Xirgo Technologies: From Product to Platform

As technologies rapidly evolve, the potential of the Industrial Internet of Things (IIoT) is drawing significant interest among investors. Successful IIoT implementations typically drive measurable results in many forms by creating smarter, more connected industrial processes.  

In Private Equity and IIoT: Finding the Best Fit, Harris Williams senior bankers explored opportunities for private equity in five specific segments of the IIoT space. In Sensing Opportunity: Building a Marquee Industrial Sensor Company, our bankers discussed how investors can assess potential acquisitions in the sensor and infrastructure segment, which includes devices fundamental to the IIoT. In this article, we take a deeper look at Xirgo—which we recently advised on its sale to Sensata Technologies Inc.—and how investors can create similar marquee companies that will generate optimal interest as the IIoT sector continues to develop. 

IIoT Evolution

IIoT solutions typically include multiple components: sensors, communication/connectivity (gateway solutions), data analytics, and software. The value proposition is simple: By collecting, communicating, aggregating, analyzing, and transforming data into usable information on industrial processes and assets in real-time, these solutions can dramatically reduce downtime, inefficiency, and suboptimal performance. It all adds up to reduced cost and improved performance for a host of companies across industrial sectors.

The value created at this confluence of technology, connectivity, and software is driving substantial sector growth. Businesses have long wanted better visibility into assets to increase productivity and utilization. The power of technology (sensors, connectivity, and machine learning) now makes that possible. “Management can leverage sensors, Wi-Fi/cellular connectivity, cloud/edge computing power, and artificial intelligence in real-time to make decisions that drive performance, cost optimization, and margin improvement,” says Giles Tucker, a managing director in the Harris Williams Industrials Group.  

Companies within the sector are evolving from a focus on components to a focus on solutions. “Until recently, companies that made sensors, for example, were focused on things like product breadth and end market coverage,” says Eric Logue, a managing director in the Harris Williams Industrials Group. “As sensor quality has generally increased while cost has decreased, companies are now integrating disciplines across the technology spectrum into gateway communications and data analytics to create differentiation. Software capabilities are critical to novel end-to-end solutions.”

“We’re turning sensors and the data they produce into information for economic benefit, whether that’s optimizing traffic routes, understanding the efficiency of machinery, optimizing equipment maintenance, or protecting people from their own driving behavior,” adds Andy Leed, a director in the Technology Group.

The Xirgo Opportunity

For investors, the industry’s rapid evolution into broader offerings signals an opportunity to build new platforms that provide comprehensive IIoT solutions. Sensata’s acquisition of Xirgo is an excellent example of such an approach.   

Xirgo is a leading provider of innovative, full-featured, application-specific wireless IIoT communication devices for tracking, monitoring, and protecting remote assets and workers across an array of end markets. HKW acquired Xirgo in 2016. In its ownership tenure, HKW positioned Xirgo well for growth and value generation upon exit.

Xirgo was founded on technology that was purpose-built and targeted. HKW saw the value in transitioning Xirgo from a hardware company into a full-stack integrated sensor, software, and communications platform to support future innovation. “This is a great example of a private equity fund that found a company that had strong secular trends behind it and good technology,” highlights Tucker. “Once acquired, Xirgo was able to create a highly differentiated solution that others couldn’t replicate.”

Since 2006, Xirgo has provided wireless communication devices for a wide range of applications. It now also delivers customized and modular device and cloud solutions and has added full-stack sensing applications to its portfolio, along with remote system health, diagnostics, and security monitoring.

Sensata is a leading industrial technology company that develops sensors, sensor-based solutions, including controllers and software, and other mission-critical products to create valuable business insights for customers and end users. The Xirgo acquisition strengthens Sensata’s position as a data insight provider across transportation and logistics end markets. Xirgo offers Sensata a broad array of complementary capabilities that will significantly accelerate Sensata’s growth in smart and connected devices and the IIoT. 

Tucker emphasizes that Sensata is an outstanding sensor company that equips assets from automobiles to heavy machinery within a local area network. “Xirgo gave them the ability to take the data communicated through IIoT sensors and conduct deep analysis,” he adds. Logue agrees: “Xirgo’s advanced asset tracking and telematics communication solutions, combined with Sensata’s leading sensor portfolio, offer a compelling platform in the rapidly evolving IIoT ecosystem.”

“This transaction highlights the interest from corporate buyers in sectors such as industrial connectivity and data analytics, which offer significant growth potential and are early in the adoption curve,” says Leed. “The potential market opportunity for machine learning and predictive maintenance is massive and very much in its infancy,” adds Chris Toussaint, a vice president in the Industrials Group.

Click here to read a brief Q&A with Xirgo’s co-founder and CEO, Shawn Aleman.

