp and paper with the automation brand, Elsag Bailey, in '99. And then, one reason I remember this transaction is that it's a system I implemented in Mobile, Alabama, More Products. Great brand that built in the '90s, and Siemens eventually acquired them in 2000. So, I've seen that.
But I would say, however, we do see new technology and trends emerge, it's kind of my former point where, what is today's technology kind of becomes more accepted and adopted over time. And I think as we see new technologies and trends emerge today with great entrepreneurs, and they take great leaps in the technology and innovation with the technologies that develop. We see, for example, another example of this is we came out of the '90s and kind of in the early 2000s, we saw the proliferation of sensors, you saw what we now call edge devices in the early 2000s. And this really talks into the development and explosion of data in the early 2000s, which was foundational to what we see today. And other innovations too, for example, a company like Universal Robots was founded in 2005. A lot of people don't realize how recent that was. And they were just founded in 2005, and they've exploded the entire collaborative robot sector and the use of robots across many industries.
And so, of course, consolidation does continue, not at the pace it was in the '90s. We saw, for example, the $5.6 billion transaction in 2014 where Schneider Electric combined their Modicon brand with Invensys. And so, there are some larger transactions that have happened. But as you noted, there was a very large swell of consolidation in the '90s, I think. Different kinds of M&A focus in 2000 to 2010. And I think a lot of the topic of the day, what's happened over the last decade.
Keith: Yeah. It certainly seemed like in the last five years or so ago, we launched our Smart Industry brand, really focusing around digital transformation. But it just seems like a whole new generation of digitally-oriented startups focusing on the industrial space really started to proliferate. I can't tell you how many unheard of companies that I got pitched at for some of these startups that I'd never heard of before, much more so 25 years before that. And I was looking at a recent article from Bloomberg analysis that there have been 38 industrial software acquisitions completed just this year so far, which puts us on track to exceed the record number of transactions set back in 1998. So, that gives you a sense of the time that's expired since the dot-com burst like that. What do you think has changed to really precipitate the shift in this new kind of new blood coming into the market the last few years?
Gene: I know, it is amazing, isn't it? It's kind of like the revenge of the startup in the automation world. And so, suddenly, I think, really, I see three trends that have kind of driven this, and it's over that previous decade that some of the foundation has been set up. And the three trends that I see that kind of have emerged to drive what's happening in the last five years, as you said, is these entrepreneurs in the early 2010, '12, '13, '14, '15, the early years begin to leverage some of the greater computing power in the cloud and in edge devices, right? That were developed in the early 2000s. And then the greater proliferation of wireless. You can't have this discussion without wireless technologies, right? And the Internet, and the ability to access data anywhere. And that's been a huge factor and trend that we've seen has impacted the ability of entrepreneurs to develop very clever innovations and clever technologies around these capabilities.
And finally, something very recent is the advancement of machine learning (ML) techniques and the adoption of artificial intelligence (AI) and more sophisticated ability to train models. Automated machine learning is a very recent innovation, and the ability for models to train themselves. So, I think most of those that are listening to this podcast and many in the controls world know what it is to train a PID algorithm and models and B-squared models and these kinds of techniques, and it's very manual. What has happened recently is the development of coding and the developing software and the more advanced data science capabilities that are out there, you have the potential of having a model that is able to train itself, it's able to calibrate itself, self-calibration. Auto calibration is a real thing now. We always dreamed of it, but it's really happening. And I think that's another exciting trend that factors into the emerging startups and new technologies, new entrepreneurs that are developing these technologies for Industry 4.0 and for Industrial Internet of Things applications.
Keith: Yeah. And I think that brings to mind just the whole kind of decoupling of hardware and software in the systems side of things. And I think that opens the doorway to more software from multiple players. Because in the past, your DCS was a pretty monolithic thing from one vendor, and it was all pretty locked down, so there's no way to bring other technologies in, which of course was also a problem when you wanted to migrate to a new version. But that decoupling through use of virtualization and container technologies to decouple the software side from the hardware and to move independently on those two platforms I think has really opened up the landscape as well.
