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Reports surrounding Synopsys' (SNPS +3%) potential takeover of Ansys (ANSS -5%) in the week ahead of the new year are confirmed today. Ansys agreed to be purchased by Synopsys for $197.00 in cash and 0.345 shares of common stock, representing a total enterprise value of around $35 bln, or a ~6% premium to Friday's closing prices. The two companies anticipate closing the deal in the first half of 2025.

Shares of Ansys already surged by around +18% immediately following the initial reports, as Reuters mentioned that the company was receiving offers as high as $400/share. Conversely, Synopsys shares fell, underscoring some disappointment from investors, likely over the price tag attached to the deal.

Today, the inverse is unfolding; Ansys is dropping while Synopsys is reversing course. We outlined several reasons why an Ansys/Synopsys deal made sense, including engaging in similar engineering software simulation development and widening an already narrow economic moat. Still, the possible price floated gave investors pause. However, following the transaction details, the deal is much more palatable -- or, at the very least, better than the market expected -- for Synopsys. On the flip side, at around $368 per share, the terms for Ansys are less favorable than the possible $400 price first hinted at by Reuters.

• At around $368 per share, Synopsys is paying roughly 38x Ansys' FY24 earnings and 14x revenue. Synopsys expects the combination to be accretive to adjusted earnings within the second full year after closing and substantially accretive afterward. The cash portion of the transaction will be funded mostly via debt, through a combination of $3 bln in cash and $16 bln in debt.
• While Ansys' top-line growth has been slowing, recently falling yr/yr in Q3, it has resulted from lackluster economic demand overseas, primarily in China. International markets comprise over half of Ansys' total revenue, making the unfavorable demand backdrop weigh meaningfully on quarterly revenue growth. However, against these headwinds, Ansys still delivered double-digit growth in its average contract value in Q3. Synopsys is unperturbed by Ansys' decelerating revenue growth, expecting to maintain its double-digit revenue growth, fortified by Ansys' market position.
• Speaking of which, while both companies offer engineering simulation software, there are differences. Synopsys specializes in electronic design automation software used to design semiconductors, while Ansys supplies software to test products across numerous verticals, including aerospace and health care. By combining forces, Synopsys would possess a much more expansive portfolio and command an even greater chunk of the engineering simulation software market.

After initial reports of a Synopsys/Ansys merger in late December sparked a significant upswing for Ansys and selling pressure for Synopsys, confirmation of these reports is triggering profit-taking in Ansys as the terms are not as lucrative as expected and driving some buying activity in Synopsys on a lower-than-anticipated price tag. The transaction still has hurdles to clear; regulatory bodies could have questions about competition. However, if allowed to proceed, adding Ansys should provide attractive returns for Synopsys over the long term.