Fanaticism consists in redoubling your efforts when you have forgotten your aim – George Santiago

 

 

Tough economic times create strange bedfellows. Does one need to purchase a technology, with its attendant costs and complications, when a lease or partner relationship would suffice? Do complimentary technologies and markets provide a return greater than the sum of the parts – or is the result characterized as “subtraction by addition?”

 

 EMF believes that embedded consolidation through acquisition will be the norm over the next few years as roll backs in DoD discretionary funding impact the larger purchasers.

 

 Let’s look to four recent acquisitions with an eye on compatibility, growth potential and whether there is a measurable outcome. Is this a trend, a lifeline or a passing strategic initiative – you decide.

 

 These include:

 

• IBM Rational buys Telelogic
• Intel buys Wind River Systems
• Cavium acquires MontaVista
• Artisan acquires Aonix

 

 

IBM Rational buys Telelogic

 

Recently IBM Rational added Telelogic to their comprehensive product lines and markets. We reported it as the Great Train Robbery of 2007. For around $800 million, IBM became the most capable and effective organization in the embedded industry, bringing with it the ability to link IT and embedded technologies under the rubric they call “smart devices”.

 

• Telelogic (along with the I-Logix acquisition) products have particular strength in software and systems development (in particular Rhapsody), requirements management (DOORS), and enterprise architecture. Their reputation in automotive, telecom/datacom and aerospace and defense systems development is outstanding
• IBM Rational brings IT development strengths to the partnership in addition to Rational Development Suite, DoDAF and MoDAF architecture capabilities as well as an impressive and unique communication infrastructure for cooperative development and management (JAZZ)
• This combination of capabilities gave IBM the ability to integrate many embedded tools within their Model Driven Development (MDD) thereby expanding the marketplace for other embedded vendors.
• IBM Rational acquired some of the best systems engineering talent in the industry – and a senior VP that is revolutionizing the embedded industry by organizing around markets rather than products.

 

How has this worked out for IBM? In 2009, which was admittedly an economically troubling year, Telelogic revenue contributions nearly tripled. EMF calls this acquisition multiplication by addition.

 

Intel buys Wind River Systems

 

Did either of them think through their respective channel strategies? Will Freescale users convert to Intel – or will there be a sales pushback?

 

So what’s in it for Intel and why did Wind River bail out so easily? Let’s look at the facts:

 

• Intel doesn’t need the additional $300 million on their balance sheet
• Wind River has been losing market share for some time now and their “subscription model” (which they have abandoned) cost them dearly in the mil/aero marketplace and allowed Green Hills and LynuxWorks to significantly underbid them
• Rob Davidson, Wind River’s VP of A&D, has publicly stated (at an Intel sponsored event no less) “let me make it clear that Wind River is a Freescale company” since 85% of Wind River’s military sales are Freescale-based
• Intel, notwithstanding their successes, is facing considerable competition from ARM and FPGA vendors – particularly Xilinx
• The Mil/Aero market and the primes that spend the most on embedded technologies and sub-systems are decidedly moving to a “software centric” purchasing model

 

Truth be told – both Intel and Wind River are missing the emergence of an embedded market that will soon overshadow the rest of the marketplace. It involves several components – none of which are within the new Intel’s capabilities.

 

• Systems development – with C and C++ developers working simultaneously on the same development
• Unique problems associated with systems-within-systems developments and long term support of such
• The new era of “Smart Devices” – the merging of IT database capabilities securely communicating with intelligent embedded devices

 

So, how will this work out? From Intel’s point they have really nothing to lose. They bought Wind River at a somewhat generous revenue multiple, but will get that back in a few years, even if Wind River continues to lose market share. Wind River’s legacy revenues in telecom and mil/aero will continue to fill Intel’s coffers.

 

There is a chance that Intel will be able to cut into Freescale markets and pick up new chip revenues. However they have a terrible record when it comes to successful acquisitions. Wind River’s global distribution agreement with Kontron for VxWorks and Wind River Linux is an example of why Intel will make back their investment.

 

EMF rates this “neutral”. Whereas mission critical applications are a fraction of broader embedded sales, the lack of a competent systems capability will be a drag on future expansion opportunities.

 

Cavium acquires MontaVista

 

Here we have a chip company acquiring an established Linux market leader. MontaVista is a major driving force in the embedded Linux marketplace.