Gene: I think that's absolutely a key trend. I'd say, Keith, a term we use kind of in our group and with clients is kind of the democratization of data analysis, so that the software gives access and the ability to get access to the data is super important. Now we've got the ability for your average entrepreneur to get access to that industrial data and to be able to do really exciting things with it through the software, like you said. So, it's much more software focused, it's much more analysis focused. Don't want to ignore that data science aspect of this and the ability make more intelligent insights. I think that's very important. Rockwell has been kind of a leader in some of these areas. I think very early on, they identified the MES layer, kind of the execution system layer, as important to begin to invest in more software companies that were part of that layer.
And now, they actually partnered with PTC in 2018 with a recognition of the importance of the data science and the importance of application of those algorithms and application of software that will make actionable insights available to operators and engineers within the facility more broadly. And I do think that, just to your point, the software is much more of a focus. And I tell people all the time that, in industrial technologies and automation control, they say, "Well, you're a technology banker now." I say, "No, I think it's more that, we're still industrial technology but a greater portion of my time is spent understanding software and which software." It's just a greater content of everyday life, frankly, for all of us. And that's no different in the industrial community. That's what Industry 4.0 is about, that penetration of software into the industrial landscape.
Keith: Yeah. And I think you mentioned Rockwell and they obviously did just acquired the MES company Plex, which is all cloud-based stuff. So, moving not only to software on-premise, but really starting to build out those software-as-a-service models, so that you can spin up MES applications very quickly across multiple sites because it's cloud-based and you're not doing something on-site on a particular.
Gene: That's right.
Keith: And so, really allowing companies to take advantage of these capabilities much more quickly than they might have in the past by leveraging cloud. So, when it comes to valuation, you have obviously been involved with a few acquisitions here recently, what sorts of multiples are these new startups fetching? And how do these compare with the more traditional hardware-oriented instrumentation and control entity in terms of those kind of multiples that you can see? How do you gauge that and how do you measure the value of those startups?
Gene: That's a very good question. And you highlighted it a moment ago when you talked about some of the recurring revenue streams that the automation players are tapping into. This is no different than the software as a service model that's employed really in all industries and all industry verticals. And technology of Silicon Valley and the technology players have understood this for a long time. But today, industrial customers and automation suppliers are really looking at these assets and digitization as an ongoing trend, and it's something that they are very much interested in. And there has been a change at the board level from a valuation perspective. 10 [or] 15 years ago, [if] you talked about an enterprise value to revenue multiple, a multiple of revenue on a business and you'd be tossed out of the room. You'd be tossed out of the room. It was always a multiple of cash flow, it was a multiple of EBITDA.
You can see some legacy of that today with some Wall Street analysts who talk about EBITDA multiples when, pragmatically, that's not what's happening at the boardroom. At the boardroom, they're talking about multiples of recurring revenue. And reason is that these platforms are so high growth you really have to talk about it that way because there's a lot of buried investments in these businesses. The cash flow today is not really indicative of where it could be five [or] 10 years from now. They do expect to be highly profitable down the path. But as you think about it, it's that Jeff Bezos Amazon claim from two decades ago, where he tells Wall Street, "Don't pay attention to my bottom line." That's creeped into boardrooms in the industrial front. And it's true.
You look at your Rockwell's acquisition of Plex Systems, for example. If you look at it in an EBITDA basis, it doesn't make any sense. It's 50, 60 times EBITDA. That's not how they're thinking about it. They're really looking at a multiple of revenue there. And they acquired the business for 15 times recurring revenue. And the business itself has around 150 million in annual recurring revenue. That's market today, 10 to 15 times for a larger, more mature business, more mature relatively, rather than a small startup. You look at these businesses in a 10 to 15 times enterprise value to revenue multiple is fairly common. And you look at other transactions as well, like, for example, Fortive bought ServiceChannel.
