Ansys (NASDAQ: ANSS) and Synopsys (NASDAQ: SNPS) stock prices will be in the spotlight this week as the two are set to announce a giant merger. According to WSJ, Synopsys is set to spend $35 billion to acquire Ansys, its smaller rival. Such a merger will create a new $100 billion software company.
What are Ansys and Synopsys?Synopsys and Ansys are software giants that most Americans have never heard about since they don’t provide consumer-facing products. Instead, they provide their software to companies in industries like semiconductor, automotive, medicine, and energy.
Synopsys is the market leader in the electronic design automation (EDA) industry. Its operates in the semiconductor & system design and software integrity segments. Its customers include the likes of Samsung and Taiwan Semiconductor.
Ansys, on the other hand, creates engineering simulation software and services that are used widely by engineers, designers, and researchers. Its solutions are also used in key industries like materials and chemicals, aerospace, and automotive.
Ansys provides several products like fluids, digital mission engineering, electronics, and embedded software.
The two companies have been growing as the manufacturing industry and automation accelerates. Synopsys annual revenue rose from $3.9 billion in 2019 to over $5.8 billion in the last financial year. It is also a highly profitable company whose net income rose from $532 million to $1.2 billion in the same period.
Synopsys ended the last quarter with $1.59 billion in cash and short-term investments and just $18 million in cash. Therefore, it can easily afford the $35 billion by providing equity and borrowing.
Ansys, on the other hand, has also been growing in the past few years. Its annual revenue rose from $1.29 billion in 2018 to over $2 billion in 2022. It made $2.15 billion in the last financial year. Its net income, however, has also grown but is much lower than Synopsys.
It had $419 million in 2018 to $523 million in 2022. Ansys has $639 million in cash and over $735 million in long-term debt.
Good for Ansys, bad for Synopsys
Synopysys vs Ansys stock prices
It is still unclear whether Synopsys will acquire Ansys. But if it does, I believe that this acquisition is a good one for Ansys shareholders, who will receive a nice premium. Its market cap has jumped to almost $30 billion since the rumours emerged in December.
In my opinion, Synopsys is overpaying for Ansys. At $35 billion, Synopsys is paying 72x its trailing twelve-month (TTM) net income. The amount of synergies will likely not be that much, which explains why Synopsys stock price has crashed by over 14% since these rumours started.
One of the few benefits for the deal is that it will provide it with several solutions in the simulation and analysis business.
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