PTC's field service long game pays off with $1.46 billion purchase of ServiceMax, complete with "Salesforce angle"

PTC has announced a plan to acquire ServiceMax for $1.46 billion to extend its closed-loop PLM (Product Lifecycle Management) strategy into downstream Enterprise Asset Management and Field Service Management.

The purchase, from SilverLake Partners, will be funded in two stages - $808 million paid on close of deal, and $650 million to be paid in October 2023. The deal is subject to regulatory approval, but is intended to close in January 2023.

Breaking down the reasons for the acquisition, the second major gambit that PTC has made this year, CEO Jim Heppelmann argues:

The ServiceMax acquisition will fit nicely into our ongoing program of performing while transforming. As a sizeable pure SaaS business, ServiceMax is completely aligned with our SaaS initiative. And as a key service system of record, it will add depth to the already successful service dimension of our PLM strategy. With ServiceMax on board, we'll be in a position to lean in harder on what we call Service Lifecycle Management, or SLM.

PTC has gained category leadership in the PLM space, he adds, but ServiceMax will bolster that position and help to move into the next phase of expansion:

The PLM market is growing double digits, which might be higher than you expect. This is because certain sub-segments of the PLM big picture, like ALM, SLM and IoT, are growing substantially faster than mainstream PLM. PTC has strong positions in each of these sub-segments. ServiceMax is expected to add about $148 million on a trailing 12 month basis to our PLM software revenue. Therefore, the addition of ServiceMax will increase our PLM category leadership, while helping us maintain our growth rate…The CAD and PLM markets we serve are large and have healthy growth rates.

Digital transformation 

Having ServiceMax in the fold will materially increase PTC's TAM (Total Addressable Market), Heppelmann explains, at a time when the macro-environment demands change:

Digital transformation has been the key driver of the market's accelerating growth rate. The investment in digital transformation is massive and about a third of it, more than $500 billion per year, is being deployed by manufacturing companies.

Manufacturers are investing a lot because they're under pressure. The hybrid workforce doesn't work with paper processes, and digital product data has to be both accessible and managed. Public companies of all types are being pressured to address climate change, and industrial companies are generally significant offenders. They have a lot of room for improvement, but they can't move the needle much without analyzing their products and the manufacturing and service processes those products employ.

Meanwhile, software is eating the world and whether it's embedded controls, digital user experience, or IoT-enabled conductivity, more and more product engineering is done in software every year. On top of all that, due to COVID semiconductor shortages, we've seen the pressures that supply chain issues are putting on product development and manufacturing.

All of this drives a need for the type of offerings that PTC has in its portfolio, he goes on:

PLM in particular has changed from a ‘nice to have’ to a ‘must have’ for manufacturing companies of all types. PTC’s strategy is perfectly aligned to the digital transformation needs of industrial companies. Our logo tells the story - the black part is a P representing the physical world; the green part is a D representing the digital world; the shape is a ying yang symbol, which means that physical and digital counterbalance and complement each other in a special way. At PTC, we've reduced this complex interrelationship to three simple words -  digital transforms physical.

Long game

As to where ServiceMax will fit in, Heppelmann reveals that this acquisition has been a long time coming from PTC’s point of view:

Our interest in ServiceMax stems from the fact that connected service is one of the killer vertical solutions for Industrial IoT. We launched our original partnership with ServiceMax in 2015, even buying an equity stake in the company. Unfortunately an interloper stepped in and derailed our plans. General Electric [GE] surprised everybody by purchasing ServiceMax in 2017 for a very high price. At first we thought our partnership would survive, but GE soon made it clear that ServiceMax would serve their Predix strategy and not PTC, and they cancelled the partnership unilaterally. The only good that came of it was a nice return on our equity investment.

There’s clearly no love lost here still as he comments:

Being part of GE Digital was very unhealthy for ServiceMax.Two years later, after GE Digital had imploded, a damaged ServiceMax was carved back out of GE by Silver Lake Partners. It took Silver Lake several years to re-build a business, including bringing on a new leadership team. But by 2021, ServiceMax was very healthy again and was just days from launching an IPO where PTC was again planning to invest as a strategic partner. After the IPO market collapsed, Silver Lake agreed to sell PTC the business at terms that we all like.

