Industrial Technology?

August 2019 Investment Banking

Convergence Amid a Shifting Industrial Landscape

In This Report What is industrial technology?

Convergence trends and a roadmap for Industrial Technology value creation

Identifying value drivers in the industrial technology sector

Industrial technology public market update CONTENTS

William Blair Insight 1

William Blair Industrial Technology Banking Franchise 7

Industrial Technology Market Update 11

WILLIAM BLAIR INSIGHT

Convergence Amid a Shifting Landscape

Advancements in theses as they identify opportunities created an opening for suppliers to technology are powering to transform their industries. look at acquiring businesses they wouldn’t have considered in the past the advent of fully What Is Industrial Technology? because of the potential for major connected manufacturing To understand what defines industrial channel conflict. environments and technology, it is important to begin by understanding what it is not. The The Industrial Technology Stack transforming business sector isn’t simply industrial One of the most valuable aspects of an models throughout the businesses with engineered products, industrial technology business is its industrial sector. significant aftermarket sales, growth ability to provide solutions throughout that far exceeds the rate of GDP the “technology stack” through More recently, automation has defined expansion, and/or high-profit integration of software and data productivity advancements in the margins. While industrial technology analytics into processes that enable manufacturing sector. Developments companies generally display these real-time decision-making across the in fundamental technologies have also characteristics, we believe that enterprise both inter- and intra- brought lower production cost, high- industrial technology companies are factory. The industrial technology performance sensing, connectivity, defined by the benefits that their stack is the collection of software and and data processing to the supply solutions enable in terms of providing hardware required to collect data, chain and manufacturing sector—all actionable insights, connecting extract useful information, and helping transform the way businesses hardware, automating process, or provide actionable insights into the operate and essentially “closing the leveraging data to generate revenue- manufacturing environment. The top loop” across the entire enterprise— producing insights. This includes all of of the stack is typically segmented into from manufacturing to delivery to the the sensors, electronics, software, and “information technology” (IT) end user. services that enable businesses to functions controlled at the transform stand-alone hardware into corporate/enterprise level and Lines that once delineated segments of fully automated solutions. “operational technologies” (OT) the manufacturing environment have designed to control production disappeared as devices on the plant Traditional industrial business models processes at the plant level. In most floor provide real-time visibility to the have focused on selling hardware organizations, those individuals executive suite. This convergence is based on traditional value drivers responsible for purchasing and vendor allowing traditional manufacturing such as quality, price, and lead times. selection processes varied by the IT businesses to embrace new business For most, the business model was and OT environment. This separation models—opening the door to new focused on driving high aftermarket created a natural choke point where revenue streams from software, content in hardware rather than a data and information either remained analytics, and services—that focus on solution-based approach that fixed a at the factory or was distributed to delivering value procured through specific pain point for a customer. senior management as a report recurring operating expenditures as New technologies have enabled produced on a periodic basis. opposed to traditional price-times- cheaper computing, greater volume purchase-order economics. connectivity, and more sophisticated sensing into this environment— These trends and others are shaping enabling new business models and strategic roadmaps and acquisition opportunities to capture additional strategies throughout the industrial value. Moreover, the erosion of the technology sector. In this report, we value (maybe more aptly described as will examine what these changes protected/proprietary go-to-market mean and how investors should frame channels) created by the traditional their decision-making and acquisition exclusive distributor/rep network has

Industrial Technology Stack

The development of the Industrial process optimization, and, ultimately, creates opportunities for Internet of Things (IIoT) has occurred new business models for suppliers performance-based contract in parallel to the traditional designed to transform one-time structuring and other creative pricing automation stack and is also hardware sales into recurring revenue models. For example, companies can transforming the way manufacturing streams by selling a longer-term now sell machine uptime or monetize businesses operate by bypassing value proposition. the insights gleaned from a broad barriers between IT, OT, and the installed base. This enables hybrid factory floor. Devices on the plant Business Models Are Evolving business models that combine one- floor (e.g., equipment, machinery, Convergence within the industrial time capex purchases with ongoing controls, etc.) can now connect technology stack has also created service contracts that drive high- directly to enterprise-wide digital powerful new opportunities for margin, recurring periodic sales, as platforms that have access to large industrial companies to transform well as opportunities to foster direct- amounts of data from a multitude of business models. In the past, the basic to-consumer interaction, building devices and processes across an model for a hardware company was to deeper brand loyalty and engagement. enterprise. These systems enable sell the equipment and then sell the businesses to optimize production and aftermarket parts once the original We believe that an industrial supply chain processes in near real system needed repairs or upkeep. businesses’ ability to transform their time, leveraging emerging artificial Now that sensing and connectivity revenue mix from one-time product intelligence and analytics software. By systems are embedded in many sales is limited by their ability to providing an enterprise-level view of products, companies can offer capture data and analyze the operations, these digital platforms predictive maintenance, performance performance of their systems in the enable better decision-making, optimization, and other services. This field. Acting as a steward of the William Blair 2

