Commentary: Electronics IP Industry - An August 2008 Update


Electronics IP Industry - An August 2008 Update

by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates

In their September 2003, December 2003, February 2004, May 2004, August 2004, November 2004, February 2005, May 2005, August 2005, November 2005, February 2006, May 2006, August 2006, November 2006, February 2007, May 2007, August 2007, November 2007, February 2008 and May 2008, Electronics IP Industry Commentaries, the authors examined the recent financial histories and future outlooks of the remarkable phenomenon of Electronics Intellectual Property (IP) providers, a niche that has emerged in its own right to claim a substantial amount of revenue in the world of Electronics Design Automation.

We had arbitrarily selected eight (8) publicly-traded companies originally (then called the “Group-of-8” or “G8”), as representative of the current financial state of the Electronics IP industry. At the end of 2004, ARM completed its acquisition of Artisan Components, Inc., thereby reducing our “G8” to “G7”. Accordingly, in this August 2008 Commentary, we look at the financial performances of the “G7” Electronics IP vendors during the second quarter of 2008. We also mention the recent interchanges between Cadence and Mentor Graphics since May 2008 in News Highlights.

Group-of-7 ("G7"):

ARM Holdings plc
Ceva, Inc.
LogicVision, Inc.
MIPS Technologies, Inc.
Rambus Inc.
Virage Logic Corporation
Cambridge, UK
San Jose, CA
San Jose, CA
Mountain View, CA
Sunnyvale, CA
Los Altos, CA
Fremont, CA

For the “G7” companies above, we assume that all of their revenues are Electronics IP sales and directly related IP services.

Recent EDA Industry News Highlights


These two members of the 'Big 3' EDA software vendors oligopoly have been making M&A headlines on a frequent basis since just after the last Electronics IP Industry Commentary and EDA Commentary were published three months ago.

Mergers & Acquisitions (M&A) are hardly rare in the world of Computer Aided Engineering (CAE) or Computer Aided Design (CAD). Indeed, seldom does a quarter pass without one Electronic Design Automation (EDA) vendor buying another. (The same is true in the Mechanical CAE and Mechanical CAD/PLM industries).

Indeed, being acquired by one of the top three vendors in EDA (or in MCAD) is a favorite exit strategy for small start-ups that develop a specialized or breakthrough technology. This exit path is especially attractive as the IPO market for venture-backed companies dries up. It is often the way for the larger software vendors to make up for their own relative lack of internal R&D funding.

While EDA companies usually “stick to their own kind” and buy smaller EDA companies, and MCAD companies likewise, it's not unheard of for crossover to occur. For example, MCAE vendor ANSYS recently acquired EDA vendor ANSOFT.

More unusual, however, is for one of the leading EDA or MCAD vendor companies to try to acquire one of the other members of their respective oligopolies.

But just such a possibility surfaced in the news in mid-June 2008, wherein CADENCE (San Jose, CA) was reportedly pursuing MENTOR GRAPHICS (Wilsonville, OR). CADENCE, SYNOPSYS, and MENTOR are currently the Big 3 EDA vendors, in that order size-wise. Founded in 1981, MENTOR reported revenues in 2007 of about $850 million. CADENCE was founded in 1988 and sported revenues of more than $1,600 million in 2007. (Their respective current revenue levels are under heavy pressure in 2008).

Rumor had it in June 2008 that CADENCE approached MENTOR on a friendly basis some months earlier regarding an all-cash acquisition, but CADENCE was rebuffed. On June 17, 2008, CADENCE revealed to the public that its offer to MENTOR was for $16 per share, a 30% premium over MENTOR's closing price on June 16. Industry sources said that CADENCE, once rebuffed, then launched a hostile takeover bid for MENTOR.

In June, MENTOR issued a statement rejecting the CADENCE offer on two grounds - that it was too low and that the merger would have trouble passing federal antitrust review. "For these and other reasons, our board unanimously rejected the proposal," wrote MENTOR CEO Dr. Walden Rhines. (Dr. Rhines joined MENTOR in 1993 from TI).

For its part, CADENCE downplayed the possible antitrust issue. CADENCE also said the merger “would lower software costs and benefit electronics makers because CADENCE and MENTOR could 'share' sales and administrative staffs”. Further, CADENCE CEO Mike Fister argued that the software products of CADENCE and MENTOR are “complementary”. (Mr. Fister joined CADENCE in 2004 from Intel).

Should it eventually be consummated, it would be highly unusual if this merger, like many others, did not result in significant numbers of employee layoffs. Moreover, there are several product lines at both EDA vendors that are arguably directly competitive.

But hey, hostile takeover attempts are the signs of our times (think Microsoft-Yahoo, Staples-Corporate Express, Electronic Arts-Take Two, InBev-Anheuser Busch, …).

Indeed, it was reported in the Portland Business Journal on June 24, 2008, that MENTOR itself was then pursuing British company Flomerics Group PLC with an offer that Flomerics' board ironically said was too low. Flomerics is a vendor of Computational Fluid Dynamics (CFD) simulation software.

Well, it now looks like all the 'Big 3' EDA vendors will be around, at least for awhile.

On August 15, 2008, CADENCE finally grew tired of the effort to acquire MENTOR and called off its $16 per share ($1.6 billion) bid.

Shareholders immediately expressed their opinions of this news. Shares of CADENCE surged 7% during the August 15 trading session to close at $7.64 a share, while shares of MENTOR tanked, falling 26% to close at $10.33.

Industry insiders say that since mid-June, CADENCE had been having trouble obtaining reasonable funding terms for the more than $1.1 billion needed to do the MENTOR deal, a task made more troublesome after CADENCE lowered its 2008 year-end guidance in late July 2008. "Although we achieved our second-quarter numbers, it was more difficult than we planned,” CADENCE CEO Mike Fister said.

So the 'Big 3' EDA Vendors will remain the 'Big '3 for the time being.

However, the entire EDA Industry is under a lot of pressure these days, and some form of consolidation and/or restructuring will likely occur sooner rather than later.

Global Semiconductor Alliance:

On June 26, 2008 the Global Semiconductor Alliance (GSA) released the CYQ1 2008 version of its Global Semiconductor Financial Report. This quarterly report includes detailed trend analysis on financial data for fabless, IDM, pure-play foundry, intellectual property, electronic design automation, design service and back-end sectors.

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