Introduction

Harris Williams is pleased to present our industrial technology industry update for Q1 2019. This report provides commentary and analysis on current capital market trends and dynamics within the industrial technology space.

Overall, the key trends in the industrial technology space are strongly influenced by the convergence of information technology (IT) and operational technology (OT), ultimately allowing real-time improvements in industrial operations. As an example of this process, we have put a spotlight on the “digital twin” in our Know-How section.

Stock markets and consequently market valuations have declined in the last 2 months due to macro-economic and political reasons. 2019 should hold the opportunity for improvement if political turmoil can be averted.

We hope you find this edition helpful and encourage you to contact us directly if you would like to discuss our perspective on current industry trends or our relevant industry experience.

Industry Events

SPS IPC Drives 2018

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Harris Williams again attended the SPS IPC Drives in Nürnberg, Germany, late last year. “There's a difference between using Industry 4.0 as a buzzword and actually being involved with the companies active in smart production, smart connectivity, etc. The trade fair allows us to talk directly to the decision makers and keep up-to-date with the most recent industry trends,” said Jeffery Perkins, managing director in Harris Williams’ Industrial Group.

 

Coming Up: Trade Fairs 2019

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February/Stuttgart, Germany: The LogiMAT is the largest annual trade fair for intralogistics solutions and process management in Europe.

April/Chicago, Illinois: Held biennial in the United States, Automate is the broadest automation solutions event in North America.

April/Hannover, Germany: The world’s largest industrial trade fair combines a total of six trade shows in one place.

April/Las Vegas, Nevada: ISC West is the largest converged security industry trade show in the U.S.

Let the team know if you will be at one of the conferences and would like to connect.

HW Deal Spotlight: IQMS & Trafficware

screen_shot_2019-01-10_at_10.44.25_am.pngIQMS, Inc., (IQMS) is a leading provider of fully-integrated software solutions that manage and optimize mission-critical operations for manufacturers of all sizes globally. IQMS’ all-in-one software solution digitally connects order processing, scheduling, production, and logistics processes, enabling manufacturers to gain efficiencies across engineering, manufacturing, and business ecosystems.

Harris Williams exclusively advised IQMS, a portfolio company of TCV and Banneker Partners, on its sale to Dassault Systèmes for $425 million.

Read the full press release here.

 

screen_shot_2019-01-10_at_10.45.10_am.pngTrafficware provides a fully integrated, innovative suite of software, Internet of Things (IoT) devices and hardware solutions that provide customers with enhanced mobility and improved safety.  As a company driving innovation in the traffic industry, Trafficware builds traffic management infrastructure for the next generation of Smart Cities, including Connected Vehicle Technology.

Harris Williams exclusively advised Trafficware, a portfolio company of KRG Capital Partners, on its sale to Cubic Corporation for $236 million.

Read the full press release here.

 

Emerging Trends in Advanced Manufacturing

screen_shot_2019-01-10_at_10.48.32_am.pngA recent whitepaper by CB Insights has analyzed 14 of the largest advanced manufacturing trends for 2019, covering a range from Industrial Sensors to the Industrial Blockchain. CB Insights categorized these trends into groups from necessary to experimental.

Those trends that should experience wide-spread industry and customer adoption are Industrial Sensors, Industrial Robots, IIoT Platforms, and Predictive Analytics. CB Insights believes that market participants should have a clear strategy regarding these topics. Others, such as Wearables or Industrial Drones attract media attention, but can be regarded only as “proof-of-concept” for now. Download the full report here.

Real-Time Monitoring is Revolutionizing Manufacturing

Among manufacturers surveyed by a recent study from IQMS, 81 percent reported that real-time monitoring is improving their business. Among others, respondents see improvements of around 50% in both scheduling accuracy and inventory control. One interviewee mentioned the more accurate assessment of established metrics such as OEE, but also remarked that the additional information allows for new strategies and metrics not possible before. Read more here.

Why 2019 will be the Year of the Manufacturing Platform

According to an article published by Forbes, 2019 may turn out to be the rise of the manufacturing platforms. As manufacturing companies have been increasingly separating design and marketing from the actual production process, outsourced production is becoming more feasible: Connected platforms, such as 3D Hubs or Xometry can access the manufacturability and pricing of a product across all network partners instantly, requiring only a CAD file and material selection. Read more here.

Private Equity and IIoT: Finding the Best Fit

Recommended Reading

Due to meteoric growth, the Industrial Internet of Things (IIoT) is attracting strong attention from large corporations and venture capital firms. To date, however, many private equity firms have treaded carefully in the IIoT space due to intimidating valuations, uncertain returns, technical complexity and participation by large strategic acquirers.