WILLIAM BLAIR INSIGHT

Transformation of Industrial Business Models

1 2 3 4 5

Traditional Hardware Aftermarket Sales Remote/Monitored “Product as a Service” “Value as a Service” Sales Services (PaaS) (VaaS)

Revenue  Hardware focused  Hardware sale with  Leverage sensors and  Periodic payment for  Potential to capture value Generation aftermarket parts / connectivity to provide products and uptime of all ROI and maintain  Limited ability to services remote monitoring ownership of data understand ROI  Per use contracts  Razorblade model  Beginning of predictive  Cost-plus pricing model  Seller may own product machines (similar to a rental car)  Hybrid model – Capex purchase and ongoing service contract

Capex Opex Examples The first The next frontier frontier

production data generated by the control the manufacturing process, more cost-effective solutions while company’s systems may enable a but because the hardware provider providing enhanced capabilities. For business to generate new service- lacked visibility of the data necessary example, a simple valve used in an oil based revenue streams. These to create a record of its and gas application will require additional services could include hardware’s performance. external input to control flow rates, anything from basic services— automatic shutdown, and other such as remote monitoring and Convergence Trends and a functions. However, integrating predictive maintenance—to Roadmap for Value Creation metering and connectivity into the more advanced software to help There are three key convergence valve allows a valve manufacturer to customers optimize their overall trends taking place that will create offer monitoring, predictive process performance— opportunities for manufacturers to maintenance, and a host of other artificial intelligence. differentiate themselves, expand use- solutions. As manufacturers work to cases for their product offerings, and create closed loops at the facility level, Ultimately, we believe there is a implement new business models to this transition is creating massive longer-term path for some businesses capture value. We believe that the market opportunities for companies to develop and implement even more industrial technology stack provides a whose solutions build on this trend by intriguing business models, such as framework for thinking about how capturing data from machinery and “Value as a Service” (VaaS). Under this these convergence trends will define turning it into actionable intelligence. model, the hardware provider retains investment opportunities. ownership of the equipment and data From an M&A perspective, we believe it generates and charges a fee based 1. Higher IP Hardware and that hardware suppliers will lead the directly on the returns that it is able to Connected Devices – Industrial way in providing connected smart provide to customers. Historically, product manufacturers are working to systems, largely because these these ROI-based payment structures incorporate sensors and connectivity suppliers typically have the customer wouldn’t have been possible, not solutions into their products in an or end-user relationships, which are because the hardware provider didn’t effort to offer scalable, reliable, and critical in enabling these

