The rise and fall of Aspen Technology

The rise & fall of Aspen Technology

Aspen Technology supplies modeling software and services used in the process industries. The company acquired a number of companies in the glory-days of the stock market, and has been going through some interesting twists and turns. Here is the story, to the end of 2004.

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In my writings and discussions on industrial automation majors, I've pointed out that there are VERY few independent companies in the $100M to $ 1B (annual revenues) range. A company in that category is Aspen Technology, the Cambridge, MA based supplier of modeling software and services used in the process industries. AspenTech revenues are at $325M, with a current market-cap of $265M.

AspenTech has been going through some twists and turns in recent times. Here is the story, upto the end of 2004.

Startup

AspenTech was founded in 1981 by Dr. Larry Evans, a professor of chemical engineering at MIT. Larry Evans, now 69, was named one of 7 heroes of US manufacturing by FORTUNE magazine in 1999 and was elected to the National Academy of Engineering in 2001 for "leadership in the development and application of integrated systems for modeling, simulation and optimization of industrial chemical processes."

Larry Evans was a good chemical engineer who hit upon a great strategy. He saw that all the pieces of information brought together in the process design effort were never used for actual operation of the facility. He saw that this information was most efficiently stored in the form of a model; flow sheet models are a much more natural interface for engineers. To test his idea, he got a government contract (DOE) to build the original models - the core models from AspenTech are public domain.

Larry Evans saw that few would use these models without marketing, packaging, support, etc. So he got private venture-capital funding to form AspenTech. With this came the next strategy - to sneak up on SimSci (the 800 lb gorilla of modeling and simulation at the time), but going into Chemicals instead of the extremely competitive Refining markets. SimSci had NO idea that they were being attacked from the flanks; this myopic view later became their downfall.

Growth through acquisition

AspenTech acquired Industrial Systems Inc (ISI) (AspenTech was about $50m at the time, and ISI about $ 10m). Another early acquisition was Prosys Technology Ltd, a sort of UK equivalent in the form of a venture capital backed spin off out of Cambridge University. With roots in the academic world, AspenTech seems to be full of people who think that they are brilliant, and a cut above everyone else. As a result, they've not got a lot of friends in the industry.

In 1994, AspenTech went public. This was the time when companies were forgetting profits and pumping up sales, to get a high market-cap. In those days a company could buy an ailing $2M startup that had never made money, and increase their own market value by $20M. Very few of these acquisitions actually worked, or were good for the stockholders, but the practice was rampant. Unfortunately, AspenTech was caught up into this bubble, buying just about any company, using their own inflated stock as tender. The value of AspenTech stock often increased more than the amount they paid for the company. They were not alone, but indeed were the most visible in the automation industry for doing this.

One industry observer notes:

"To generate growth, AspenTech put primary emphasis on revenue over profits; this went too far in manpower-rich integration projects which carried attendant liabilities. Jobs like advanced controls, scheduling, supply chain and integration have high revenues, but are low-margin work. This matched their growth model, but it got out of hand."

Hypro-trouble

In May 2002 AspenTech acquired Hyprotech, a Canadian supplier of process simulation and engineering software for oil and gas refiners. Wayne Sim, Hyprotech's CEO. became the chief product officer at AspenTech. Hyprotech 2001 revenue were about $50m, and AspenTech aquired the company for about $100M in cash. To help pay for the acquisition, AspenTech raised $50M from the issuance of 4.2 million shares of common stock and related warrants in a private placement. AspenTech also raised its earnings expectations for the year by 31% because of the pickup.

By now, AspenTech had already fallen on hard times and was itself for sale. With about 1,900 employees and 2001 sales of about $310m, the company was generating significant operating losses and cash flow problems. Market-cap dropped from over $1b to about $140m. Most major investors were clearly under water and were looking to get out for whatever they can get. Auditor Arthur Andersen was fired in June 02 and CEO Larry Evans was reported to be retiring. The "retirement" of Wayne Sim of Hyprotech was not announced - it simply appeared in the quarterly reports

Here is an industry expert's technical analysis:

"AspenTech needed refinery models to complete their coup and seemed to think that they were getting these with the acquisition of Hyprotech. They made two really bad moves in this acquisition: a/ they did not check with the FTC to see if it was legal, and b/ they did not do the due diligence to find out of they actually got these models when they purchased Hyprotech. Both of these turned out to be wrong.

