2024-01-17 14:31:47 ET
Summary
- ANSYS, Inc. is a market leader in simulation services used in various industries, making it difficult for competitors to replicate its solutions.
- These traits make ANSYS an acquisition target by Synopsys, despite the pricey element to it.
- Investors in ANSYS are now stuck between a rock and a hard place.
As it looks like ANSYS, Inc. ( ANSS ) is going to be acquired in a big transaction by Synopsys, Inc. ( SNPS ) , a review of the business seems overdue. First, I am going back to the fall of 2022, when I believed that ANSYS was a stimulating simulation company, before judging the offer on its merits.
The company has seen a strong track record as a steady growth play, driven by superior margins, revenue growth, and a great future positioning, all of which have meant that shares have been able to command a premium valuation.
This comes with risks, as investing in a great business does not always result in a great investment outcome, as ANSYS now looks to be sold to its competitor Synopsys. A decline in the acquirer's stock and regulatory uncertainty, and long envisioned closing times, saddle investors in ANSYS with immediate losses, with uncertainty and a declining premium causing a massive overhang on the shares, despite the fact that the company might be acquired.
A Recap
ANSYS is a market leader in simulation, a rapidly growing industry and service which is used in a wide range of industries and applications, which includes aerospace, general industrial applications, phones, food, and healthcare, among others.
These services are used in simulation settings, as well as autonomy, 5G, IoT, the cloud, and electrification, with the ecosystem of services making it very hard for competitors to replicate its solutions.
In the 2010s decade, ANSYS has tripled sales to around $1.5 billion, with operating profits reported around half a billion dollars, as the strong growth and superior margins were even accompanied by very modest (net) buybacks.
A $40 stock in 2010 rose to the $300 mark in 2020, as this was based on a situation and performance in which 2019 earnings were reported at $6.58 per share (adjusted) and $5.25 per share (on a GAAP basis). Most of the gap between both earnings metrics was explained by stock-based compensation ("SBC") expenses, resulting in sky-high valuations.
Forwarding to 2022, shares were down to $210 per share, after having peaked around the $400 mark early in 2021. This was based on a business which had grown 2021 revenues to over $1.9 billion, with adjusted earnings posted at $7.37 per share, although GAAP earnings of $5.16 were rather stagnant compared to 2019.
With the company guiding for 2022 sales between $2.0 and $2.1 billion, and adjusted earnings between $7.64 and $8.10 per share, growth was moderating. Despite a pullback in the share price, they were still very pricey at over 40 times more realistic GAAP earnings.
Too Cautious
As it turns out, my take in the fall of 2022 has been too cautious, as shares rallied back to the $300 mark in 2023, and even traded around the $350 mark in recent days.
Through November of last year, ANSYS reported its third quarter results, with full year sales for 2023 now guiding around $2.26 billion. While adjusted earnings were set to improve to around $8.55 per share, GAAP earnings are seen stuck around just over $5.50 per share.
With the 87 million shares trading at $350, ANSYS commanded a $30.5 billion equity valuation, that is excluding a very modest $115 million net debt load. These are very high valuations at 13-14 times sales. Pegging realistic earnings around $6.50 per share, as I am happy to accept a third of the adjustments of the reconciliation between both earnings metrics, a low 50 times earnings multiple was still demanding by all means.
The Danger Of Investing In Highly Valued Stocks
Despite being positioned as a truly great business for the decades to come, investing in even very promising but highly valued businesses can be tricky, as near-term investors in ANSYS now find out.
Synopsys has reached a deal to acquire ANSYS in an effort to create a leader in semiconductor design technology and simulation and analysis, addressing customer needs for fusion of electronics, and physics, augmented with AI. Deal terms call for a cash component of $197 per share to be paid to investors in ANSYS, which furthermore receive 0.3450 shares in Synopsys for every share which they own.
The transaction is based on the closing prices of December 21 of last year, when shares of Synopsys traded at $559.96. This implies an implicit $193 stock component and roughly similar cash component, for a combined offer of $390 per share. That day has been chosen, as Bloomberg reported that ANSYS was evaluating a sale of the company at that time, with Synopsys named as one of the many peers which might have an interest in the business.
The Math
Despite the premium offered, versus a share price of $346 last Friday, shares of ANSYS fell to $327 per share in response to the news. Part of this came as shares rallied from $303 to $358 on the back of the Bloomberg report in December.
One obvious reason for the decline in ANSYS shares is that shares of Synopsys have actually fallen in a short period of time since, and while they rose 3% on the final announcement, they now trade at just $510, while the share value used in the deal calculation was nearly $560!
This reduces the implicit stock component to $176 per share, which together with the fixed cash component makes for a $369 per share offer. Of course, there is great uncertainty on the regulatory, timing, and closing front.
In fact, closing is only seen in the first half of 2025, as uncertainty is killing for rapidly growing and developing countries. The distraction is potentially very painful in a talent-rich and rapidly growing business, as the regulatory environment is anything but friendly for big deals here.
This creates a tougher setup for investors in ANSYS, Inc. here. The standalone case is expensive, and a modest premium to be reaped in a transaction comes with a long waiting period and lots of uncertainty.
For further details see:
ANSYS Stock: The Risks Of A High Valuation