This article by Harris Williams identifies five segments that provide a good fit for the private equity model, and three principles that can help investors make the most of the potential within those segments.

Practical Innovation: Tapping into Data Center Growth

As the global economy continues to be driven by everything digital, data is proliferating at an unprecedented rate. As data is produced, it must be sent, stored, secured and processed, all of which is leading to substantial growth in data center construction. In fact, global data center construction is expected to generate revenues of approximately $45 billion by 2023.

In this report, Harris Williams Director Eric Logue and Associate Michael Gessner of the firm’s Industrials Group share their thoughts on where the opportunities are in this growth market for acquirers and investors with industrial expertise.

Know-How: The Digital Twin

Our Know-How section presents one trending strategic concept in the industrial technology space.

screen_shot_2019-01-10_at_10.58.08_am.pngDigital twins are virtual models of physical processes, products, or devices to run simulations before they are built or an update takes place. They allow the user to better understand, predict, and optimize performance through changes in product design before the physical unit or entity is available. Depending on the case, the digital twin mirrors a process or machine, but can also be used at plant level or even mimic entire cities.

With the increasing availability of continuous, high-quality data from IIoT devices, digital twins are becoming more accurate, easier to create and maintain. Artificial intelligence (AI), machine learning, and other advanced technologies can then be used to improve the digital model and actual operations based on the input data provided. With the recurring input from the physical product paired with further application of the digital twin, operations can be improved continuously.

According to Gartner, an estimated 21 billion connected sensors and endpoints will be installed by 2020, resulting in the availability of billions of digital twins. The company predicts that by 2021, 50% of large industrial companies will be using digital twins with those organizations realizing a gain of 10% in effectiveness.

Market forecast

According to a report by WiseGuy Reports, the global digital twin market is forecast to grow to c. $ 18.3bn in 2024 - a CAGR rate of 39.3% over the forecast period from 2017 to 2024. You can find the report here. A similar report from MarketsandMarkets sees a CAGR rate of 37.9% from 2017 to 2023.

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Further Reading

Prepare for the Impact of the Digital Twin - Gartner

Where Do Digital Twins Fit In? – IndustryWeek

Busting the Myth of Digital Twins and Planning Them Realistically - Gartner

A primer on digital twins in the IoT – Bosch

Signals for Strategists - Expecting digital twins – Deloitte

Twins with potential – Siemens

Digital Twin for the Digital Power Plant – GE

Valuation Metrics Overview

Peer group trailing average LTM share price; indexed; Source: FactSet (as of January 7, 2019)

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Due to an underperforming Q4, the 2018 stock market was the worst year in a decade

At least according to one metric, 2018 was the worst year in trading history: As tracked by Deutsche and cited here, 93% of all asset classes were down last year. For comparison: the previous record holder was 1920 – with “only” 84% of asset classes posting negative total returns. According to Quartz, several reasons were responsible for the development: Slowing global growth, a strong dollar, struggling commodities, political turmoil (a potential no-Deal Brexit, US-China trade war, etc.). As can be seen from the chart above, the development did not leave industrial technology stocks unscathed.

However, with the potential of a solution to Brexit and an end to the US-China trade war in the near future, 2019 may turn better than many are currently expecting.

Public Markets | Key Trading Statistics

Source: FactSet (as of January 7, 2019)

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Public Markets Overview

Source: FactSet (as of January 7, 2019)

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Public Comparables Detail

Source: FactSet (as of January 7, 2019); $ in Millions, except per share amounts

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Our Sector Practice & Selected Experience

Discrete and Process Automation

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Test & Measurement

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Engineered Components

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Communication & Connectivity

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The information and views contained in this report were prepared by Harris Williams LLC (“Harris Williams”). It is not a research report, as such term is defined by applicable law and regulations, and is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities or financial instruments or to participate in any particular trading strategy. The information contained herein is believed by Harris Williams to be reliable but Harris Williams makes no representation as to the accuracy or completeness of such information. Harris Williams and/or its affiliates may be market makers or specialists in, act as advisers or lenders to, have positions in and effect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide investment banking services for those companies. In addition, Harris Williams and/or its affiliates or their respective officers, directors and employees may hold long or short positions in the securities, options thereon or other related financial products of companies discussed herein. Opinions, estimates and projections in this report constitute Harris Williams’ judgment and are subject to change without notice. The securities and financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. Also, past performance is not necessarily indicative of future results. No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Harris Williams’ prior written consent.

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