Strategy in Action

Reflecting on Xirgo’s success and that of other businesses Harris Williams has advised in this space, our bankers offer the following three strategies that can help investors build similar value in newly acquired companies in this segment.

Focus on niche leadership with a clear value proposition and technology differentiation.

Given where we are in the technology and adoption curve within IIoT, it is not uncommon to see the most attractive and fast-growing companies serving what would usually be considered unattractive sectors (e.g., oil & gas or automotive). It is often within these sectors where the value proposition for IIoT solutions is the greatest and most apparent. Further, it is not uncommon to see a moderate degree of customer concentration with IIoT companies. Large customers with extensive installations demonstrate the ability to drive scale and show a leadership position in highly customized solutions. They also help a company to transition to a recurring revenue model. Recurring revenue models, such as Xirgo’s leasing-based revenue model, tend to command revenue-based multiples, which can increase valuations over a traditional hardware-based revenue model. They also smooth the revenue profile, can be structured to increase total lifetime customer value, and often lead to greater customer stickiness.
 

Broaden capabilities and seek diversification opportunities.

There are multiple opportunities to expand into differentiated end markets with minimal current penetration. Xirgo’s technology, for example, is well suited for markets that demand operations in harsh environments. It’s a leader in applications that require customized solutions with high reliability. Xirgo expanded capabilities through two acquisitions: one primarily to deepen software capabilities and the other to deepen data capture and insight capabilities. “Xirgo continues to broaden the spectrum of its sensing and data insight capabilities to deliver the richest, most usable data insights to a growing base of applications and end markets,” says Toussaint. “The add-on Xirgo did in Lithuania brought software engineering in-house and opened up the European market. Its second acquisition greatly expanded Xirgo’s capabilities within driver and cargo condition monitoring and control.”
 

Recognize that the company doesn’t have to be a software business to generate significant value from its software capability.

Xirgo is a prime example of such a company. “While the majority of Xirgo’s revenue historically came from device sales, the company’s underlying technology differentiation is grounded in its software and device integration capabilities,” says Leed.Xirgo’s firmware, middleware, and cloud-based device management solutions are the critical enablers that allow the company’s telematic gateway solutions to deliver valuable data insights to its end users.”

For Xirgo, and parent HKW, its investment in capability expansion and diversification made it highly attractive. Sensata purchased Xirgo for $400 million, or approximately 16x 2021 EBITDA.

Conclusion

There is significant technological advancement occurring at the confluence of sensors, connectivity, software, and machine learning. The visibility and control made possible by the IIoT adds up to dollars and cents for a wide range of businesses, whether that value comes in the form of efficiency, higher quality, less waste, or greater capacity.

Tucker concludes: “As the story of Xirgo makes clear, buyers are actively searching for innovative businesses that can bring new IIoT capabilities to the table and help businesses solve even more challenges. We expect strong, continued M&A interest as the market evolves and participants realize the power of IIot.”

Five Minutes with Xirgo’s CEO

Tucker, Logue, and Toussaint spoke with Xirgo’s co-founder and CEO, Shawn Aleman, to get his perspective on how Xirgo has grown to be at the forefront of IIoT innovation. 

Q. How have things changed since Xirgo was launched? “Back then there were essentially no edge devices. And, there wasn’t much requirement for real-time data insights. Now it’s becoming more and more prevalent to have decisions made on the edge device itself. A lot of heavy lifting is done on the device.”

Q. What are some of the things edge computing enables? “Driver distraction warnings. This has to be done on the device itself. You can’t send a video stream of the driver to the cloud, make that determination on the cloud, and then send it back to the device. If the driver looks down, we need to immediately detect that and send an audible sound. Lane departure, street sign recognition, these are all things that require processing on the device itself through machine learning.”

Q: What differentiates Xirgo from the competition? “The company’s software and focus on selling services. Even though we sell the hardware, we are a software company at our core. The secret sauce is our firmware, middleware , and cloud applications that enableour hardware, leveraging what we know about cellular connectivity, vehicle bus communications, and other variables. All of the assets have some sort of control units. You need to be able to communicate to those control units. And that’s where we come in.”

Industrial companies represent the backbone of the manufacturing economy, and the Harris Williams Industrials Group has a long-standing heritage of providing superior-quality advisory services to a spectrum of growth and manufacturing businesses. We’ve represented companies in a variety of industries that produce niche products with leading market positions and technologies.

The Harris Williams Technology Group advises leading private and public companies, founders, and private equity, growth equity, and venture capital firms on mergers and acquisitions and capital-raising transactions worldwide. The Technology Group has deep domain expertise in software and technology-enabled services and dedicated focus areas across a variety of vertical software applications and end markets. 

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Published June 2021
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