"In the mean time, the competition has been battering Aspen on the quality of their software. So they spent what little money they had left on a giant Anderson project to build the infrastructure of the future. This project was done in such a way that all of the cash they had left and a bunch of stock (the amount varied with stock price) went to Anderson for the work that they did (this is the integration with TIBCO, arguably one of the worst software moves in the manufacturing industries) that set the stage for them having to sell at really bad prices to venture-capitalist Advent International. Advent has, on paper, made lots of money; but they can't sell any stock because if they do, the price will drop through the floor."

Back from the brink

In August 2002, JimPinto.com eNews featured a story on Aspen Technology, stating that the company was in trouble with its recent acquisitions and was for sale. The most likely buyers were Siemens or GE, though other process majors like Honeywell and ABB were prospects, as well as software leaders like SAP and Peoplesoft.

Somehow, that sale did not take place. Perhaps the price was too high, and the "baggage" of recent acquisitions too heavy. AspenTech remained "independent" by raising $100M (almost exactly the amount AspenTech had paid for Hyprotech) from Advent International, a Boston-based private equity firm. This (August 2003) was Advent's third investment in AspenTech - they had invested in 1986 and 1991, before the company went public in 1994. Advent was now upping the ante, and clearly drove a very hard bargain. The recapitaliztion, with stock and warrants, created major dilution for existing shareholders, to the extent that Advent had clear control. Larry Evans was bumped up to Chairman, and a new CEO was installed.

According to Andrew Bond of Industrial Automation Insider, there are some broader issues raised by AspenTech's problems.

They presented themselves as the first Process Automation major which didn't require its own hardware platform to deliver added value. Their problem was that the traditional Process Automation vendors started delivering what AspentTech offered, plus the hardware platform, plus offering to take responsibility for the whole package. This is, of course, what the major users want. That left AspenTech either out in the cold, or playing second fiddle to the majors.
AspenTech followed Anderson Consulting/Accenture down the supply chain integration route, on the basis that supply chain integration will enable users to realise the benefits they thought they were going to get out of ERP. Accenture have done very well out of this approach, as consultants usually do, but AspentTech have found it digs them deeper than ever into the mire and the users are even more disillusioned with supply chain integration than they already were with ERP.
The simulation/optimisation/APC business is changing rapidly and becoming commoditised. Rather than running APC as a high level task applied to a few critical loops, Emerson, for example, is now offering it in a form which could, at least in theory, be applied to every loop in the process at no extra cost. I don't think AspenTech or for that matter vendors such as Honeywell have fully woken up to the implications.

AspenTech continued to brave through the Hyprotech acquisition debacle. Almost concurrently, disaster hit. In August 2003 the Federal Trade Commission judged that AspenTech's purchase of Hyprotech was in violation of the Clayton Act. They ruled that AspenTech had to divest Hyprotech AND provide "any incentives necessary" for the viability of the restored company.

At this same time as the FTC bombshell, KBC Advanced Technologies in the UK also sued Hyprotech for breach of a contract made with AEAT, the previous Hyprotech owner, to get the original source code of HYSYS and Profimatics models. The case was lost in arbitration. The FTC allowed AspenTech to "license" the models but it was not at all clear what the fee would be, so it seemed to work out for both.

In Oct. 2004, AspenTech announced the sale of Hyprotech assets to Honeywell at a nominal $ 2M - the price of getting the FTC off their backs. Then in Nov. 2004 AspenTech's audit committee released a statement regarding the need to restate previous financial results. At the same time AspenTech announced the "resignation" of CEO Dave McQuillin.

VC looking for an exit

In Dec. 2004 AspenTech announced that board member Mark Fusco would assume the role of President & CEO. Fusco, a former US Olympic and professional ice hockey player, has a background in IT consulting and software development. Advent had originally nominated Fusco to the board a year ago, which is significant because it finally gave them a board majority. This will probably see the exit of Larry Evans and the removal of any "poison pills" that prevent selling of assets and outright acquisition. It remains to be seen how Advent will find their exit - with, or without, a "haircut".