Fortive is the old DNR spin out, very much an industrial technology player. They have some aspects of automation in some of the industrial markets we talk to and look at. But ServiceChannel is very much a software service platform for tracking service technicians, and it operates at around 125 million ARR, annual recurring revenue. And they bought that for 10 times. Emerson bought Open Systems for 10 times. Again, I don't want to go through every example. But, this is kind of the way we think about multiples for some of these software-as-a-service companies in today's environment.
Keith: How does that compare to maybe a valve maker or something a little more mundane, if you're looking at somebody who's just consolidation where a company might be looking to expand their portfolio from a hardware perspective. How does that compare to what you're seeing with these software companies?
Gene: Yeah, I don't want to be unfair to those players as well. There's a lot of innovative technology.
Keith: No, I just want to get some perspective, you don't need to name any names.
Gene: Yeah. I think as you look at, and it's not just the valve maker, it's the sensor maker, the instrument maker, they're making some really super important products. They may have great brands, they have great channels that could have proprietary edge and something they've developed around their instrument. May have be an edge device that has more capability than the previous generation. And from that standpoint, you do see some strong EBITDA multiples. You see north of 10 times frequently. For a great sensor company, you might see 12 to 15 times EBITDA. I think for something that is a little bit more mature in the industrial technology areas, maybe has some proprietary elements, it tends to be in the eight to 10 times range. Thinking of a more mature valve company, for example. But I think, as we think about the multiples for companies that are a little bit more in mature markets, you are going to look at a cash flow multiple. And companies that are in the higher growth instrumentation sensor space are going to command higher EBITDA multiples than others.
Keith: That makes sense. Makes sense. Back to the innovation side, I guess. So, what are your some of the primary factors that drive established players to acquire innovative new technologies as opposed to investing and developing more homegrown capabilities? Can you talk a little bit about that dynamic?
Gene: Yeah. I think it's a fascinating trend because, not only do we see industrial customers and the automation suppliers, the suppliers of these technologies investing. Normally, in a marketplace or a mature marketplace, you'd see just the suppliers, some consolidation among suppliers, for example, of this capability. But you're seeing consumers invest in those types of digital assets. And so, from our perspective, it's moving so rapidly, you're seeing many of the large industrials more broadly, they have a fear of being left behind, a competitor adopting an innovative digital technology that gives them that edge in the marketplace, in operations, in the supply chain, with customers, many of the aspects of running their business, and it's the buy or build decision as well.
The technologies that really are advancing so quickly and entrepreneurs are developing those so quickly. Do you buy this or do you invest in yourself? And that ties into the Acqui-hire concept, which is another trend we see, where the talent to build is a constraint on many of the large industrials. That talent tends to go toward the startups, and we've seen that over the last five years. We've seen a lot of talent out of the great engineering programs, the great computer science programs, the great data science programs around the country has been flocking to the startups, flocking to new ventures, they want to be entrepreneurial. So, a lot of the great development, a lot of the great talent is found in those companies. So, we do see that the talent at a company is a big factor for an industrial or an automation company that wants to buy these assets. So, that's very important as it relates to the M&A decision at the board level.
Keith: Yeah, that makes a lot of sense. Things are booming right now, but are there potential technical or market place stumbling blocks that could limit growth and contribution to some of these new ventures to our industry overall?
Gene: Yeah. We continue to see a little nervousness of adoption, it's a little bit of the Wild West among the various technologies, and a lot of the smaller players are out there delivering a lot of innovation. There's a ton of innovation that's ongoing. And so, you see a lot of the big corporates that are testing out the technology. They're very open to doing a proof of concept, to doing a pilot, but we're seeing some delay in kind of overall broader adoption as it relates to some of the technologies. That's still a factor as it relates to and kind of a headwind for the industry. I think when we start to see a shakeout of some of the winners and losers a little bit down the path, you'll start to see adoption pick up. It will follow that traditional S curve trend that we all have seen in the past.