 

Fifty percent of the current Linux marketplace is for in-house, or what EMF calls Roll Your Own (RYO) Linux – as distinct from commercial Linux offerings. EMF research has shown, year-over-year, that commercial Linux products produce a superior ROI to RYO Linux. The commercial Linux market opportunity would be enhanced if commercial Linux products were able to rescue RYO developments that are failing or reach a stand-still position. MontaVista is the first commercial Linux provider to provide such a solution.

 

By having Cavium’s resources behind them, MontaVista is in a commanding position to maintain their advantage over Blue Cat and Wind River Linux initiatives.

 

EMF believes that this acquisition is an excellent one for the following reasons:

 

• Acquisition gives Cavium multiple revenue account opportunities. One by winning the processor design, two by selling SW and services during the design phase, and three by generating revenue in software and services even if they lose the design
• Cavium’s 140-2 security certification makes MontaVista the only embedded OS vendor that has this important security capability
• The investment of a public company like Cavium in MontaVista adds stability to the embedded Linux market.
• Cavium has a history of delivering solutions that work with other company’s processors.
• MontaVista should be able to invest in more multi-core and virtualization technologies. While this benefits Cavium, it also benefits all of their semi partners with multi-core processors. Another potential win-win.

 

 

Embedded Darwin Awards

 

One of my favorite readings is from the book The Darwin Awards which reports on those whose carelessness and ignorance contributed to their early demise thereby removing them from the genetic pool. Quoting from the 2008 edition:

 

“The Darwin Awards celebrates those who have dived headfirst into the shallow end of the gene pool. From offering a beer to a bear to self-testing a Taser to jumping off a drawbridge on a bike, The Darwin Awards Next Evolution honors these macabre and entertaining feats of hapless misjudgment”

 

The following example might have earned at least an “Honorable Mention” if the book carried embedded technologies as a subtopic. 

 

Artisan acquires Aonix

 

This to EMF is one of the stranger acquisitions of recent memory. Take one struggling company attempting to climb out of the shadow of IBM Rational’s MDD capabilities acquiring a company that has been in free-fall for the past four years in order to gain a marginal Real-time Java capability. Some may remember that 5 years ago RT Java was forecast to displace C++ for military applications in order to permit software to inter-operate across different hardware systems. Fast forward to today and C++ is more entrenched than is Java. So buying Aonix to gain access to a Java capability (that is competing directly with IBM) that is readily available for licensing is like searching for a wife at a brothel – too expensive (it’s cheaper to rent) and history suggests that it won’t provide a long term benefit.

 

Someone should have asked Artisan if they knew the difference between Santa Claus and the need for RT Java (the answer is that there really is a Santa Claus) before they made the acquisition.

 

To add to their pain is the re-branding of the combined companies to be called Atego (this makes sense to change the Aonix name – but the Artisan name as well?). This is the 3^rd acquisition in the past year and a half for the management bought-out Artisan enterprise.

 

So why did this happen – and to whose benefit is the establishment of Atego?

 

EMF might accept the argument that a vastly superior management team could make a difference by integrating the companies – yet the Aonix component remains under the control of the management team that ignored market realities and caused Aonix’ decline.

 

The Artisan folks are not stupid people – misguided perhaps. EMF suspects that the investment bankers at risk for each of the enterprises came together to attempt to minimize risk.

 

If so, perhaps these bankers might have followed Warren Buffett’s admonition “When management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it’s the reputation of the business that remains intact.”

 

We are not sure that Buffett would characterize Artisan’s management as brilliant.

 

File under “assured mutual destruction.”

 

When will the next shoe fall? 

 

The Aerospace and Defense Industries of the United States are poised to undergo one of the most significant changes since the end of the Cold War, perhaps the most significant since World War II.  These impacts will reach down into the value chain, in some cases devastating naive second and third tier vendors as major primes shift financial challenges to their vendors.

 

These third tier vendors constitute the embedded marketplace.

 

One might expect that in a market contraction, companies would seek to outsource more seeking lower costs.  We think this will happen for some defense firms, but we believe that many will resist it.  The largest contractors have been formed by merger and acquisition activity.   In many cases, large fixed costs have been merged on corporate balance sheets and are being depreciated.  Outsourcing might require significant write downs for post-merger balance sheets.

 

EMF expects to see a necessary consolidation of vendor offerings as falling revenues will be stabilized by acquisitions – acquisitions that might be found at bargain prices.

 

EMF considers the usual suspects in its published research.