Hexagon Eyes Disruptive Opportunities in $2.1 Billion Acquisition of Intergraph

The Swedish congolerate plans a go-to-market strategy of laser scan for full-time plant and asset analysis, using Intergraph software as the presentation layer.

Swedish measurement technology specialist Hexagon AB yesterday announced the acquisition of Intergraph, a leading provider of geospatial and process engineering software, for $2.125 billion. The new owner expects “significant synergies” from the acquisition, creating a “unique and differentiated technology business.”

In a presentation to investors, Hexagon spelled out a grand technology plan that will combine Hexagon’s existing laser scanning and traditional metrology with Intergraph’s expertise in spatial data. Short term, Hexagon plans to create a new “presentation layer” to visualize the terabytes of data created by precision measurement. Long term Hexagon will use Intergraph to create “sensor fusion,” its term for applications that meld precision measurement with CAD and GIS, eventually blurring the boundaries between the two.

Hexagon will use bank financing for the initial purchase, then back it up with a secondary stock offering. Existing investors have already expressed interested in 50% of the future stock offering.

Taking a Profit
Intergraph was a public company until 2006, when it was acquired for $1.3 billion by an investor group of Hellman & Friedman LLC, TPG Capital and JMI Equity. Revenue that year was $632 million, and hit a high of $808 million in 2008. Percentage of revenue as gross profit also climbed, from 53% to 57% in the same time frame. Not counting taking profit out during their ownership, the investor group earned a 60% premium on their Intergraph investment in four years.

Intergraph operates in two units: Process, Power & Marine (PP&M) and Security, Government & Infrastructure (SG&I). In PP&M it competes with Autodesk, AVEVA, Bentley Systems, and to a lesser degree Dassault Systemes and Siemens PLM. In 2009, PP&M had revenue of about $315 million. SG&I provides geospatially enabled solutions to the defense and intelligence, public safety and security, government, transportation, photogrammetry, utilities and communications industries. Primary competitors include ERSI, GE Smallworld, Bentley Systems, Axium, Aspen Technology, MWH Soft, and a wide variety of smaller companies. SG&I had revenue of $450 million in 2009.

In recent years Intergraph has restructured its business to be more about vertical solutions for specific businesses as opposed to offering broad-based horizontal environments. Its SmartPlant suite, for example, relies on a database backbone from Oracle, Microsoft, or IBM instead of providing its own.

Hexagon believes it has significantly expanded its market by acquiring Intergraph. (Image courtesy Hexagon AB)

Hexagon has pursued a more horizontal strategy with its measurement tools, but intends to use its newfound synergy to create custom solutions for specific industry applications, such as data capture and processing for bridge analysis. 3D is especially important to Hexagon, as well as the ability to constantly update and improve models.

When the deal closes later this year, Intergraph will operate as a separate Hexagon division, continuing to use Intergraph name and branding. Because Intergraph has sensitive federal contracts in the US, the deal with be structured to include an independent subsidiary for Intergraph’s federal and classified business, controlled by a US-approved special proxy board of outside directors controlling all operations of the business. The appointed directors are required to be independent of Intergraph and Hexagon with no prior affiliation to either party and must be approved by the US Defense Security Service (DSS).

The Bentley Angle

There is an interesting side story to this acquisition. Bentley Systems started as a contract developer for Intergraph, creating a “microcomputer” version of Intergraph’s CAD software for civil engineering and plant design. Intergraph took an initial ownership stake in the company instead of hiring Keith and Barry Bentley as programmers. Today Intergraph still owns approximately 30% of privately held Bentley, whose annual revenues in 2008 topped $500 million.

Over the years Bentley and Intergraph have both cooperated and fought like cats and dogs. Most customers of the Bentley Plant and Infrastructure divisions are also Intergraph customers. Bentley bought Intergraph’s architecture and civil engineering divisions. They have sued and counter-sued each other over the years. Now Hexagon will own that 30% piece of a major thorn in Intergraph’s side. It would not surprise us a bit if they sold it to help pay for the acquisition.

What Do We Think?
If any executives from ESRI, Bentley, or AVEVA were watching Hexagon CEO Ola Rollen’s presentation to analysts this morning, they must have reached for the antacids before he finished. He waxed enthusiastic about the market disruptions his now-doubled company intends to produce by marrying terabytes of constantly updated point cloud data into the original 3D engineering model. Instead of only using a laser scanner as a point solution for specific tasks, the marriage of scan data and CAD makes Hexagon solutions a friend of the asset from initial design to decommission. In SG&I the merger of point clouds and GIS offers the possibilities of preemptive and corrective activities for gas pipelines, Internet glass fiber lines, rail lines and—can one dare to dream—deep water oil rigs.

Hexagon sees the union of its existing measurement tools and Intergraph's design and operations software as a perfect match. (Image courtesy Hexagon AB)

Others in the industry have talked about the marriage of point cloud and visualization tools before, but all previous efforts have been partnerships where each party was more interested in their own products than the synergistic possibilities. One team, one salesman to call, and one neck to choke gives this new venture a big head start.

The last time somebody spent $2 billion in geospatial technology was when AOL bought MapQuest. That deal was about eyeballs for advertisers; Hexagon is spending $2 billion to reinvent the future of creating and deploying capital assets and networks.