And then, edge computing, on-prem versus cloud, kind of where do you put the data? Where do you send the data? That input and output beyond the fence is a consideration, especially with the cybersecurity issues that are kind of front headlines every day. They've seen the list and the roster of companies that have been impacted by cybersecurity threats and shutdowns. And I think probably that's been a very large headwind most recently for companies, because a lot of the computing power is in the cloud. You send some of this data off-premises in order to have some of the better algorithms, better results, more data analysis and analytics to capture more actionable insights. So, it's that IT hesitation to send data kind of outside the fence is another headwind that we see.
Keith: Yeah, it's always kind of a push-pull thing, where I really want the benefits that these new technologies can bring but I don't want to open myself up to, in order to take advantage of some of these new technologies, you've got to be able to extend your architecture and open it up to things that you may not it want to be. So, it's got to be done very carefully.
Gene: That's right. Absolutely.
Keith: You have to think twice about that.
Any predictions, let's say, for five years down the road? Could we be headed for a bursting of an industrial IoT bubble like the dot-com bust a few years back?
Gene: Oh predictions, and you're recording too, so, let me be very careful. I think I'll go back to kind of how I opened up, is that, I think we're subject to cycles. I think you're going to continue to see some of these trends, the ability of computing at the edge [for example], will continue to get better and better. The processing power that you saw. Honeywell is really investing in quantum computing. I think we're all kind of excited about what that may bring. Now, that's leading edge technology. That's more of a technology. It isn't an industrial technology at this point. But quantum computing may be another breakthrough that we all see. I think you'll see the more democratization of data. But I think you'll see more algorithms expand to handle this data. You will see machine learning, automated machine learning, you'll see that proliferate. That data and analytics will get engineers, I think, to actually be more empowered by the data analytics and the tools that are being offered.
We're seeing some really great self-service analytics companies that are being developed to allow an engineer not to be an expert in Python or MATLAB, but be an expert in the application in the physics and to be able to merge those two with that software and create great solutions for their company. And so, I think you'll see more and more of that. And then, finally, another kind of important prediction here, I think we're going to see a lot more robotics. It's behind the scenes still a little bit, but I think you're going to see your average middle-market company, your average smaller company that's maybe one facility in a hometown could have a lot more robots, a lot more automation. That's the next trend. You saw Hitachi bought JR Automation recently, and that transaction, I think, is indicative of what's happening in robotics. Integration robotics into our everyday life is going to really take off. You're going to see that more visible evidence for that.
Keith: Yeah. I think that fits with the process side of the business much more into this discussion around autonomy and unattended operations and just moving in that direction where it may not be drones and robots necessarily but more sophisticated models that can do process control and can do these things more efficiently and effectively than human operators, and allowing human operators to spend their time on higher and value-adding things other than very repetitive types of actions. I think that kind of fits with what you're seeing on the robots and more of the moving stuff around side. We're seeing those more sophisticated models for doing control of chemical processes and other processes that happen inside pipes, and are technically robots but it's the same technology being applied to machine learning and all those same things. Definitely.
Gene: That's right. Absolutely agree.
Keith: Well, thanks so much, Gene, for taking the time to share your insights with us today. I think we're getting to the end of our allotted time. And for those of you listening, thanks again for tuning in.
I'm Keith Larson, and you've been listening to another episode of the Control Amplified podcast. Our guest today has been Gene Bazemore with Founders Advisors. Thanks for joining us. And if you've enjoyed this episode, you can subscribe at the iTunes Store or at Google podcasts. Plus, you can find a full archive of past episodes at controlglobal.com.
Thanks again, Gene, one last time. I really appreciate it.
Gene: Thank you, Keith. Really enjoyed it.
Keith: And signing off till next time, everybody.
For more, tune into Control Amplified: The Process Automation Podcast