transformations—simply put there is providers for better visibility and geographic and end-market exposure. no established trust that the IT suite shorter supply chains. We believe that the systems will make the best decisions for the integration market is ripe for factory floor. Identifying “passive” 3. Progression of Services Across consolidation as financial investors traditional industrial hardware the Stack – The proliferation of new seek to play the macro trends without solutions that can be fully integrated technology in the manufacturing making bets on specific technologies. into larger operations, but controlled environment has widened the skills gap between the workers on the floor and monitored externally, is an ideal Identifying Value Drivers in the and the knowledge and training starting point for investors looking to Industrial Technology Sector enter the industrial technology sector. required to integrate, operate, and Drawing on our understanding These businesses typically have large maintain new hardware, software, and of the convergence trends shaping installed bases that can be retrofitted systems. This gap has created the the industrial technology sector, to add sensing and connectivity opening for a new ecosystem of we have developed a framework for solutions and generate new value specialized engineering firms to help identifying transformative propositions for their existing with the integration and maintenance investment opportunities. customers. In addition, suppliers of of the key aspects of the factory floor. sensing and connectivity hardware Systems integrators generally focus on Industry “N.0” Framework to should seek to identify niche two distinct areas. Control systems Identify Value: applications where the addition of integration firms focus on the Investors seeking investments in the their technology could create new integration of informational industrial technology sector can capabilities and efficiencies as part of technology (IT) and plant-level leverage the Industry N.0 framework an overall production process. operational technology (OT) to assess whether a business either a) systems—the top of the stack—to enables the connectivity and sensing 2. Software-Enhanced Processes – capabilities required in an Industry The cost of computing power and allow manufacturers to be more agile in how they use data and more fully 4.0 environment or b) is capable of connectivity solutions has declined incorporating such enabling exponentially, enabling the optimize their processes. This will lead to improvements in calculating technologies to make the proliferation of devices capable of transformation directly. Industry N.0 generating production data. This, in key performance indicators, tracking asset performance, and optimizing is an allusion to the proliferation of turn, has created new demands on the Fourth Industrial Revolution that industrial businesses as they attempt processes throughout the enterprise. The second group of integrators focus has frequently been referenced in the to process this data and turn it into popular press. We have experienced actionable insights to improve their on the design and integration of automated production lines—the four major technological upheavals overall processes. This has resulted in over the past 150 years: a fundamental shift in how industrial bottom of the stack—from robotic companies think about their digital cells to logistics facilities on the • Industry 1.0 – Steam capabilities and how they can leverage supply chain. Powered Manufacturing software to improve demand The integration market is highly • Industry 2.0 – Electrically forecasting and operational efficiency. fragmented with a few larger firms Powered Mass Production This convergence of software into the focused on broader applications and industrial sector has had a hundreds of smaller firms specializing • Industry 3.0 – Computer transformative effect on key in one market and/or one application. Powered Automation subsectors such as industrial IoT The best-positioned firms have • Industry 4.0 – Internet applications for predictive identified ways to create streamlined of Things maintenance, connected warehouses processes to replicate design work on for faster fill times, and logistics new projects, adhere to strict project bidding guidelines, and diversify their William Blair 4

WILLIAM BLAIR INSIGHT

Industry “N.0” Framework Capex Focused 6 - 9x Median 9 - 12x Opex Focused 12 - 14x + Industry 2.0 Industry 3.0 Industry 4.0 Hardware focus requiring on-site Addition of remote monitoring and services Real-time analytics dramatically expands manual labor to monitor and control significantly enhances productivity value proposition to customer processes

Remote Monitoring Automated Cloud-based & Control Process Controls Analytics

Technology Framework Analog Integrated Instruments Instruments Instruments Controller Controller

Data Data Sensors Sensors

Business  Sale of individual units with  Focus on adding sensing capabilities to  Paradigm shift as businesses leverage ModelFocus potential for aftermarket drive automation and improve installed base and transition to selling replacement productivity through enhanced uptime analytics and a service based model  Limited service network for  Focus on utilizing data internally to  Ability to provide fully integrated realizing aftermarket sales improve performance solution is key to leveraging installed base and transitioning customers to new service models

We believe businesses that can network, to replace failing systems or customers’ overall process. Industry leverage their product offering and/or request spare parts. This limits a 3.0 companies use this data to deliver installed base to provide new and company’s ability to drive aftermarket higher uptime, predictive differentiated solutions for their sales, putting the company at risk of maintenance, and failure monitoring customers along these dimensions replacement by higher-value products as a means to drive higher-margin (i.e., transform from Industry 2.0 → or systems with more compelling sales and higher-visibility aftermarket Industry 3.0 → Industry 4.0) have the value propositions. These businesses services and spare parts. greatest value-accretion are most successful when the opportunities. This progression has a company sells mission-critical systems Industry 4.0: There are very few direct correlation to the valuation into old economy industries (e.g., businesses operating today in the these businesses are typically worth. infrastructure, government, etc.) and Industry 4.0 framework. These The following provides an overview of is the entrenched player in the space. businesses are leveraging hardware the profile of typical businesses with high levels of intellectual Industry 3.0: High-quality industrial operating in each of these paradigms. property to derive actionable insights businesses operate in the Industry 3.0 and real-time optimization of their Industry 2.0: The bulk of industrial framework. They understand the products. These businesses are able to businesses tend to operate in the importance of adding connectivity, capitalize on opportunities to expand Industry 2.0 framework. This model is sensing, and control features to their their high-margin (90%-plus gross designed to drive the sale of hardware products as a value enhancer for their margin), subscription-based offerings and replacement parts on a purchase- customers. They use hardware that support safety and automation of order-by-purchase-order basis. These characterized by higher levels of customer processes, including remote businesses are heavily reliant on their intellectual property to provide data monitoring and control, emergency customers returning to them, either to customers about the product’s shutdown, and asset tracking. For directly or through a third-party performance as part of their these companies, having ownership of