But the way events rolled out had an impact on PTC’s plans, he notes:

We originally got into this partnership with ServiceMax to drive cross sell. We had integrated our products together, we were starting to make joint sales calls, we were building a nice pipeline, and were really pretty excited about it. And then that was interrupted, as I described, and, kind of, we lost a lot of momentum there. We went back to the drawing board. At that point, we still had the IoT business and the AR business,  so it was just a question of priorities. We had a strategy for SLM that was supposed to have ServiceMax in the middle of it, and suddenly that strategy didn't exist.

So, this has been a long game to date, but one that’s worth the wait, says Heppelmann:

The reason we've been pursuing ServiceMax for so long is that it fits perfectly into the service or SLM part of our PLM strategy. ServiceMax will be the anchor system of record for products in the field, which knits together our whole SLM story across the many different service-related assets PTC has acquired over time...ServiceMax is doing well because they offer a wide range of capabilities, all running on the Salesforce platform, that work together to address the entire range of service needs a customer has, from contract management to install base management to the scheduling and utilizations of parts, crews and contractors in the service process.

ServiceMax is the missing ingredient in our SLM story. ServiceMax is designed for companies who need to deliver asset-centric service. That means companies who can't service a given product without knowing a lot about that specific product's serial number. Contrast that to the Verizon truck that can come to your home and fix your cable problem without knowing anything about you or your home or the hardware you have because it's all disposable commodity stuff anyway. They only need to know your address and have somebody let them in.

That Salesforce angle

And there’s a useful Salesforce angle here in play, he attests, with ServiceMax built on the Force.com platform:

We really like the Salesforce angle and believe we can drive cross sell in both directions here. Obviously Salesforce has a proven SaaS platform with a massive installed base. Salesforce CRM manages the 360 degree view of the customer; PTC manages the 360 degree view of the product or asset; ServiceMax bridges these worlds because it knows which products are at which customers, what their service needs are, how to perform that service and what parts the technician will need to bring along. I think that choosing PTC for PLM will make incrementally more sense for Salesforce customers, and choosing Salesforce CRM will make incrementally more sense for B2C customers. I expect that PTC will be able to help take the ServiceMax partnership with Salesforce to an elevated level.

He adds:

We have zero - zero! - interest in re-platforming this thing off Salesforce. We actually think the Salesforce platform's just fine. The cost structure of using that platform is pretty fair. And we think it's frankly a nice bridge to that massive customer base. One of the things that got GE into trouble is they started to talk about re-platforming ServiceMax onto Predix and that didn't go over well. First of all, Salesforce didn't like it. And the second  thing is that customers of ServiceMax are typically customers of Salesforce. They didn't want it to be re-platformed. So we have zero interest in doing that. We're not even going to have that conversation internally.

As to how PTC intends to integrate Salesforce’s platform and its own Atlas platform, he explains:

When software runs in the cloud, whether it runs on one cloud, two clouds, three clouds, you don't really know. So it's very easy for us to deliver an experience to a customer that appears 100% integrated, even if part of it is running on Salesforce and part of it is running on Atlas. And so that's how we will proceed. By the way, the user interface of ServiceMax looks like the user interface of Salesforce because normally you're running it inside Salesforce. So we won't try to even change that.

There's a look and feel there that makes sense. We'll integrate these products together in the best way possible. We need to do a lot of design work. For all these 'gun-jumping' [regulatory] rules and so forth, we're not actually allowed to do all that work prior to closing the deal. The good news is we did it all five years ago. We actually built all these integrations five years ago. We just need to dust them off, update them and talk about what else can we do going forward?

My take

All good things come to those who wait…

This latest stage in the ServiceMax story came somewhat out of the blue, but the pitch from PTC’s Heppelmann is a compelling one. That Salesforce angle is going to be one to watch. That said, overall, assuming this gets the regulatory approval it needs, this acquisition and its aftermath will be one to keep an eye on in 2023.