Seen the Charmin Mega Roll? Four times the size of the average toilet paper roll, it showed up in stores earlier this year. Few people gave much thought to the new logo or dancing bear on the packaging. But not Robert Dixon. The Procter & Gamble Co. (PG) vice-president helps coordinate how the company makes changes in the art on its products. With 300 P&G brands, from Charmin to Tide, that adds up to thousands of tweaks a year. The solution? Software from UGS Corp. that lets designers, execs, and others collaborate easily. Dixon says the technology allows P&G to handle 25% more art changes than before, with the same staff. P&G also has used the software to develop drugs and design the manufacturing line for its diapers. "Innovation is the lifeblood of our company, and UGS is one of the strategic platforms in our innovation," says Dixon.
UGS may be the most promising software company you've never heard of. Spun out of ailing Electronic Data Systems Corp. (EDS) in May, 2004, in what was then the largest private equity investment in the technology industry, UGS has been on a tear. It's on track to surpass $1 billion in sales and $200 million in cash from operations this year, although heavy interest and amortization expenses will keep net income in the red until at least the fourth quarter. UGS is the leader in the fastest-growing segment of the corporate software market: product life-cycle management (PLM). Such software lets people coordinate their work, whether they're in San Francisco or Shanghai. "You can tie together companies and tap the intellectual resources of China or India," says UGS Chief Executive Officer Anthony J. Affuso.
It works like this. Click an icon on any PC loaded with UGS software, and you're ushered into a digital forum, with a three-dimensional workspace and folders of information along one side. Marketers can post ideas for new products. Engineers can design 3D prototypes. And manufacturers can lay out a new assembly line, complete with every piece of equipment necessary. Tens of thousands of people can participate on a single project from anywhere there's a Web connection.
General Motors Corp. (GM) uses UGS programs to tie together 19 design centers on six continents. The auto giant, which designed the latest Cadillac CTS and Hummer H3 with the software, says it has saved $75 million in materials alone by replacing physical car mock-ups with digital versions. "It has expanded our horizons," says GM director Diane Jurgens.
Affuso ran the business while it was inside EDS, but he has stepped on the gas pedal since the buyout. He revamped the UGS management team, using stock options to lure new heads of marketing, sales, and legal affairs. He's expanding relationships with blue-chip customers, including GM and Lockheed Martin Corp. (LMT). And he's striking alliances with tech service companies, including Hewlett-Packard Co. (HPQ) and Accenture, to help sell UGS software to more industries.
An engineer who grew up on a farm in New York's Hudson Valley, Affuso has grand ambitions for the company. He wants sales to reach $3 billion in five years. And he's making quick progress: UGS just landed a contract with Korea's LG Electronics, BusinessWeek has learned.
All this has Affuso eyeing an initial public offering. He says the company is interviewing investment bankers. Although he won't comment on timing, analysts say an offering could happen by yearend. An IPO is key because it would give the company the currency to make more acquisitions. And bankers think investors would clamor for the offering, which would be one of the largest software IPOS ever. "The banking interest in this transaction will be second only to Google (GOOG)," says M. Benjamin Howe, managing partner of America's Growth Capital LLC, a Boston investment bank.
UGS investors are riveted, too. Buyout firms Silver Lake Partners, Bain Capital, and Warburg Pincus paid $2.05 billion for the company, half debt and half equity. If UGS continues its current growth and gets an average sales multiple of 2.5, it'll be worth just shy of $3 billion. Each firm stands to nearly double its $350 million investment. "It's one of those things private equity guys dream about," says David Roux, a Silver Lake managing director.
The UGS deal is one sign of why private equity companies are moving into technology. Traditionally, buyout shops shied away from the volatile industry. But as tech has matured and banks have grown more comfortable lending money for tech buyouts, deals have been on the rise. The first quarter saw $19 billion in technology buyouts, up from $4 billion in the year-ago period, according to researcher Dealogic.
UGS drew attention because it's the top player in the brightest spot in corporate software. Last year, the $5.7 billion PLM market grew 14%, faster than any other segment, says AMR Research Inc. UGS was the No. 1 player last year, with a 7.9% share, followed by Germany's SAP (SAP) at 6.7% and France's Dassault Systèmes (DASTY) at 5.7%. AMR analyst Kevin O'Marah says UGS has an edge over SAP and Dassault since it is making more progress expanding beyond aerospace and autos, into consumer goods and technology. "UGS is doing the right things to make it spiral positively," he says.
The battle for this market is shaping up into a trash-talking dogfight. In April, UGS borrowed $228 million to purchase Tecnomatix Technologies Ltd., which makes software to let companies design and analyze their manufacturing. On May 17, Dassault struck back by snapping up simulation-software maker ABAQUS Inc. for $413 million. Dassault CEO Bernard Charles admits UGS is a strong rival but says Dassault has better technology that will win the day. "Last year we took 180 of their customers," he says. "It's going to be a fun game." UGS says 96% of its clients renew their contracts for maintenance and other services.
Incumbent enterprise application makers such as SAP and Oracle Corp. (ORCL) present another major challenge (ORCL). Both of these giants are moving aggressively into the PLM market. Nils Herzberg, SAP's senior vice-president for manufacturing industries, says that its technology is appealing because it can more easily connect to SAP's core run-the-business applications. "Our solution is superior to UGS's," he says.
Affuso says he doesn't worry too much about what his competitors are doing. Instead, he concentrates on satisfying customers and relies on the work ethic he learned on the family farm. "I was always tinkering with the equipment, trying to do things faster, better," he recalls. Affuso is worlds away from the farm, but he'll be doing plenty of tinkering in the next few years to make UGS faster and better.
By Spencer E. Ante in New York