ANSYS (ANSS - Free Report) inked a deal to acquire Livermore Software Technology Corporation, in a bid to strengthen its explicit dynamics suite and finite element analysis capabilities.
With the latest buyout, ANSYS aims to aid developers design cost-efficient and safer vehicles while minimizing costs concerning physical testing.
Robust functionalities of Livermore’s flagship solution, LS-DYNA, compelled ANSYS to pursue the deal. Notably, LS-DYNA is general purpose highly scalable software with multiphysics computations capabilities.
Moreover, LS-DYNA solution aids automotive customers to precisely ascertain the behavior of the vehicle and its effects on occupants in case of a collision. Consequently, the solution boasts of customer base comprising tier one automotive suppliers, which is expected to be a major positive for ANSYS.
We believe the latest agreement is in sync with ANSYS’ strengthening involvement in automotive industry and focus on integrating efficient designs for smart autonomous vehicles.
Also, LS-DYNA supports distributed and shared memory platforms, including, Linux, Unix, Windows. Further, LS-DYNA, which enables customers in simulating complicated real world problems, is utilized by aerospace, defense, construction, bioengineering and manufacturing industries.
Furthermore, integration of ANSYS Workbench with LS-DYNA is expected to expand customer base.
These initiatives are instilling confidence in the stock. Notably, shares of ANSYS have returned 47.7% year to date, significantly outperforming the industry’s rally of 30.5%.
The transaction is valued at $775 million. The acquirer notes that 60% of the transaction value will be paid in cash, while remaining 40% will be paid in equity terms. In a bid to back the deal, ANSYS anticipates to take to new debt financing.
Notably, ANSYS exited second-quarter 2019 with cash and short-term investments of $631.7 million compared with $607.6 million in the previous quarter.
The acquisition is projected to conclude in the fourth quarter of 2019, subject to customary closing conditions. Management will divulge financial details on 2019 outlook upon closure.
The buyout is envisioned to rake in $60-$65 million to non-GAAP revenues in 2020. Further, ANSYS anticipates the deal to be “neutral to modestly accretive” to non-GAAP earnings and operating margins.
Automotive Initiatives to Enhance Growth Prospects
ANSYS is making every effort to capitalize on growing proliferation of IoT in the automotive industry. The company recently announced it is teaming up with Autodesk, to enable automotive companies integrate regulatory compliance validation with visual design review in a unified workflow.
Moreover, the growing clout of AI, 5G and ADAS chipset making is fueling demand for computational software tools, which favors ANSYS’ prospects. The company’s automotive design tools were recently selected by Subaru Corporation to design safe vehicles. Increasing popularity of ANSYS’ simulation solutions, particularly in the automotive end-market, bodes well given the alluring growth prospects.
Notably, ADAS market is estimated to hit $91.83 billion by 2025, according to data from MarketAndMarkets. Further, per Mordor Intelligence data, the simulation software market is forecast to hit $16.69 billion by 2024, compared with $7.16 billion in 2018, at a CAGR of 15.14%.
The latest acquisition is expected to aid ANSYS enhance strength in automotive, avionics and aerospace, and other domains. This is expected to boost ANSYS’ financial performance in the days ahead.
Aggressive Acquisition Strategy Imposes Risk
Frequent acquisitions have escalated integration risks for ANSYS. Moreover, inorganic strategy to strengthen portfolio is negatively impacting the company’s balance sheet in the form of high level of goodwill and intangible assets, which totaled approximately $2.06 billion or almost 58.6% of total assets as of Jun 30, 2019.
Moreover, the company has to opt for debt financing to fund the deal, which are likely to weigh on the balance sheet at least in the near term.
Zacks Rank & Stocks to Consider
Currently, ANSYS carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are LogMeIn (LOGM - Free Report) , Anixter International (AXE - Free Report) and Perficient (PRFT - Free Report) , each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for LogMeIn, Anixter and Perficient is currently pegged at 5%, 8% and 10.75%, respectively.
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