Unigraphics Solutions, the CAD/CAM software company spun out of Electronic Data Systems Corp, remained static after an initial public offering of five million shares. The shares were issued at $14 and, after a day of hectic trading in which 3.7 million changed hands, they closed at $14. While this might suggest that they were priced […]
Unigraphics Solutions, the CAD/CAM software company spun out of Electronic Data Systems Corp, remained static after an initial public offering of five million shares. The shares were issued at $14 and, after a day of hectic trading in which 3.7 million changed hands, they closed at $14. While this might suggest that they were priced at exactly the right level, any issue with Morgan Stanley Dean Witter behind it is expected to soar effortlessly upwards once dealings begin. However, the market only has eyes for companies with internet interests. Nevertheless, CAD/CAM software companies have been enjoying substantial growth rates and the mechanical sector of the market MCAD was worth $3.6bn last year, according to analysts Dataquest. The market is extremely fragmented with the top ten vendors – which includes Unigraphics – only responsible for half of sales. Unigraphics revenues grew by 11% in the financial year to December 31 though net income has been steadily declining from $83.3m in 1995 to $11.2m last year. While the St Louis, Missouri company enjoys the benefits, from the EDS spin-off from General Motors in 1996, of an agreement of being the principle supplier of IT to the automotive giant for the following 10 years and this provides a solid base of 10,000 seats. But competition is ferocious and the prospectus warned investors that it is characterized by falling prices due to competition, lower marginal costs and rapid technological change. In particular, increased competition from new sources, including the introduction of numerous lower priced, higher volume 3-D CAD products, the emergence of a mid-range market, and the increased penetration of niche players into the CAM and CAE markets, has led to price pressure on MCAD software products which is expected to continue. Furthermore, the tendency of big companies to outsource design to smaller outfits is giving Unigraphics’s rivals an enormous opportunity. Fighting off the competition is an expensive business. R&D costs have risen from 11% of revenues in 1996 to 15% last year. Nor are the immediate prospects bright. The write-off of R&D costs and additional amortization expense resulting from an acquisition leads the company to expect that net income in 1998 will be significantly less than in prior years. Proceeds of the offer will be used to repay indebtedness to EDS which still owns 31.2 million shares. Given competition within the industry, Unigraphics will need all the support its parents can give in the difficult years ahead.