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In their September 2003, December 2003 and February 2004 Electronics IP Industry Commentaries, the authors examined the recent financial history and future outlook 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 (hereinafter known as the “Group-of-8” or “G8”), as representative of the current financial state of the Electronics IP industry. In this May 2004 Commentary we look at the financial performance of these same vendors during the first quarter of 2004.

Group-of-8 (G8):

For the G8 companies above, we will assume that all of their revenues are Electronics IP and directly related IP services.



Electronics IP Background

Electronics IP providers today supply an incredible array of hard and soft re-usable cores, design blocks and “integration platforms” for a broad range of digital applications, such as DSP processors, encoders/decoders, bus interfaces, micro-processors, memories, micro-controllers, and related data communication cores. Moreover, “soft cores” are usually available in Verilog and/or VHDL, which can be synthesized and targeted to almost any semiconductor foundry process. Most available soft cores and IP blocks are fully documented, pre-tested & verified, and support the software tool flows from most leading EDA vendors. The value proposition for prospects is faster time to market, less technological risk and lower development and testing costs.

Customers of IP providers include independent manufacturing facilities or foundries, integrated device manufacturers, application specific integrated circuit manufactures, system manufacturers and fabless integrated circuit companies. IP vendors offer non-exclusive licenses, while retaining ownership of Intellectual Property including that developed under contract engineering services. The sources of revenue are licensing fees, maintenance and support fees, engineering services and royalties. Royalties can be on a per-integrated circuit or per-wafer basis. A typical royalty might be 8 cents a chip. Since chips containing IP are found in PCs, cell phones, consumer entertainment and so forth, the volume can be in the tens of millions. Royalties are received when chips incorporating IP are actually manufactured. Consequently, there can be a considerable time lag between the time the IP is delivered and the time royalties are received, if at all. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating intellectual property components, which is typically in the quarter following the sale of the licensee's product to its customer. Up front fees including non-cancelable pre-paid royalties are included in licensing fees.



First Quarter 2004 IP News Highlights

In the MCAD industry, one of the significant newsworthy financial events of the first quarter of 2004, was the divestiture of UGS PLM Solutions by EDS (see May 2004 MCAD Commentary).

Likewise, in the IP industry, one of the major news items of the first quarter is the saga of the on-again/off-again acquisition of Monolithic System Technology, Inc. (MoSys) by Synopsys.

In February, Synopsys announced it would acquire MoSys in a cash and stock transaction for $432 million (~$346 million net of cash).

At the time Aart de Geus, chairman and CEO of Synopsys said "As SoC complexity continues to increase, larger and larger parts of the chip will be delivered as pre-designed, pre-verified IP blocks Synopsys' acquisition of MoSys and Accelerant will expand our IP portfolio to provide a comprehensive offering of standards-based IP, chip infrastructure IP and embedded memory IP. This important step puts us at the forefront of the market in helping to deliver the integrated solutions our customers need to reduce their manufacturing risk and lower the cost of design for high-performance chips."

During the Synopsys quarterly financial conference call on February 23, 2004, Aart de Geus said, “Over the years, we built a very complete, high-quality collection of building blocks under the name “DesignWare.” This collection is available on a subscription basis to our customers and is the most widely used commercial IP in the world…. Customers increasingly want Synopsys to become their “house supplier” for the majority of their diverse IP needs. In 2002 embedded memory was already about 50% of the chip. The International Technology Roadmap for Semiconductors sees this growing to over 70% by 2005! … This is why it is so timely for Synopsys to be expanding into embedded memory IP right now.”

The boards of directors of both companies had approved the transaction. In addition, certain of MoSys' shareholders, including its executive officers and directors, who collectively own approximately 29 percent of the outstanding shares of MoSys, had agreed to tender their shares to Synopsys in the transaction.

On April 1, 2004, MoSys was notified of a complaint filed against it by UniRAM Technology, Inc., alleging trade secret misappropriation and patent infringement. On April 19, 2004, UniRAM filed an amended complaint asserting that it provided trade secret information to TSMC in 1996-97 and speculated that MoSys improperly obtained unspecified trade secrets of UniRAM from TSMC in an unknown manner. In its answer, MoSys has denied all claims made by UniRAM against MoSys, raised affirmative defenses to UniRAM's claims and asserted counterclaims for declaratory judgment that UniRAM's patents-in-suit are not infringed, are invalid and unenforceable.

On April 16, 2004, Synopsys announced that it had exercised its right to terminate its merger with MoSys. In accordance with the terms of the merger agreement, Synopsys paid MoSys a $10 million termination fee. Mountain Acquisition Sub, Inc., a wholly owned subsidiary of Synopsys, accepted no shares of MoSys common stock for payment in the tender offer that had been commenced pursuant to the merger agreement.

On April 23, 2004, MoSys announced that it was suing Synopsys for breach of contract following the abrupt termination of the merger agreement. The complaint seeks to force Synopsys to complete the merger agreement or otherwise seeks monetary damages arising from the breach of the merger agreement.

“Synopsys waited until the last minute to pull out of a lawful agreement, causing significant damage to our company and our stockholders," said Fu-Chieh Hsu, MoSys Chairman and CEO. "While we regret our only alternative is litigation, we believe this merger is still important for both companies and we are prepared to move forward to close the transaction. We hope the management of Synopsys will recognize not only its contractual obligations but also the benefits it has repeatedly asserted about this merger."

The press cited Synopsys spokeswoman Yvette Huygen as saying "There were a number of requirements for the merger agreement that were not met. One of the requirements was the absence of third-party litigation. So, the lawsuit was one of a number of issues."

Dr. Hsu stated. "We were completely unaware of any issues that would constitute a legitimate reason to breach our agreement as we had discussed all the significant aspects of our business and operations that Synopsys had inquired about." He repeated this during quarterly conference call on May 6, 2004.

The lawsuit alleges that, in the absence of any explanation, Synopsys may have engaged in obtaining confidential information to gain an unfair and illegal advantage in competing with MoSys at some future point when Synopsys enters the memory business.

MoSys shares rose from $7 before the merger announcement to $13.40, a figure just below the Synopsys offer, and then back down to $7.45 after the deal was terminated. The 93% premium and the strategic synergy of the prospective deal were not welcomed by stock market analysts, prompting Synopsys shareholders to knock almost 20 percent off the company's stock price.

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