the data generated by the hardware incorporated substantial software- and processes is often critical to and subscription-based revenue driving full value potential. streams into their solution offerings. These figures vary depending on how Typical Characteristics of Leading well-positioned the company’s Industrial Technology Companies business model is to capitalize on the The financial profiles of industrial convergence trends that are driving technology companies reflect their much of the industry’s growth and the rapidly growing importance in driving macro tailwinds described above that productivity and profitability are elevating the financial profiles of enhancements for manufacturers. As companies across the industrial recently as 2015, industrial technology sector. technology companies typically generated gross profit margins of To learn more about these and other about 40% and EBITDA margins of trends shaping the deal-making about 20%. Today, those benchmarks landscape in industrial technology, have risen to 50%-plus for gross profit please do not hesitate to contact the margins and 25%-plus for EBITDA William Blair Industrial margins at leading industrial Technology team. technology businesses that have

Industrial Technology Valuation Continuum

William Blair 6

WILLIAM BLAIR INDUSTRIAL TECHNOLOGY BANKING FRANCHISE

William Blair Spotlight on Recent Transactions William Blair • Leading provider of laser measurement and projection systems with Industrial Technology Team applications in healthcare (patient positioning) and industrial production processes Industrial Technology • Diversified market exposure to several highly attractive niche end- North America markets such as radiology, wind energy, aerospace, and composites • The Company’s easy-to-use and reliable product portfolio precisely Corey Ryan meets the requirements of a broad and diversified customer base +1 312 364 8619 consisting of many global OEMs [email protected] • Based in Lüneburg, Germany, LAP maintains a global and commercially oriented organization with a sales force across the U.S., Scott Mattson Europe, and Asia +1 617 235 7532 [email protected]

• Based in Davenport, IA, and with operations across the U.S., Japan, Matt Zimmer and Mexico, Genesis is an industry-leading integrator of robotic systems +1 312 801 7821 [email protected] • 35 years of operations as a leading independent provider, Genesis has completed 4,900+ robotic integrations and has 30+ patents Michael Basil • One-stop-shop, full solutions provider supported by the company’s +1 312 364 8902 vertically integrated tooling, design for manufacturing, and assembly operations [email protected] Ryan Foley +1 312 364 8912 • Global industry leader in mission-critical powering solutions for broadband, telecom and wireless, renewable energy, and industrial [email protected] customers globally Europe • Alpha’s powering solutions comprise systems, software, and services, and are sold across a highly diversified set of networks and Julien Darmon applications, including HFC / fiber, LTE, 5G, fixed wireless, and IoT +44 20 7868 4433 • Alpha has established its position as a trusted solutions provider across a large base of blue-chip customers, such as Comcast, Charter [email protected] Spectrum, Verizon Wireless, and AT&T Philipp Mohr • Alpha is based in Bellingham, Washington, and Burnaby, British Columbia, Canada, with several worldwide locations and has over +49 69 509527 610 1,000 employees [email protected]

Mark Brune +49 69 509527 627 • World leader in mechanical, precision automation, and motion control solutions leveraging industry-leading manufacturing [email protected] capabilities, technology, and proprietary design Uwe Helin • Serves numerous high-growth end-markets, capturing the entire aftermarket generated by its global installed base +49 69 509527 640 • Proprietary, in-house developed software platform drives unique [email protected] design and manufacturing processes that allow for highly customized products, minimal tooling expenses, world-class lead times, and very minimal finished goods inventory • Significant investment in new product development, specifically in the robotics markets, positions the business for substantial growth

William Blair By the Numbers

Drawing on our deep sector expertise and the strength of our relationships with buyers around the world, William Blair 300+ has built a leading industrial technology banking franchise. bankers globally with local Business owners turn to us for outstanding execution for cultural knowledge their M&A and capital raising objectives. Recent transactions include: 600+ M&A transactions since 2014